Some people thought I was referring to development charges, but I was actually thinking of the GST/HST New Housing Rebate in Ontario.
The way it typically works in Ontario is that when buy a new construction home, the price you pay is inclusive of HST (harmonized sales tax) and net of any applicable rebates, such as the rebate program mentioned above.
This means that the price you see on your agreement is usually the price you pay. I say usually only because there are ways that you could disqualify yourself from the New Housing Rebate program. But that’s a different post.
So what does this mean in practice?
Let’s say you went out and bought a new construction condo for $368,200 (there is a reason I’m picking what seems like an arbitrary number). If there was no such thing as the New Housing Rebate program, then the sales tax owing on this home would be the full 13%. And that would mean that the price paid before any taxes is actually $325,841 (x 13% = $368,200). This is an important number because it represents revenue to the developer.
But since there is a New Housing Rebate program, the effective tax rate actually works out to be 5.20% for this particular sale price, which means that the price paid before any taxes is now $350,000 (a nice whole number). And so because of rebates and because they are now paying less HST, the developer’s revenue number has increased. It has gone from $325,841 to $350,000.
The way this logistically works is that purchasers usually assign the New Housing Rebate benefits to the developer who then processes all the paperwork. This is what I mean when I say that the “sticker price” is inclusive of HST and net of any rebates – it already factors in the possible deductions.
So far things are looking good. And I want to be clear that I don’t have concerns with the New Housing Rebate program in its entirety. In fact, it’s a hugely important part of the new home industry. Without it, many projects would simply not be feasible to build.
However, as the price of the new home increases (which typically happens as the home gets bigger), the rebates start to fall off. The federal portion of the rebate maxes out at a base purchase price of $350,000 (which is why I chose that number) and the Ontario portion maxes out at a base purchase price of $400,000.
What all this means is that as the unit sizes get bigger and more expensive, the effective tax rate is no longer at 5.20%, as was the case in the example I gave above. It increases. And if you hold prices constant for the purchaser, it means that the developer’s revenues now start to drop.
To illustrate why this matters, consider the following chart:
In the first scenario, the developer builds and sells 2 units for a price of $368,2000. This translates into revenue of $700,000. However, if the developer instead decides to combine those 2 units and sell the larger single unit for $733,100 (roughly double the price) then the effective rate of HST goes up and revenue drops by $30,000.
The second scenario is similar to the first one except that instead of 2 units, it’s 3 units which then get combined into one. Here revenue drops even further – by $50,000.
Now, you could argue that there are some cost savings associated with building fewer suites, but I don’t think it would offset the differentials shown above, especially if you multiply those revenue numbers across an entire project. So what this all means is that it can be more profitable for developers to build smaller units priced below the thresholds mentioned above, as opposed to a smaller number of larger units.
Again, I’m not saying that HST rebates are bad. They’re critical to the industry. I love them. But I do believe we should be thinking about the possible implications that the current set up could be having on what we’re building and in particular on unit sizes.
If you’d like to learn more about how the rebates work, check out this PDF from the Canada Revenue Agency. I tried to keep things simple in this post.
I just got home from a weekend up at a friend’s cottage. It’s an annual birthday tradition and it’s always a great time. A good cottage weekend can do wonders to reinvigorate yourself. I am ready for the week.
But since the Pan Am Games closing ceremony fireworks are about to kick-off and I want to go watch them from my sun deck, I don’t have a lot of time to write a post. So instead, I thought I would share a few of my photos from the weekend.
The first photo is near Shelburne, Ontario. The wind turbines are from the Amaranth Wind Farm, which is the largest wind energy installation in Canada.
Some people thought I was referring to development charges, but I was actually thinking of the GST/HST New Housing Rebate in Ontario.
The way it typically works in Ontario is that when buy a new construction home, the price you pay is inclusive of HST (harmonized sales tax) and net of any applicable rebates, such as the rebate program mentioned above.
This means that the price you see on your agreement is usually the price you pay. I say usually only because there are ways that you could disqualify yourself from the New Housing Rebate program. But that’s a different post.
So what does this mean in practice?
Let’s say you went out and bought a new construction condo for $368,200 (there is a reason I’m picking what seems like an arbitrary number). If there was no such thing as the New Housing Rebate program, then the sales tax owing on this home would be the full 13%. And that would mean that the price paid before any taxes is actually $325,841 (x 13% = $368,200). This is an important number because it represents revenue to the developer.
But since there is a New Housing Rebate program, the effective tax rate actually works out to be 5.20% for this particular sale price, which means that the price paid before any taxes is now $350,000 (a nice whole number). And so because of rebates and because they are now paying less HST, the developer’s revenue number has increased. It has gone from $325,841 to $350,000.
The way this logistically works is that purchasers usually assign the New Housing Rebate benefits to the developer who then processes all the paperwork. This is what I mean when I say that the “sticker price” is inclusive of HST and net of any rebates – it already factors in the possible deductions.
So far things are looking good. And I want to be clear that I don’t have concerns with the New Housing Rebate program in its entirety. In fact, it’s a hugely important part of the new home industry. Without it, many projects would simply not be feasible to build.
However, as the price of the new home increases (which typically happens as the home gets bigger), the rebates start to fall off. The federal portion of the rebate maxes out at a base purchase price of $350,000 (which is why I chose that number) and the Ontario portion maxes out at a base purchase price of $400,000.
