Susan Smith

August 2009

Introduction

On July 23, 2009, the provincial government announced the adoption of a Harmonized Sales Tax (HST) for British Columbia for a single tax rate of 12 per cent on all consumable goods and services.

Though the Canadian Home Builders’ Association of BC (CHBA BC) understands and recognizes the need to keep British Columbia competitive with the rest of Canada in a global economy and realizes the positive impact of reducing the burden on small business in BC, housing is not a consumable and already bears the added tax burden of property transfer tax and myriad municipal downloaded taxes and should not be treated in the same fashion.

We also believe that tax neutrality for new housing construction will be the most beneficial avenue to British Columbians.  BC consumers cannot be subjected to more taxes for their homes or home renovations. 

Therefore, we accept during these recessionary times, with the help of the provincial government, that we can mitigate the negative impact of implementing a harmonized sales tax on British Columbia’s consumers by adjusting the thresholds to ensure tax neutrality and indexing these thresholds in line with the new housing price index.  (Table D)

Impact of HST on Housing

The residential construction industry is paramount in generating local jobs, wages, investments and significant government revenues.  Already impacted by various emerging economic factors, local housing markets are affected by global issues over which there is little control:

• Changes in international, regional, and local economic conditions
• Changes in job creation and unemployment
• Shortages of serviced land
• Municipal tax pyramiding,

The federal equalization payment process is an indicator of the tax burden already borne by British Columbians and is affected by the value placed on housing.  The housing value affects the equalization transfer through property tax.  Equalization entitlements are determined by measuring a provinces ability to raise revenues or “fiscal capacity”, based on five fiscal elements personal income taxes, business income taxes, consumption taxes (sales tax) property taxes, and natural resources.   Our thriving residential sector has been a contributor to this calculation as a result of the value based on property tax revenues. It has been recognized during the equalization calculation that British Columbians already bear an increased burden due to high housing costs.

Now we are purporting to add to this tax burden by increasing taxes and using unrealistic data.  Why was a threshold for the calculation of a harmonized sales tax based on a median price of new and re-sale homes in urban British Columbia?   Since the proposed HST will affect new product, shouldn’t we at least be using actual absorption numbers of new product?  (Table A)

Altus Group Economic Consulting using data from Statistics Canada shows that purchasers of homes valued between $400,000. to $500,000. are considered middle class with total family incomes of $70,000. or less.  These middle class, middle income families are already financially stretched.  Increasing housing prices by layering on tax will put home ownership out of reach of these families and those that are able to manage the increase will do so by increasing the amount of their mortgage and amortizing the HST increases associated with the purchase over the term of the mortgage. 

The Ontario model has been a good starting point template to copy, but Ontario with its huge manufacturing base is not British Columbia. Land in Ontario is much less expensive and in BC at least 50% of the cost of a home is the land component.  The B.C. housing market is not the same as Ontario and should not be treated the same.

Housing prices in British Columbia are the highest in Canada. Our market shows geographical spikes in pricing more than anywhere else in the country, the Okanagan, Lower Mainland, Sea to Sky corridor, Kootenay region, Vancouver Island; therefore, setting a median price to calculate the HST rebate threshold makes no sense as it might in Ontario. That is why our recommendation to government is that the threshold should be raised to reflect real values and indexed in line with the new housing price index. 

Relative affordability comes into context when consumers are now dealing with added costs to the purchase of a home. In addition to the HST that will be paid on the price of a home, it will also be paid on various closing costs including appraisal fees, survey fees, realtor commissions, legal fees, mortgage application fees and mortgage default insurance to name a few.  The B. C. Real Estate Association documents that these closing costs add over 5% to the price of a new home, and with the introduction of HST will be subject to an additional tax.  We strongly urge the provincial government to take this additional burden of tax into consideration when evaluating the HST for residential construction.

Impact of HST on Renovations

BC homeowners spent approximately $7 billion on home repairs and renovations in 2008. Of the $7 billion, some $4.5 billion was through legitimate contractors, accounting for 64% of total residential renovation investment in the province, with a substantial portion of the balance by “do it yourself” homeowners.  The Altus Group calculates that provincial sales tax of 2.3% is embedded in these sales and the introduction of HST will add an additional 4.7%.

The desire to renovate in British Columbia is fueled in part by geographical constraints and shortage of developable land, which impact housing affordability.  The high cost of housing impacts the need for homeowners to renovate to accommodate lifestyle changes  and add secondary suites to ease the cost burden.

To the detriment of consumers, the underground economy is thriving in BC and is an issue that CHBA BC has been tackling for years with the assistance of the Canada Revenue Agency and the Ministry of Small Business and Revenue with our publication “Get it in Writing”.

