Are you building or buying a new home? You may want to know some of the following information:
Municipal Permit to Build
Prior to construction commencing, the municipal building permit office reviews plans for your home. Permits may be required for many types of work: for instance: plumbing, electrical, sewers, and more. Site tests may be conducted to examine the water table, soil, bearing capacity of the ground, and more. Amendments to these plans can be made following final engineering adjustments.
You should not build until all the municipal requirements and conditions have been met. The municipality will not usually approve a plan if it does not meet its conditions. Make sure all is well; otherwise, your investment could be seriously affected.
Subdividing Land
If you are a developer or individual trying to subdivide a plot of land to build multiple homes, you have to obtain municipal approval to draft plans of subdivision. This is important because without municipal approval to subdivide land, you will not be able to sell the homes you built. One of the reasons for this is that the Planning Act prohibits this.
Why does the Planning Act forbid this? Many years ago, among other reasons, people were dividing farmland and selling it to people and expecting municipalities to provide utilities and other services to rural areas. This ended up being very costly for many municipalities and the Provincial government decided to enact the Planning Act back in the 70s. Ultimately, the Planning Act regulates illegitimate subdivisions and transfers of property.
Demolishing and Building Again?
Watch out for new homes being built on pre-existing foundations. Your new home is likely not protected by the Ontario New Home Warranties Plan Act. For purchasers of these new home types, this is important because your protections could be limited. Extensive provisions in your agreements may be needed to protect you. This could lead to extensive costs and unexpected delays.
HST
After June 30, 2010, the government requires from you to pay Harmonized Sales Tax (“HST”) or 13% tax on every new home purchase. That said, you should also know that the federal government of Canada and Ontario provide you with 2 types of rebates. For instance, Ontario provides you with a rebate on taxes paid, up to $24,000.00.
The government of Ontario and Canada implemented the HST in Ontario effective July 1, 2010. Basically, the HST is comprised of the federal Goods and Services Tax of 5% (“GST”) and Provincial Sales Tax of 8% (“PST”). In other words, if you paid $13,000.00 in HST, $5,000.00 of it is GST and $8,000.00 of it is PST.
The GST and PST that comprise the HST is important to know considering the governments provides you with different rebates for each type of tax paid (GST and PST). What you could receive in a rebate also depends on the pre-tax value of your home. For instance:
Federal Government (GST)
Value of Home & Rebate Formulas
Up to $350,000 (pre-tax) = 36% of the 5% GST payable (Rebate)
$350,001 to $449,999 (pre-tax) = 36% declines to 0% of the GST payable using a straight-line formula (Rebate)
$450,000+ (pre-tax) = $0.00 (Rebate)
EXAMPLE (Federal)
Home Value (pre-tax) = $300,000.00
GST Amount (5%) = $300,000.00 x 5% or .05
GST Amount (5%) = $15,000.00
Rebate = 36% of 5% ($15,000.00)
Rebate = .36 x $15,000.00
Rebate = $5,400.00
Provincial Government (PST)
Value of Home & Rebate Formulas
Up to $400,000 (pre-tax) = 75% of the 8% PST payable
$400,001+ (pre-tax) = $24,000 rebate
EXAMPLE (Provincial)
Home Value (pre-tax) = $399,999.99
PST Amount (8%) = $399,999.99 x 8% or .08
PST Amount (8%) = $32,000.00
Rebate = 75% of 8% ($32,000.00)
Rebate = .75 x $32,000.00
Rebate = $24,000.00
As you can see, HST rebate calculations are complicated. You should get help from a lawyer to assist you in your next new home purchase.
Holdbacks
Holdbacks are what the name implies: holding back money in trust for the next subcontractor and are meant to protect the buyer. Considering the subcontractors do not have a contract with the buyer of the property (privity of contract), but with the main contractor, it would be hard for the subcontractors to have security against the home buyer’s land. This is, of course, if the home buyer has not paid more than 30% of the property’s value and the property is not conveyed until it is ready for occupancy. If you have paid more than 30% of the property’s value, you may have to retain a holdback at the time of closing.
To illustrate this better, think of it as a hierarchy… the owner or developer (usually) is at the top and contractors are below that owner and subcontractors are below the contractor. If a subcontractor hires other subcontractors to complete other work, they are considered sub-subcontractors and so on. Each time money is paid to the contractor, the owner must hold back 10% from the contractor and the contractor must hold back 10% from subcontractors and so on. One cannot opt out of or waive holdbacks.
There is more information on holdbacks available, but you should know these holdback basics.
TARION Warranty
Everyone should know about this. TARION warranty is a not-for-profit corporation established by the Ontario government. Generally, TARION provides new home buyers with (1) limited deposit protection and protection against defects in work and materials, (2) unauthorized substitution of materials, and (3) delayed occupancy or closing without proper notice.
What must happen for buyers to access the TARION warranty? There are many conditions, but for the purpose of this blog, you should know that all builders and vendors of new built homes must be registered with TARION and all qualifying homes must be enrolled. