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If you are planning on buying a new home over the next two years, then you need to know about the 2% BC Transition Tax. It is a new tax that came into effect on April 1, 2013. It applies to the sale of new residential homes that are 10% or more complete as of April 1, 2013. The 2% BC Transition Tax will end on March 31, 2015.
The 5% GST also applies to the full price of a new home, where ownership or possession is on or after April 1, 2013. With the end of the HST and the return to the PST/GST system, the BC government chose to introduce the 2% BC Transition Tax as a way, in their words, “to ensure the equitable application of tax for purchasers of new residential homes currently under the HST system”. The government also wishes to replace some of the revenue lost through the return to the PST. BC’s portion of the HST will no longer apply to newly built homes where construction begins on or after April 1, 2013. Builders will once again pay 7% PST on their building materials (construction inputs).
The provincial government asserts that on average, about 2% of the home’s final price is embedded PST that builders pay on their building materials. The Transition Tax rebate for
builders (sellers) recognizes that the builder will not be able to claim input tax credits on the PST paid on building materials acquired after March 31, 2013. The rebate is available
where both of the following conditions are met:
• The 2% BC Transition Tax applies to the sale of new housing; and
• Construction or substantial renovation is at least 10%, but not more than 90%, complete before April 1, 2013.
What is property transfer tax?
A property transfer tax (PTT) applies when there are any changes in the certificate of title at the Land Titles Office. In other words, when the property is sold to a different owner, the new owner is required to pay a tax for the change in ownership. The PTT, also known as a land registration tax, is payable on the fair market value (selling price) of the property being transferred.
The calculation is based on 1% of the purchase price up to $200,000 and 2% of any amount above $200,000.
For example: If the property’s fair market value is $250,000, the tax is 1% of $200,000 ($2,000) plus 2% of the remaining $50,000 ($1,000) for a total tax of $3,000.
Do first time home buyers pay property transfer tax?
As a first time home buyer, you may not be required to pay the property transfer tax which is otherwise payable on all property purchases in B.C. First time home buyers are exempt from having to pay this tax according to the following criteria:
• You have never owned a principal residence before;
• The fair market value threshold for eligible residential property is $425,000 (A proportional exemption is provided for eligible residences with a fair market value of up to $25,000 above the threshold (i.e. up to $450,000);
• You have never received a first time home buyers’ exemption or refund;
• You are a Canadian citizen or permanent resident and residing in B.C. for a minimum of 12 months;
• The property will only be used as your principal residence.
Your property qualifies for the first-time home buyer land transfer tax rebate if:
• The fair market value of the property is not more than $425,000
• The land is (0.5) hectares or smaller
• The property will only be used as your primary residence
You may apply for the exemption when you register your property at the land title office, which is generally done by a lawyer or notary on your behalf. Visit the B.C. Government website for more info.
What is capital gains tax?
A capital gains tax is basically a tax that is paid by the homeowner on the increase in value upon the disposition of the property. One of the benefits of property ownership is the intrinsic value increase over time, especially in British Columbia, where there are some of the highest valued properties in Canada. In Canada, we do not have a separate capital gains tax, rather the net gain is treated as ordinary income. The Income Tax Act distinguishes between three types of income: employment income, business income, and property income.
How is the tax calculated?
If you were to buy a home for $400,000, and over time the property increased in value by $100,000, the $100,000 is considered the capital gain. Capital gains are taxed at 50% of the marginal rate, in other words $50,000 will be taxed upon the sale of the property, and the other 50% is earned tax free. This is only applicable if this was your investment property.
There are two types of property classification when understanding capital gains tax: principal residence and investment property (i.e. capital property or inventory). As a Canadian homeowner, you can claim the principal residence exemption which reduces or exempts the capital gains otherwise realized on a disposition of your home.
What qualifies as a principal residence?
A principle residence can be classified to a variety of housing types:
• a house;
• a cottage;
• a condominium;
• an apartment in an apartment building;
• an apartment in a duplex; or
• a trailer, mobile home, or houseboat.
A property qualifies as your principal residence for any year if it meets all of the following four conditions:
• It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
• You own the property alone or jointly with another person.
• You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
• You designate the property as your principal residence.
The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (5,000 square meters), which converts to about 1.24 acres (54,000 square feet).
This is a non-refundable income tax credit for qualifying first time buyers of detached, attached, apartment condominiums, mobile homes or shares in a cooperative housing corporation. The credit is meant to assist the homebuyer with costs such as legal fees and property tax transfers etc. It is calculated by multiplying the lowest personal income tax rate for the year (i.e. 15%) by $5,000, with a maximum credit of $750, and is claimable for the taxation year in which the home is acquired.
You or your spouse or common-law partner can claim the home buyer’s tax credit if you have not owned a house in the last five years, and are purchasing a qualified home. You must intend to occupy the property as your principal place of residence no later than one year after you acquire it.
The credit is also available for a home acquired by an individual who is eligible for the disability tax credit (DTC), or by an individual for the benefit of a DTC-eligible relative, if the home is acquired to enable the DTC-eligible person to live in a more accessible dwelling.
GST rebate on new homes
If you plan to purchase a newly constructed or substantially renovated home to use as your primary residence, you can obtain a rebate on part of the GST.
Which properties qualify?
The rebate is available for any of the following:
• Building a home or contracting someone to build one
• Buying a newly constructed or substantially renovated home from a builder
• Buying a newly constructed house from a builder, where you lease the land from the builder under the same agreement to buy the house
• Substantially renovating a home or building a major addition to one
• Rebuilding a home destroyed by fire
• Buying a share of the capital stock in a newly constructed cooperative housing project
• Applications must be received within 2 years of the possession date.
Tax-Free Savings Account
If you are over 18 and provide a Social Insurance Number, you are eligible to open up a tax-free savings account (TFSA). This account will allow you to contribute up to $5,000 per year from your investments (capital gains, dividends, interest, etc.) and the ability to withdraw from the account without any tax repercussions. There are also no annual administration fees, and no minimum balance requirements. The unused contribution allowance can also be carried forward indefinitely.