How the HST will affect real estate investors
Mar 29th, 2010 by July Ono
There is no harmony in this Harmonized Setback Tax.
Get ready for having your bottom line drop out from under you. In theory, the harmonized sales tax appears to be a beneficial transition by eliminating the embedded Provincial Sales Tax in goods from raw materials to the retail shelf. Also, most businesses will be able to claim input tax credits which is their ability to have the HST tax refunded. It all sounds great unless you are a real estate investor.
The fact is that real estate investors cannot claim input tax credits on their purchases. We must pay the full amount and bear the tax burden. The only way for us to recoup this cost is to increase rental revenue and decrease expenses. In provinces with rent control, legislation prohibits real estate investors from recouping even half of this increase. See the table below. As for decreasing expenses, this becomes more challenging as buildings continue to age.
The 2010 rent increase guidelines are:
| British Columbia | 3.2% | 3 months notice required |
| Alberta | No rent control | |
| Saskatchewan | No rent control | 6 months notice required |
| Manitoba | 1% | 3 months notice required |
| Ontario | 2.1% | 3 months notice required |
| New Brunswick | 2.5% | 3 months notice required |
| Nova Scotia | No rent control |
For many property owners, the HST will be more than just a 7% increase in your costs. It could represent as much as a 35% reduction in your bottom line. In the example below:
|
Current Tax System in BC |
|
| Revenue | $100,000 |
| Expenses | 50,000 |
| Interest | 40,000 |
| Bottom line | $ 10,000 |
|
HST System in BC |
|
| Revenue | $100,000 |
| Expenses | 50,000 |
| Interest | 40,000 |
| Bottom line | $ 10,000 |
| Add’l HST | 3,500 |
| New bottom line | $ 6,500 |
Consider your $50,000 of expenses that you currently pay 5% GST will now be charged at 12% HST. Seven per cent of $50,000 is $3,500. Subtract $3,500 from your bottom line and you are left with $6,500 instead of $10,000. This $3,500 of extra tax represents a 35% profit loss. This is an over-simplified example but it shows the impact that a 7% tax increase could have on your financial statement.
Erosion of profit margin means less money for the capital reserve and contingency funds which in turn means no upgrades or renovations which forces owners into deferred maintenance. And this is never a good thing. Our mandate as real estate investors is to provide safe, clean, affordable rental accommodations in a good state of repair and fit for habitation that complies with health, safety, housing and maintenance standards. The HST will have a negative impact in an industry already plagued with government intervention which continuously erodes our ability to provide decent accommodations for our customers.
While the majority of consumers and business owners will experience a benefit with the HST, property owners will bear its financial brunt. There is no benefit in running a real estate business if we are not able to compete on the same level playing field as other business owners. Government should give real estate investors the ability to claim input tax credits and thereby give us the financial support to maintain our properties.
July Ono
President
On The Beach Education Corporation
