Canada: A Cautionary Tale Regarding The GST/HST New Housing Rebate

As an incentive to a prospective buyer, a builder may offer to provide a credit to decrease the purchase price of a newly-constructed or substantially renovated detached house, duplex, or condominium unit (collectively referred to as a "Home") in exchange for the buyer transferring to the builder their new housing rebate. However, buyers requiring mortgage financing assistance from an extended family member or friend should beware that the rebate may be lost if the individual providing assistance is a party to the agreement of purchase and sale.

New Housing Rebate

While a used residential Home is generally exempt from GST/HST, a new build is subject to GST/HST. The new housing rebate, pursuant to subsection 254(2) of the Excise Tax Act (Canada) (the "ETA"), allows for the partial recovery of GST or the federal portion of HST paid for a new or substantially renovated Home that is intended to be used by the buyer (or a relation) as his or her primary place of residence (the "Federal Rebate"). There are several conditions that must be met to be eligible for the Federal Rebate. The same conditions apply to be eligible for a separate rebate available in Ontario, pursuant to section 41 of the New Harmonized Value-added Tax System Regulation, No. 2 for the provincial potion of HST paid in Ontario (the "Ontario Rebate"). Nova Scotia offers a provincially-administered First-Time Home Buyers Rebate, which is not discussed in this article.

The Federal Rebate is 1.8% of the consideration of Homes priced at no more than $350,000. The Federal Rebate is phased out for Homes priced between $350,000 and $450,000 and is not available for Homes over $450,000. The original intention of the Federal Rebate was to remove the barrier the GST may pose to affordable housing; however, the Federal Rebate thresholds have not changed since the introduction of GST in 1991, notwithstanding the increased price of newly-constructed "starter" Homes, particularly in Vancouver and Toronto. The Ontario Rebate amount is limited to the lesser of $24,000 and 75% of the provincial portion of HST with no limit on the purchase price.

Rebate Denied – Buyers and Builders Beware

In a recent Federal Court of Appeal decision, Canada v Cheema, 2018 FCA 45 ("Cheema"), the Court allowed an appeal from the Minister of National Revenue and held that the rebate in issue ($24,000, in this case) was unavailable.

The facts that gave rise to this case are not that unusual. In 2012, Mr. Cheema wanted to purchase a yet to be built Home in a new subdivision in Vaughan, Ontario. However, in order to qualify for financing, Mr. Cheema needed his friend, Dr. Akbari, to co-sign an agreement of purchase and sale. The intent of the parties was that Dr. Akbari would be a bare trustee, while the beneficial interest would be with Mr. Cheema who would otherwise be responsible for all of the HST payable. The purchase price was $800,000, so only the Ontario Rebate was available.

To be eligible for the Federal and/or Ontario Rebate, one condition that must be met is that, at the time the "particular individual" enters into an agreement of purchase and sale with the builder, the individual is acquiring the Home for use as a primary place of residence for themselves or a relation. A relation includes parents, siblings, and children but excludes aunts, uncles, or cousins.

It was found that if the sale of the Home was made to two or more individuals, each individual is considered a "particular individual" and each individual must intend to use the Home as their primary place of residence. The court did not consider a bare trust relationship between co-purchasers. Under an agreement of purchase and sale, the supply of the Home was made to both Mr. Cheema and Dr. Akbari. Since Dr. Akbari did not intend to use the Home as his primary place of residence, this condition was not met and the Ontario Rebate was denied in full.

When multiple individuals execute an agreement of purchase and sale for a new Home, use of the Home as a primary residence must be satisfied by all the individuals. If this not the case, then the Federal and/or Ontario Rebate is not available. If the amount of the anticipated Ontario Rebate had been credited by the builder in Cheema, then the builder may have extended a credit to Mr. Cheema and Dr. Akbari that it was unable to recover. The builder would then have to rely on the buyers' covenants under the rebate document in order to recover from the buyers.

Builders must be mindful of the findings in Cheema when extending a credit on the purchase price to a buyer in anticipation of a transfer of the buyers' GST/HST rebate. If the buyer is comprised of multiple individuals, the conveyancing documents should include provisions that can be relied upon if the application for the rebate is later denied. Since the content and form of these documents varies from developer to developer, a careful review of standard forms (including the transfer of the GST/HST rebate) would be prudent.

A buyer (and their advisors) need to be cognisant of the result in Cheema when structuring transactions. As suggested in the decision, a buyer may consider accepting a gift or loan, or the generous extended family member or friend may offer to be a secured guarantor instead of co-signing the agreement of purchase and sale.

Cheema highlights for developers the importance of reviewing their sale documentation, including GST/HST transfer forms, to ensure they are protected if it is later determined that the buyer is not eligible for a rebate. It also serves as a reminder to buyers and their advisors to consider the structure of a new Home purchase when the buyer needs financing assistance.

Justice Stratas, writing for the majority in Cheema, invited Parliament to amend section 254 of the ETA if it did not agree with his conclusion in Cheema. Of note, Justice Webb remarked in dissent, "an individual who is unable to afford a new house on their own and who needs a second unrelated person to guarantee the payment of the purchase price, will be denied the new housing rebate. This would appear to deny the new housing rebate to those who need it the most and would raise the question of whether this was the intent of Parliament." However, as Justice Stratas commented, what is best for Canadian society is not the equivalent of what the legislation means.

Legislation is known to be amended in response to "disagreeable" decisions, but will this be one of them? We will monitor any developments closely.¹

Footnotes

1 Another case to watch (Ngai v R., 2017 TCC 79) has a similar fact pattern to that of Cheema but involves an aunt rather than a friend; it is currently being appealed by the Crown.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.