Last week we released the results of our survey and study on the increased costs Ontario and BC residents will have to incur on selling and buying a new home after the HST is introduced on July 1st. As a follow up we have also looked at the additional money current home owners and condo owners would need to cover their higher expenses as a result of HST.

Our estimates include average household costs that many home owners and condo owners incur. Our calculations found that home owners should expect expenses to increase by approximately $580 per year because of HST, while condo owners will likely see a rise of $504 per year. Although condo fees aren’t directly affected by HST, condo corporations costs are going to increase because of HST and they won’t be able to claim them back. As a result, many condo corporations will be passing on the HST they will have to pay on after July 1st, 2010 to condo owners in the form of increased fees.

Other condo corporations are being more creative. We spoke to one resident of a downtown Toronto condo, who said that his building is installing smart meters into all units in order to try and save energy costs. Hopefully, these energy savings would offset the higher HST costs, and condo fees would not need to be increased.

Here are our calculations:

Increased costs due to HST on condo owners:

Note:

Increased costs due to HST on home owners:

Notes:

There is alot of confusing information out there and it’s not surprising that 80% of respondents to our survey said they knew little or nothing about HST and how it will impact them. Some industry experts are confused themselves. A case in point is that during our research we found an article outlining how moving costs are not going to be HST eligible in Ontario. After phoning 3 Ontario moving companies and the Ontario Ministry of Revenue, we were told that moving costs in Ontario will be eligible for HST.

With any new tax there will always be some grey areas that need to be ironed out and it looks like the HST will be no exception. I think the main point is that if you’re unsure of what is included, please consult a tax specialist to make sure.

Kelvin

In less than one month, BC and Ontario will experience an overhaul in their tax system with the introduction of the Harmonized Sales Tax (HST) on July 1, 2010.
Many of our visitors still have a few questions about the new HST and how this will affect home buyers and existing home owners.

To help us make sense of these changes we asked Frank Bilotta, Associate Partner and Tax Specialist at SBLR Chartered Accountants, to answer our questions.
(Frank operates in Ontario, so answers are specific to Ontario law)

What exactly will change on July 1, 2010?

Frank: On July 1st the 13% Harmonized Sales Tax (HST) will come into full effect in Ontario. The HST is a combination of the 5% federal Goods and Services Tax (GST) and the 8% Ontario Retail Sales Tax (RST or PST). There will no longer be a separate Ontario retail sales tax. (The new Harmonized Sales Tax in BC will be applied at a rate of 12%.)

The biggest change is to services that were not subject to the Ontario PST, but will now be subject to an additional 8% in taxes under HST.

What type of services are we talking about?

Frank: Well, actually, quite a few common services will be affected. Consumers are most likely to notice an increase in the price of gasoline and heating fuels. Electricity will no longer be exempt from provincial sales tax, nor will tobacco. Personal services like haircuts, membership fees for clubs and gyms, magazines, and taxi fares will all be affected.

With regard to services associated with buying a home or home ownership items such as renovation services, legal fees, real estate agent commissions, landscaping, land survey reports, home inspections and cleaning – will all be subject to the new HST.

Will anything remain exempt?

Frank: Not a lot. Children’s clothing and footwear, children’s car seats, newspapers, books, diapers, feminine hygiene products and meals under $4.00, will remain exempt from the provincial portion of the single sales tax.

Basic groceries, rent, condo fees, prescription drugs, and medical devices which are currently exempt from both PST and GST, will remain exempt from HST.

What about home sales?

Frank: Only newly constructed or substantially renovated homes will be subject to HST. For purchases of new homes that straddle the implementation date of July 1, 2010, the provincial portion of the HST will apply depending on when the written agreements of purchase and sale were entered into and when ownership or possession are transferred.

For contracts signed before June 18, 2009, HST will NOT apply. For contracts signed on or after June 28, 2009, where both ownership and possession are transferred after June 30, 2010, HST will apply. For all contracts signed on or after July 1, 2010, HST will apply.

