Financial Planning

RESCON urges Ottawa to bring rebates back into line

By IE Staff |

The federal government is raking in some $2 billion a year in GST on new homes, driving up the cost of housing and making home ownership more difficult for many purchasers.

That’s the conclusion of a new study being released today. It found that GST on the average-priced new home in Canada is now approaching $20,000 -- almost double what it was in 1991.

Even if the GST is reduced to 5% next year, homebuyers will still be paying about $16,500 on average.

“That’s a huge amount of money for anyone to have to pay, and it is especially onerous for young families and first-time buyers,” says Phillip Rubinoff, chairman of the Residential Construction Council of Ontario (RESCON), which commissioned the research.

The study, conducted by Will Dunning Inc., explains that the growing tax-bite has come about because the federal government has not adjusted the rebate thresholds since the GST was introduced in 1991.

When the tax was implemented, buyers of new homes were entitled to a rebate of 36% of the GST on homes costing up to $350,000. The rebate declined for houses priced between $350,000 and $450,000. For homes priced at $450,000 and above, a rebate was not available. But in 1991, only 4% of new homes fell into this upper category and were taxed at the full GST rate.

Seventeen years later, house prices have increased considerably while the rebate thresholds have remained the same. This has put a greater percentage of homes over the upper threshold. Today, more than one quarter of all new homes are taxed at the full GST rate.

The study notes that when the GST and the rebate structure for new homes were introduced in 1991, the federal government made a commitment that it would review these thresholds at least every two years and adjust them as necessary to ensure that they adequately reflected changes in economic conditions and housing markets.

“That commitment has not been met,” the report states. It cautions that the effective GST rate on new homes will continue to rise in the future unless the rebate thresholds are adjusted upwards.

RESCON is urging Ottawa to bring the rebates back into line by raising the thresholds by the full amount of the change in the average price of new homes since 1991, and thereafter by indexing the thresholds to the annual percentage increase in these prices.

Based in Toronto, Will Dunning Inc. is an economic research firm specializing in housing market analysis.