Harmonized Sales Tax: Information on the Transitional Tax Adjustment for Builders of Housing in Prince Edward Island

GST/HST Info Sheet GI-150
March 2013

This info sheet explains how the transitional tax adjustment would apply to builders who sell "grandparented housing" in P.E.I.

Refer to GST/HST Info Sheet GI-146, Harmonized Sales Tax: Information for Builders of New Housing in Prince Edward Island, for a detailed explanation of "grandparented housing".

Definitions for GST purposes, e.g., builder, residential complex, residential unit, residential condominium unit, and substantial renovation, would generally apply under the HST, as would the CRA's current policies on the application of the GST to housing. Guide RC4052, GST/HST Information for the Home Construction Industry, and GST/HST Info Sheet GI-005, Sale of a Residence by a Builder Who is an Individual, discuss many of these important terms.

Grandparented sales of housing

When newly constructed or substantially renovated grandparented housing is sold in P.E.I., the builder would not be required to collect the provincial part of the HST on the sale of the housing even though both ownership and possession are transferred to the purchaser after March 2013. Only the GST at the rate of 5% would apply to the sale.

However, the builder may be considered to have collected an amount referred to as the transitional tax adjustment and if so, would be required to include that amount in its net tax calculation.

Transitional tax adjustment – Overview

Since the provincial part of the HST would not apply to the sale of grandparented housing, the transitional tax adjustment is intended to approximate the amount of the provincial sales tax (PST) that the builder would otherwise have paid on construction materials after March 2013 and that is embedded in the sale price of the housing.

This transitional tax adjustment would be considered collected by the builder (even though not actually collected from anyone), and would have to be included in the builder's net tax calculation for the reporting period which includes the day that is:

• in the case of a detached house, semi-detached house, rowhouse unit or residential condominium unit, the earlier of the day ownership or possession of the housing is transferred to the purchaser under the written agreement of purchase and sale for the housing; or
• in the case of a condominium complex, the earlier of the day ownership of the complex is transferred to the purchaser and the day that is sixty days after the day the complex is registered as a condominium.

A builder who is a GST/HST registrant that would be required to account for the transitional tax adjustment in its net tax calculation would have to file its GST/HST return using GST/HST NETFILE. Refer to GST/HST Info Sheet GI-099, Builders and Electronic Filing Requirements, which will be updated shortly for P.E.I., for information on the electronic filing requirements that would apply to builders of new housing in P.E.I.

The transitional tax adjustment would be considered collected by the builder and would not be payable by the purchaser. It would represent the amount of PST that the builder would have been required to pay on construction costs incurred after March 2013 and that is embedded in the sale price of the housing.

The transitional tax adjustment would not apply to sales of traditional apartment buildings, duplexes, mobile homes or floating homes, as these would not qualify as grandparented housing.

Transitional tax adjustment – Single-unit housing

For grandparented sales of newly constructed or substantially renovated single-unit housing, the builder would be considered to have collected the transitional tax adjustment if the construction or substantial renovation of the housing is less than 90% complete immediately before April 1, 2013.

The transitional tax adjustment for single-unit housing would be based on the total consideration payable (which excludes the GST payable and any new housing rebate) and the degree of completion of the construction or substantial renovation of the housing immediately before April 1, 2013. However, where the consideration is less than what the fair market value of the housing would have been on the day the builder and purchaser entered into the written agreement of purchase and sale, had the housing been substantially complete on that date, the consideration for purposes of calculating the transitional tax adjustment would instead be equal to that fair market value.

In recognition of the PST that will already have been paid by the builder on construction costs incurred before April 2013, the amount of the transitional tax adjustment in respect of single-unit housing would decrease as the degree of completion increases:

The method used to determine the degree of completion must be fair and reasonable. For information on determining the degree of completion, refer to GST/HST Info Sheet GI-105, How to Determine the Percentage of Completion for Purposes of the Provincial Transitional New Housing Rebates and the Transitional Tax Adjustment in British-Columbia and Ontario. The methods described in that info sheet would also apply for P.E.I.

Refer to Appendix A for a summary chart on how the transitional tax adjustment would apply to newly constructed or substantially renovated housing.

Transitional tax adjustment – residential condominium units and condominium complexes

As a general rule, the transitional tax adjustment would apply to all grandparented sales of newly constructed or substantially renovated residential condominium units or condominium complexes.

Typically, the transitional tax adjustment would be equal to 4.5% of the total consideration payable for the sale of the condominium unit or complex, as applicable, regardless of the degree of completion of such housing immediately before April 1, 2013. However, where the consideration is less than what the fair market value of the unit (or complex) would have been on the day the parties entered into the written agreement of purchase and sale for the unit (or complex), had the unit (or complex) been substantially complete on that date, the consideration for purposes of calculating the transitional tax adjustment would instead be equal to that fair market value.

Transitional tax adjustment for condominiums and the provincial transitional new housing rebate

In the case of residential condominiums, the 4.5% transitional tax adjustment would be in addition to the PST that would have already been paid by the builder on construction costs incurred before April 2013. To reduce the tax embedded in the condominium to approximately 4.5%, a builder may be entitled to claim a provincial transitional new housing rebate if the construction or substantial renovation of the condominium unit or complex is at least 10% complete immediately before April 1, 2013. For more information on this rebate, refer to GST/HST Info Sheet GI-151, Harmonized Sales Tax: Provincial Transitional New Housing Rebate for Housing in Prince Edward Island.

All technical publications related to GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech.

Appendix A – Summary chart

Newly constructed or substantially renovated housing

* "Sale price", for purposes of the transitional tax adjustment would be the greater of:

• the consideration payable under the written agreement of purchase and sale and any amendments to that agreement, i.e., before the GST applies and before any new housing rebate is applied; and
• what the fair market value of the housing would have been on the day the builder and the purchaser entered into the written agreement of purchase and sale, had the housing been substantially complete on that date.