So resale homes will not be subject to the HST?

Frank: No, although real estate transaction fees will be taxed along with legal fees, as I mentioned earlier.

It sounds like home ownership is going to get a lot more expensive after July 1st. What’s the up side to all of this?

Frank: HST will result in the removal of the hidden PST which is buried in the price of the final goods and services. This should result in lower costs incurred by businesses and potentially allows savings to be passed onto consumers. The new tax will also make things easier for businesses currently charging both GST and PST; one sales tax is all they need to worry about now.

For consumers, the Ontario government has allowed for certain point of sale rebates and transition credits to offset the additional cost of the HST.

Tell me more about the housing rebates that will be offered.

Frank: Under the new HST rules, individuals will be eligible for the Ontario new housing rebate which is 6% of the value of the house, up to a maximum of $24,000.

This rebate is in addition to the existing GST New Housing Rebate, which remains at 5% and is phased out for house values greater than $350,000.

What if the value of the house exceeds $400,000?

Frank: Unfortunately, the rebate is capped at $24,000, but there is no reduction of the rebate if the value of the house exceeds $400,000. Unlike the rebate for the GST portion which is clawed back.

The chart below might help to explain this.

When will rebates be paid out?

Frank: The Ontario rebate will be administered by the Canada Revenue Agency along with the GST rebate.

What if a homeowner is in the process of renovating their kitchen? Will they be charged HST even though the work started before July 1, 2010?

Frank: HST will apply on the portion of the progress payments on contracts to construct, renovate, alter or repair real property (this excludes newly constructed or substantially renovated housing) relating to work completed from July 1, 2010 onward. For example, if 60% of the work related to a progress payment is completed before July 1, 2010 and 40% is completed after July 1st, HST will apply to the 40% portion.

Who determines what percentage of the work is complete?

Frank: With July 1st fast approaching, the rules for HST have not been finalized into law and we have not been given any guidance as to whether there is going to be a specific rule to determine this. What is most likely to happen is that the facts of each specific situation will determine the work completed before and after July 1st. The supplier of the services, who will be responsible for charging and collecting the HST, will have to ensure they have the necessary documentation/proof available to substantiate their determination under a CRA review of their GST/HST account.

What should potential home buyers and existing home owners do to prepare for the price increases caused by the new HST?

Frank: If you’re worried about the price increases, I suggest you speak with an accounting professional to see how these changes will affect your own personal situation. The most important thing is to be aware of the changes that are coming so you can adjust your spending plans and budget accordingly.

Where can consumers find more information about the new HST?

Frank: There are a lot of information sources out there. The Canada Revenue Agency website is likely to have the most accurate and up-to-date content. But if you can’t find what you’re looking for online, speak to your accountant.

HST chargeable common items

Here’s a list of common products and services that were subject to 5% GST before July 1, 2010, but will be charged 13% HST in Ontario after July 1st:

• Dry cleaning
• Electricity and heating
• Internet access services
• Home service calls (i.e. electrician, plumber, carpenter)
• Landscaping, lawn care and private snow removal
• Hotel rooms
• Taxis
• Camping sites
• Domestic air rail and bus travel originating in Ontario
• Magazine subscriptions
• Home renovations (i.e. installation for a new kitchen, or painting services)
• Gasoline/Diesel
• Real estate commissions
• Massage therapy
• Vitamins
• Green fees for golf
• Gym membership fees
• Sport/leisure lessons/classes (i.e. dance, karate, hockey, soccer, sewing, etc) (some exemptions apply)
• Hall rental fees
• Fitness trainer
• Hair stylist
• Esthetician services
• Funeral fees
• Legal fees
• Cigarettes and other tobacco purchases
• Nicotine replacement products

To learn more about the new tax changes go to www.ontario.ca/taxchange in Ontario and www.gov.bc.ca in British Columbia.

