If you will be shopping for a new home in the coming year, you can breathe a little easier thanks to the provincial government's announcement last week of changes to the structure of the harmonized sales tax (HST), which goes into effect July 1, 2010.

First, a little bit of background on harmonization and housing: currently, the embedded PST share of sales taxes on a new home only applies to the material portion of the home (translating to approximately 2% of the final sale price), whereas under a harmonized scenario, the provincial share of sales taxes would be applied to the total cost of a new home, including the cost of land and labour.

Under a harmonized sales tax regime, new-home buyers would have to cough up an additional 6% worth of sales taxes to reach the full 8% value of the provincial share of sales taxes.

Now this is where it gets a bit complicated. The province had planned to offer a 75% rebate on the provincial portion of the sales tax (6% of the 8% PST) on homes priced under $400,000 -- which meant that consumers would, in effect, still be paying 2% provincial sales taxes after harmonization.

However, for new homes priced over $400,000, the plan was to phase out the rebate up to a $500,000 threshold, at which point new-home buyers would have been hit with a massive tax increase, footing a full 8% provincial sales tax bill (plus GST and land transfer taxes). This was simply an unfair and unwarranted tax increase that would have squeezed the middle class out of the new housing market.

Recognizing that new housing plays a critical role in the upward socio-economic mobility and prosperity of Ontarians, the provincial government has improved the previously proposed rebate structure with a progressive harmonized tax treatment for new housing:

• 2% sales tax would be applied to the sale price of a new home up to $400,000;
• 8% sales tax would apply to the incremental sale price above $400,000

In addition, buyers who have signed a purchase agreement prior to June 19 but have not yet closed on their new home will be protected from any tax increase.

The modifications to the structure of the tax is a good-news story for new-home buyers, for consumers seeking major residential renovations and for the tens of thousands of people employed in the residential construction industry.

Michael Collins-Williams is a Registered Professional Planner and Director of Policy at the Ontario Home Builders' Association.