The introduction of HST to BC will no doubt fuel the underground economy as unprofessional contractors attempt to negotiate cash transactions and “save” the client 12%.  Our office receives many phone calls from persons who have been duped in this manner.

There are many problems with an underground economy, including:

• Loss of income tax revenue to the federal, provincial and local governments
• Introducing risks to consumers because cash transactions are generally not governed by a written contract resulting in disputes between the contractor and homeowner, and causing the homeowner to lose the ability to seek redress through the court system
• Underground contractors often are not covered by liability insurance and therefore the homeowner could be held responsible for costs related to injuries
• Neglecting WorkSafe BC coverage
• Creating barriers for the industry’s future development
• Ignoring the need for permits and inspections

The provincial government must protect this multi-billion dollar industry from going further underground by supporting a rebate equal to the increase in sales tax paid directly to consumers requiring proper documentation and receipts showing taxes paid.

Impact on Energy Efficiency

In 2007, the provincial government made a commitment to the future of British Columbia and announced a goal to reduce greenhouse gas emissions 33 per cent by 2020. CHBA BC commends the government for all the actions it has taken thus far to encourage energy efficiency in residential construction and reducing our carbon footprint.  CHBA BC has walked the talk in the implementation of our Built Green™ BC program which is omitting thousands of tons of GHG emissions from our province and saving thousands of gig joules of energy yearly. 

We also support and are partners in the LiveSmart BC program.  Measures such as LiveSmart BC, various PST exemptions on energy and resource efficient products and the Federal government’s Home Renovation Tax Credit are all key steps to ensuring a strong and healthy future for our children and grandchildren.

Introducing the HST, and ultimately taking PST exemptions away on upgraded energy efficient products, will negate the steps taken by government to increase energy efficiency in our homes and reduce BC’s carbon footprint.  This should not be allowed to happen.

Rental Units

Purpose rental built units are seldom being built.  The benefits for this magnitude of investment are few.  With the high price of housing in British Columbia and now adding an additional tax onto the construction of rental units we will continue along the path of purpose rental drought.  It is therefore imperative that rental units be included housing thresholds.

Transition Period

Actions taken to ensure a fair and equitable revenue neutral transition require further dialogue and must be studied carefully.  Our economy is fragile and a hurried or transferred approach is not the answer.  British Columbia is unique in many aspects of its economy, geography, land availability, construction cycles and phases of construction.  To this end, CHBA BC will establish a transition group, to work with Ministry of Finance staff and create a “made for BC” solution.

Summary

The residential construction industry is an important component of investment in British Columbia. Sales taxes are primarily considered a “consumption tax”. Government should reconsider its tax treatment of housing and home renovations as a form of consumption. Homes and renovations are an investment that last many years and ultimately should not be subject to a consumption tax.

Residential construction is an economic driver that supports all British Columbians and cannot be overlooked in the creation of jobs, tax dollars and spin off spending which exceeds $28K per home in all geographical areas of our province.  Do we really want to slow down an economic giant with an unfair tax when support of its growth would in actual fact net more tax dollars?  Do we really believe that our consumers should be penalized for investing in a new home or renovating their existing home?

We believe that the harmonized sales tax should be based on fairness and minimize market impacts.  Given the higher dollar value of housing and home renovations in British Columbia careful consideration should be engaged before exacerbating the already high value by adding additional taxes.

With this in mind, CHBA BC respectfully requests that:

• Tax neutrality be observed for new homes and substantial renovations up to a threshold of $600,000 with a rebate starting at $30,000* indexed to the New Housing Price Index (Table D)

• To help curtail the underground economy, the government should institute a renovation income tax credit, (similar to the Federal Home Renovation Tax Credit) of 4.7% requiring invoices showing taxes paid and the HST number of the company providing the service.  Since renovations in British Columbia are more reflective of the affordability necessity vs. cosmetic, the credit should be allowed on the dollars spent and not a small unrealistic ceiling.

• To further curtail the underground economy all British Columbians conducting any type of business should be required to register for HST with no exemptions.

• Purpose built rental properties should enjoy the same tax neutrality thresholds as new homes.

• To invest in the future of our children and grandchildren and ensure we limit our carbon footprint, the government should not eliminate sales tax exemptions on energy and resource efficient products and continue to encourage British Columbians to embrace energy efficiency.

 * $30,000 = 7% pst less 2% assumed imbedded
Table A

Table B

New Housing Starts in British Columbia

Source: Will Dunning Inc. Economic Research

 Total Economic Impacts of Residential Construction

Source: Will Dunning Inc. Economic Research

Total Fiscal Impacts, Due to Total Residential Construction Activity (Millions of $s)

Source: Will Dunning Inc. Economic Research

 Table C

 Impact of HST on New Housing

(In this example, the average or mean single family home price is used.)

 Table D