Frank Bilotta, CGA, Associate Partner
SBLR LLP Chartered Accountants
416-488-2345 x 269
fbilotta@sblr.ca
www.sblr.ca

Frank is a Tax Specialist with SBLR, a full-service accounting and business advisory firm located in mid-Toronto. With 9 partners and over 40 team members, including a full-time senior tax department, SBLR specializes in providing creative income tax solutions and high-impact growth and exit strategies for profitable, privately-held companies.

SBLR and RateSupermarket.ca do not accept any responsibility for the contents of this article or for the use thereof. Furthermore, SBLR and RateSupermarket.ca do not accept any contractual, tortuous or other form of liability for the contents or for any consequences arising from its use.

The Bank of Canada had their April rate announcement today and reported that they will be keeping their key interest rate, the target for the overnight rate steady at 0.25%.

Although this doesn’t come as a surprise, the most alarming piece of news in this announcement is that they have removed the conditional commitment to hold rates at their current level until the 2nd quarter of 2010 (July 2010). This is a big change as commitment has been in place since April 2009 and was introduce to provide guidance during the global economic crisis. This was an exceptional move and many industry observers believed they would not increase interest rates until July, because their conditional commitment was taken by the market as a promise, and if they failed to hold that promise, they’d never be able to provide this kind of guidance again – as no one would be sure if they’d stick to it. See our article on the “Two Camps“.

So this tells us that the economic recovery and inflation are climbing quicker than expected and the Bank of Canada felt compelled to make this change. This signals that interest rates will start rising at the next rate announcement meeting on June 1, 2010. As this is the main rate that influences Canadian variable rates, this means that variable rates could also start rising in June from their current levels at around 1.70%.

The press release highlighted the following reasons for removing the commitment:

While in Canada:

Negative signs:

Canadian home sales slowed down in February 2010 partly due to lower activity in Vancouver, BC because of the Olympics, but this was offset by continuing high activity in Toronto.

According to a report released today by CREA (Canadian Real Estate Association), seasonally adjusted home sales across Canada for February 2010 were 42,700, which was 1.5% lower than January 2010. CREA President Dale Ripplinger said the Ontario and BC markets were likely to remain high until the summary with buyers looking to get in before HST and interest rate hikes.

Other notable stats from the release included:

CREA Chief Economist Gregory Klump, commented that “There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising. Further expected supply increases will continue to take the steam out of housing markets as the year progresses.”

Bank earnings announcements season ended this week with Canada’s major banks announcing more than $5B in profits in Q1 2010. Main drivers were less losses on loans as the economy recovers, along with personal loans and mortgages.

This is great news for shareholders, but probably not so great for mortgage shoppers, as highlights our story earlier this week about how Canadian’s lender loyalty could be costing them thousands of dollars over the years. TD was so happy with the results, that they’re giving their employees an extra day off next week!

Here is a breakdown of the bank profits:

Bank earnings – Q1 2010
Bank	Q1 profit	Change from year ago
	$988 million	+17%
	$652 million	+343%
	$657 million	+192%
	$215 million	+211%
	$1.5 billion	+35%
	$1.29 billion	+98%

The Bank of Canada did as expected this morning and kept interest rates steady. They will maintain their key interest rate, the target for the overnight rate at 0.25%, and reiterated their commitment to hold rates at current levels until the end of Q2 2010.

They cited that the global economic recovery is being fuelled by domestic growth in emerging markets, while the western world’s recovery is due to the monetary and fiscal stimulus by governments.

Closer to home in Canada, economic activity has been higher than expected back in January as the economy grew by an annualized rate of 5% in Q4 2009. The high Canadian dollar and low US demand are acting as the main drags on the economy while inflation seems to be under control.

So no major surprises ahead of the budget announcement on Thursday, and we expect the same from the Finance Minister.

The US government passed a new law back in May 2009 regarding stricter credit card regulations which went into effect today, February 22, 2010. It is aimed at credit card issuers and will try to eliminate bad credit card practices and was set up to help protect vulnerable Americans who are already having trouble with their debt. The American government is hoping this will help millions of people get out of bad credit and debt problems from their credit cards and over-leveraged mortgages brought on by the global economic collapse, and the US housing crisis.