What all this means is that as the unit sizes get bigger and more expensive, the effective tax rate is no longer at 5.20%, as was the case in the example I gave above. It increases. And if you hold prices constant for the purchaser, it means that the developer’s revenues now start to drop.
To illustrate why this matters, consider the following chart:
In the first scenario, the developer builds and sells 2 units for a price of $368,2000. This translates into revenue of $700,000. However, if the developer instead decides to combine those 2 units and sell the larger single unit for $733,100 (roughly double the price) then the effective rate of HST goes up and revenue drops by $30,000.
The second scenario is similar to the first one except that instead of 2 units, it’s 3 units which then get combined into one. Here revenue drops even further – by $50,000.
Now, you could argue that there are some cost savings associated with building fewer suites, but I don’t think it would offset the differentials shown above, especially if you multiply those revenue numbers across an entire project. So what this all means is that it can be more profitable for developers to build smaller units priced below the thresholds mentioned above, as opposed to a smaller number of larger units.
Again, I’m not saying that HST rebates are bad. They’re critical to the industry. I love them. But I do believe we should be thinking about the possible implications that the current set up could be having on what we’re building and in particular on unit sizes.
If you’d like to learn more about how the rebates work, check out this PDF from the Canada Revenue Agency. I tried to keep things simple in this post.
I just got home from a weekend up at a friend’s cottage. It’s an annual birthday tradition and it’s always a great time. A good cottage weekend can do wonders to reinvigorate yourself. I am ready for the week.
But since the Pan Am Games closing ceremony fireworks are about to kick-off and I want to go watch them from my sun deck, I don’t have a lot of time to write a post. So instead, I thought I would share a few of my photos from the weekend.
The first photo is near Shelburne, Ontario. The wind turbines are from the Amaranth Wind Farm, which is the largest wind energy installation in Canada.
This is the Georgian Bay. I love swimming in this water.
Cottage reading: Monocle.
The wood shop. There’s a lot of creative talent at this particular cottage.
Creemore = cottage.
All of these photos were also posted to my Instagram if you’d like to follow me there. The last photo was from Snapchat (donnelly_b).
Regular scheduled programming will resume tomorrow. I have a great guest post queued up on road pricing. I can’t wait to share it.
Today I had lunch at Webers Hamburgers so that I could see what all the fuss is about. Here’s my check-in.
For those of you who don’t know Webers, it’s a burger place on the side of the highway in Orillia, Ontario. It opened in 1963 with the goal of targeting cottage goers and has since become an “institution” in the region.
I don’t think I’ve ever been, so I figured I had to give it a try.
Before going, I decided to ask around to see what people thought of the burgers. And in almost all of the cases, I got the same response: “You can get better burgers in the city. But you have to go. It’s an institution. It’s tradition.”
And that ended up being a very accurate description.
Were the burger goods? Yes. Were they mind blowing? No. In fact, they’re pretty basic burgers. You have a choice of 3 different toppings and 2 different condiments. That’s it. Want mayo? Sorry, they don’t do that.
But in the end, it’s not really about the burgers.
While there, I was reminded of a blog post by Seth Godin called, “Am I supposed to like this?” His opening line is the following: “If we think we are, we probably will.” And it’s all about how we make judgments well before we think we do (and how marketers invest in that).
What matters a great deal is how we’re “supposed to” feel about something. If a wine is expensive, we’re “supposed to” to think it tastes better and our mind usually makes that a self-fulfilling prophecy.
And in this case, Webers has become symbolic of summer and good times at the cottage. You’re “supposed to” stop there whenever you go to the cottage. It’s tradition.
This is the Georgian Bay. I love swimming in this water.
Cottage reading: Monocle.
The wood shop. There’s a lot of creative talent at this particular cottage.
Creemore = cottage.
All of these photos were also posted to my Instagram if you’d like to follow me there. The last photo was from Snapchat (donnelly_b).
Regular scheduled programming will resume tomorrow. I have a great guest post queued up on road pricing. I can’t wait to share it.
Today I had lunch at Webers Hamburgers so that I could see what all the fuss is about. Here’s my check-in.
For those of you who don’t know Webers, it’s a burger place on the side of the highway in Orillia, Ontario. It opened in 1963 with the goal of targeting cottage goers and has since become an “institution” in the region.
I don’t think I’ve ever been, so I figured I had to give it a try.
Before going, I decided to ask around to see what people thought of the burgers. And in almost all of the cases, I got the same response: “You can get better burgers in the city. But you have to go. It’s an institution. It’s tradition.”
And that ended up being a very accurate description.
Were the burger goods? Yes. Were they mind blowing? No. In fact, they’re pretty basic burgers. You have a choice of 3 different toppings and 2 different condiments. That’s it. Want mayo? Sorry, they don’t do that.
But in the end, it’s not really about the burgers.
While there, I was reminded of a blog post by Seth Godin called, “Am I supposed to like this?” His opening line is the following: “If we think we are, we probably will.” And it’s all about how we make judgments well before we think we do (and how marketers invest in that).
What matters a great deal is how we’re “supposed to” feel about something. If a wine is expensive, we’re “supposed to” to think it tastes better and our mind usually makes that a self-fulfilling prophecy.
And in this case, Webers has become symbolic of summer and good times at the cottage. You’re “supposed to” stop there whenever you go to the cottage. It’s tradition.
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