1. Still at it: Transitioning back to GST/PST for builders of new residential real property Presented by: Darren Taylor, CA, Senior Manager, Sales and Indirect Tax The information contained herein is prepared by Grant Thornton LLP and Pushor Mitchell LLP for information purposes only and is not intended to be either a complete description of any tax issue, legal issue or the opinion of our respective firms. Changes in tax laws and the applicable law or other factors could affect, on a prospective or retroactive basis, the information contained herein. You should consult your Grant Thornton LLP adviser or Pushor Mitchell LLP lawyer to obtain additional details and to discuss whether the information in this presentation applies to your specific situation.

2. Agenda 1.New housing transition rules 2.BC Transition tax and rebate 3.Progress payments and construction holdbacks 4.Non-substantial renovations 5.Percentage of completion (March 31, 2013) 6.Long term contracts and rebate issues 7.Accounting and administrivia

3. Transition Rules New Housing Transition Rules

4. Transition Rules Timing of consideration / application of tax Basic rules re: incidence of tax If either ownership or possession is transferred prior to April 1, 2013, then 12% HST applies If ownership and possession are transferred on or after April 1, 2013 and before April 1, 2015, 5% GST and 2% Transition Tax applies If either ownership or possession is transferred on or after April 1, 2015, only 5% GST applies Consistent with the July 1, 2010 transition rules introduced to roll into HST.

5. BC Transition Tax & Rebate

6. BC Transition Tax & Rebate BC transition tax (purchasers) The BC Transition Tax Tax of 2% applies to the purchaser of a residential property where – GST applies to sale and – property at least 10% complete on April 1, 2013 Generally applicable to housing sold between April 1, 2013 to March 31, 2015 – Calculated on the consideration for GST purposes – Payable by the purchaser (same time as GST) – Builder collects, reports and remits

7. BC Transition Tax & Rebate BC transition tax (purchasers) 2% BC Transition Tax does not apply to: – Mobile homes not affixed to land – Floating homes – Owner-built homes – Contracts to construct real property (buildings only)

8. BC Transition Tax & Rebate BC transition tax (purchasers) Important considerations with BC Transition Tax Applies to builders in self-assessment situations – E.g. build-to-sell, but rent instead Applies to short-term accommodation sold/converted to residential use Applies in sale from builder to builder Provincial tax administered by Federal government. Each have different administrative polices regarding the application of tax to certain structures. i.e. limited partnership with Status Indian members on reserve land

9. BC Transition Tax & Rebate Rebate (builders) BC Transition Tax Rebate Builder eligible for Transition Rebate where transition tax payable: Construction is 10% or more complete as at April 1, 2013 and Closing is prior to April 1, 2015 – Amount of rebate based on degree of completion at April 1, 2013 – Builder must certify that it paid PST on substantially all of its taxable purchases on or after April 1, 2013 Receipts/documentation retained for audit purposes

10. BC Transition Tax & Rebate Comparative example Builder sells new home for $500,000. Ownership and possession transfer on April 15, 2013. x>90% complete January 31, 2013.

11. BC Transition Tax & Rebate Rebate to builder - % completion table Table 1 – BC Transition Rebate to builder (general case)

12. BC Transition Tax & Rebate New residential construction, 60% complete March 31, 2013, sells July 31, 2013

13. Transition to PST Double-straddling transactions Double-Straddling Transactions - Overview Special rules apply for housing agreements entered into prior to HST implementation (July 1, 2010) and not finalized prior to PST re- implementation (April 1, 2013) Grand-fathered purchases (contracts prior to Nov 19, 2009): – transitional tax (2010 tax) and transitional rebate not applicable – BC Transition Tax deemed to be included in GST tax base BC Transition Tax on GST consideration of $500,000 is $9,803 ($500,000 / 1.02) – GST and GST rebate (as applicable) apply