The new rules include:

While these are great initiatives to help protect consumers, there are still ways that the credit card companies can still affect card holders. There is no limit on the interest they can charge and they can still reduce the credit limit on card’s already issued and create new fees. President Obama says its not perfect but a good first step and hope it will cut down on unfair practices.

Canadian credit card regulations

New credit card regulations were fairly high profile last year when the government proposed changes to Canadian rules, but then it went quiet. All the mortgage and housing market news must have overshadowed the credit card changes, but we just looked on the Department of Finance website and the credit card regulations did go through.

Most of the regulations went into effect on Jan 1, 2010 while a few are delayed until September 1, 2010.

The new regulations include:

The regulations apply to credit cards issued by federally regulated institutions. Some provisions in the regulations have broader application to other financial products, such as fixed- and variable-rate loans and lines of credit.

We’ll do some more digging and find out which ones are already in effect and which changes will be in Sept 2010.

Yesterday was a very busy day as the Finance Minister finally showed his hand and outlined what mortgage regulation changes he is implementing in his efforts to try and cool down the housing market, after months of speculation.

However, it seems that these changes won’t have a huge impact on the mortgage market. Flaherty and Bank of Canada Governor, Mark Carney, were both concerned about the increasing personal debt levels of Canadians, and with the additional pressure of the big bank’s top brass going to Flaherty and saying they were concerned that the housing market is getting out of hand and that mortgage arrears could increase in the future, the Finance Minister had to be seen as taking action and make changes.

Here are the main reasons that each of the changes won’t have a huge impact when they come into effect on April 19, 2010:

1. All borrowers need to qualify for a 5 year fixed rate even if they choose a lower mortgage rate or term

Many of the banks have been qualifying applicants at higher rates anyways. So if you were applying for a crazy, low variable rate at 1.95%, they would make sure you could handle at least the 3 year fixed rate at 3.29% or a higher 5 year fixed rate. Genworth Financial‘s COO said they had been qualifying applicants for mortgage default insurance at at least 4% for the last little while.

This makes sense as the mortgage lenders don’t want to give people mortgage loans that they can’t pay back and qualifying people at higher fixed rates is a prudent control. So this change shouldn’t have too big of an impact on people qualifying for mortgages.

The big question that comes out of this is – which 5 year rate will you have to qualify for? Depending on which mortgage lender you apply with, if it’s a big bank, do you have to qualify for their 5 year posted rate (currently 5.39%)? Or do you have to qualify for their “special discounted rate”, or the actual rate where it depends on the amount of investments you have with them and how good your negotiating skills are? If the bank has a 4.09% 5 year fixed special (like RBC), but you can get, 3.99%, due to your other investments with them, which rate is the qualifying rate?

Let’s look at the differences on the monthly payments for various 5 year fixed rates versus a variable rate with a mortgage value of $300,000 and an amortization period of 25 years:

5 year variable rate versus 5 year fixed rate payment differences

As a result, the monthly payment difference for qualifying could be from $256.18 – $556.09 per month or 31%, which is obviously a huge discrepancy. So which 5 year fixed rate is the “qualifying rate”? And each mortgage lender could have a different qualifying rate, so this means comparing products from different lenders could become even more important in the future.

As a result, it will be interesting to see how each mortgage lender defines the qualifying rate and how this is implemented.

2. Lower the maximum amount Canadian homeowners can refinance from 95% to 90% of the value of their homes

This could impact people looking to consolidate higher paying debt into their lower mortgage interest payments, but 5% should only impact a small % of Canadians.

3. Minimum 20% down payment for house buyers looking to buy investment properties and to get government insurance through the CMHC

This may slow down market speculators and real estate investors somewhat, but for the average Canadian looking for a home, the impact could possibly be more supply, so properties on the market, and could tame house prices as well, with less investors buying up large amounts of properties.

