GST Reduction Effective July 1

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In its first budget on May 2, 2006 the Conservative government in Ottawa fulfilled a key election

promise by announcing a reduction of the Goods and Services Tax (GST) rate from 7% to 6%.

The rate change will not take effect until July 1, 2006. While this gives businesses time to adjust

their accounting systems to account for the rate change, it may also motivate purchasers of

property and services who cannot recover GST an incentive to delay certain purchases,

particularly big ticket items, until after June 30, 2006 in order to benefit from the reduced rate.

Such purchasers would include consumers and businesses engaged in exempt activities (financial

institutions, residential landlords, residential care providers, physicians and most public sector

bodies).


Some specific items that may be of particular interest to some:


Sales of Real Property


Where a taxable sale of real property is made and ownership or possession of the property is

transferred to the purchaser prior to July 1, 2006, the 7% rate will apply. Where both ownership

and possession are transferred after June 30, 2006, the 6% rate will apply, with one exception.

Where taxable residential property is sold under an agreement for sale entered into prior to

May 3, 2006 with ownership and possession transferring to the purchaser after June 30, 2006, the

7% rate will apply. However, the purchaser will be entitled to claim a refund of the 1%

differential from the CRA.


Purchasers who cannot recover the GST may seek to defer closing until after June 30, 2006

although as described in the above transitional rule, consumers who entered into purchase

agreements prior to May 3, 2006 will not benefit from deferring closing until after June 30, 2006.

Also, it should be noted that there are anti avoidance provisions with respect to transactions

between related parties aimed at benefiting from the rate reduction.


Housing Rebates


Individuals who purchase a new home for use as their primary place of residence are entitled to

claim partial rebates of GST that they pay. The maximum rebate is the lesser of 36% of the GST

paid and $8,750. For homes that cost more than $350,000, the rebate is phased out so that there is

no rebate for home costing $450,000 or more. The maximum amount claimable will be adjusted

from $8,750 to $7,560 so as to be equal to 36% of the GST paid at the new 6% rate on a home

costing $350,000.