14. Transition to PST Double-straddling transactions Double-Straddling Transactions – Overview (continued) For non-grand fathered purchases (contracts post Nov 19, 2009): – General rule No PST rebate available BC Transition Tax applies BC Transition rebate reduced by any PST rebate taken GST and GST rebate (as applicable) apply – Exception: where property substantially all completed (90%) as of July 1, 2010 and no PST rebate taken by builder: BC Transition Tax (and rebate) will not apply GST and GST rebate (as applicable) apply

15. Transition to PST Progress Payments & Construction Holdbacks

16. Transition to PST Progress payments Progress payments Not treated as deposits Consideration for: – Work completed at the time the payment is made, or – Becomes due in anticipation of work being completed – Likely stipulated by an agreement Timing of consideration/application of tax – HST applies if consideration becomes due March 31, 2013 or earlier – GST applies if consideration become due April 1, 2013 or later

17. Transition to PST Holdbacks Holdbacks Retention of payment, subject to satisfactory completion of work Usually in accordance with federal or provincial law GST/HST collectible earlier of – Day holdback is released or – Day holdback period expires GST/HST applicable (effectively) based on the percentage of the holdback that relates to either of the GST or HST construction period.

18. Transition to PST Holdbacks Holdback - Example Written contract to construct a small commercial building in BC for $1,500,000, entered into September 2012 which includes a 10% holdback ($150,000) is due June 15, 2013. Progress payments are: – Pmt #1: $500,000 November 15, 2012 – Pmt #2: $500,000 February 15, 2013 – Pmt #3: $500,000 May 15, 2013 30% goods/services delivered before April 1, 2013 70% goods/services delivered after April 1, 2013

19. Transition to PST Holdbacks Result Total holdback due to be released on June 15, 2013 is $150,000 Amount of tax collectible Pmt#1 $50,000 x 12% HST $6,000 HST Pmt#2 $50,000 x 12% HST $6,000 HST Pmt#3$50,000 x 30% x 12%HST $1,800 HST Pmt#3$50,000 x 70% x 5% GST$1,750 HST Total remittable in June 2013 reporting period$15,550 GST/HST

20. Transition to PST Non-Substantial Renovations

21. Transition to PST Non-substantial renovations Non-substantial renovations by a builder Not a taxable supply to the purchaser Non-substantially renovated 'used-residential unit' for GST/HST purposes Causes self-supply to the builder based on costs that are: Renovation or alteration to the unit – Except financial services – Goods/services that GST/HST were paid on (not recoverable as an ITC) Included in the cost base of the unit if considered to be capital property – Wages, benefits, non-registrant contractors Self-assessment reportable on line 103 of GST/HST return, based on timing of substantial completion or date ownership is transferred to purchaser.

22. Transition to PST Non-substantial renovations Percentage of Completion @ March 31, 2013

23. Transition to PST Percentage of completion CRA GI-105 (Determining percentage of completion) Costs that may be included in determining the percentage of completion are those that are "necessary to put the residential complex in a position to fulfill its function as a place of residence" Percentage of completion Impacts BC Transitional Rebate factor for builders.

24. Transition to PST Percentage of completion 6 CRA acceptable methods for determining %-age of completion Methods do not include the cost of the land Building by building basis Commercial areas and commercial common areas excluded Builders required to determine percentage of completion of units if unit is x>10% complete as at March 31, 2013 (therefore, builder eligible for BC Transitional Tax Rebate) Capital and operating costs Interior floor space Total floor space Fair market value Progress billings Certified report

25. Transition to PST Percentage of completion CRA GI-105 (Determining percentage of completion) Examples: Plans, drawings, architects – integral to the construction process Builder's permits and development cost charges; representation costs (local government, zoning, planning, bylaws, etc.) Site investigation, clearing, leveling, grading, filling, retaining walls Construction and inspection fees Legal & accounting relating to the construction Construction materials, services, components, foundations, landscaping Parking lots, water mains, sewers

26. Transition to PST Other Transitional/Administrative Matters

27. Transition to PST Long term contracts Dealing with in-force and new contracts Existing contracts – Where price (or tax) adjustment clauses are included, suppliers will pass on cost of non-recoverable PST as of April 1, 2013 with an increase in sales prices. – BC transition rebate (builders) should relieve double taxation for building x>10% complete as at March 31, 2013. New contracts – Where price (or tax) adjustment clauses are included, same result. – All parties should be reviewing terms of any long term contract that will extend past March 31, 2013.