So these are our thoughts, we’ll see what else comes out over the next few weeks as more of these questions are answered, and we expect there to be a big rush of pre-approvals before April 19. More to come.

The mortgage market is changing.

After much talk since mid-December about possible mortgage rule changes, the Finance Minister finally announced the changes at a press conference. He re-iterated that the housing market is healthy and stable with 2/3 of Canadians owning their own home. The housing market has been performing very well providing Canada with a competitive advantage over other countries, and helping our economic recovery, driven by a stable banking system, low interest rates, and a growing population.

The Government wants to encourage ownership, assist first time home buyers, and they believe that previous regulatory changes helped avoid a US style bubble. These changes were made in 2008 with the government increasing the minimum down payments needed to qualify for a mortgage with CMHC default insurance from 0% to 5%, decreasing the maximum amortization period from 40 years to 35 years, and requiring standard loan documentation.

The 3 changes to mortgage regulations as precautionary measures are as follows:

1. All borrowers need to qualify for a 5 year fixed mortgage even if they choose a lower mortgage term such as the current 1 year fixed @ 2.09%, as Canadians don’t need to not take on higher financial risk due to lower mortgage rates

2. Lower maximum amount Canadian homeowners can refinance from 95% to 90% of the total value of their homes. Government wants to encourage home equity investment, and discourage people doing mortgage refinancing for cash.

3. Minimum 20% down payment for house buyers looking to buy investment properties and to get government insurance through the CMHC

These three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010.

He also went on to say there are no signs we are in a housing bubble, and that pro-active regulatory guidance can help avoid problems in the future. This will help protect Canada’s economy, and encourage prudent home ownership, with a family occupying their home and paying down their mortgage, and he wants people to stop using their homes as “an ATM” through refinancing to get out more cash. He also wants to curb the housing market speculators who believe prices will continue to increase and are buying up investment properties (such as buying 4 condos in a development and only living in 1), which reduces supply, and drives up prices.

He didn’t move to increase the current amortization period from 35 years or increase the minimum down payment needed from 5%, which he mentioned that he was considering in the past. Those would have been much more drastic changes, which could have killed the housing market rather than simply encourage home owners to act more prudently.

Check out the latest 5 year fixed rates you will need to qualify for in order to get a mortgage.

Former Bank of Canada governor David Dodge spoke out this week saying that as the reality is house prices are more likely to go down rather than up in the next few years that the Finance Minister and Bank of Canada need to consider intervening to avoid a housing bubble. He didn’t comment on whether we are in a housing bubble at the moment saying that you don’t know you’re in a bubble until it bursts, but believes house prices are strong enough that Ottawa should take action.

“Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.

His comments come as the debate on whether the Canadian market is in a housing bubble or not, has become a very hot topic since December 2009, especially after Finance Minister Jim Flaherty‘s comments that the government may consider adding additional restrictions on the mortgage market to slow down the housing sector. It’s a very fine line as this sector has been performing tremendously well while the economy was in trouble over the past year, and trying to rein in this sector alone while not affecting other struggling parts of the economy will be very difficult.

While it’s clear that low interest rates are heating up the market, it would not be wise to raise them just in order to calm housing because such a move would have other consequences, Mr. Dodge said.

He identified lending standards and the framework default mortgage insurance is issued by companies like the government controlled CMHC and private Genworth Financial, and said they are important tools and stands should probably have been tighter over the last little while. For example, he said that people putting down only 5% for a down payment isn’t enough, and that minimum down payments of 7.5% or 10% is probably better. This would make it tougher for first time home buyers to get on the property ladder and to get their first mortgage, as they would need to save more beforehand for a down payment. With an average house value of $300,000, currently prospective home owners, would need at least $15,000 as a down payment, versus $22,500 (7.5% down payment) or $30,000 (with a 10% down payment).

Genworth Financial‘s President has said that the company is already being more prudent by making sure mortgage applicants can handle mortgage rates of about 4%, despite variable rates being under 2% at the moment.