28. Transition to PST Rebate Issues and Resources

29. Transition to PST Rebate issues CRA GST/HST Notice No.276 (November 2012) CRA extensively examines most rebate claims Typical reasons for delays in processing/rejection – Purchaser not eligible/incorrect rebate claimed e.g. new housing rebate claimed instead of new residential landlord rebate (same amount different forms) – Incomplete applications/incomplete documentation – Estimates used, not proved totals supported by invoices – Vendor/purchaser statement of adjustments not identifying rebates – Inconsistencies between bare trustee/beneficial ownership of real property being sold

30. New Housing Rebates Resources CRA website resources RC7190-BC, GST190 British Columbia Rebate Schedule RC7000-BC, British Columbia Provincial Sales Tax (PST) Transitional New Housing Rebate RC7001-BC, British Columbia Provincial Sales Tax (PST) Transitional New Housing Rebate - Residential Condominiums RC7002-BC, British Columbia Provincial Sales Tax (PST) Transitional New Housing Rebate - Apartment Buildings

31. New Housing Rebates Resources CRA Forms and publications Guide RC4028, GST/HST New Housing Rebate Guide RC4231, GST/HST New Residential Rental Property Rebate Form GST190, GST/HST New Housing Rebate Application for Houses Purchased from a Builder Form GST190, GST/HST New Housing Rebate Application for Houses Purchased from a Builder Form GST524, GST/HST New Residential Rental Property Rebate Application Form GST524, GST/HST New Residential Rental Property Rebate Application GST/HST Technical Information Bulletin B-092, Substantial Renovations and the GST/HST New Housing Rebate GST/HST Technical Information Bulletin B-092, Substantial Renovations and the GST/HST New Housing Rebate GST/HST Memoranda Series Chapter 19-0, Special Sectors: Real Property

32. Transition to PST Accounting and Administrivia - Life after April 1, 2013

33. Transition to PST Accounting and Administrivia BC transition rules/period ends March 31, 2015 Sales of new residential property after March 31, 2015 not subject to BC transition tax Rebates generally have to be claimed within 2 years after substantial completion or the date the property is occupied. Eventually, purchase/sale agreements that close near March 31, 2015 will need to be reviewed to ensure proper treatment outside of the 2013-2015 transition period.

34. Transition to PST Accounting and Administrivia Collection/remittance of GST Watch accounting rollup of GST collectible – Separate from PST collectible if applicable. Reset automated billings to 5% (or 5% GST and 7% PST, as applicable) Employee taxable benefits Non-substantial renovation of real property Collection / remittance of PST Use separate G/L account Watch for self-assessment issues on imported equipment / own-use inventory

35. Transition to PST Accounting and Administrivia ITCs Ensure only 5% GST claimed as ITC going forward Use GST clearing accounts for each reporting period to clear G/L accounts to $nil with each filed return. No recaptured ITC calculations effective April 1, 2013 Accelerate PST-taxable equipment purchases prior to April 1, 2013 Consider buying out operating leases prior to April 1, 2013 Watch auto-debits Update employee expense report templates

36. Transition to PST Questions? Darren Taylor T 1 604 443 2106 Grant Thornton LLP 888 Fort Street Victoria, BC V8W 1H8 T 1 250 383 4191

37. Thank You! "The information and examples contained within these presentation materials has been prepared by Grant Thornton LLP for information only and is not intended to be relied upon, a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other company specific factors could affect, on a prospective or retroactive basis, the information contained within these presentation materials. You should consult your Grant Thornton LLP adviser to obtain additional details, to discuss whether the information in this presentation applies to your specific situation or to obtain specific tax advice and/or a tax opinion.”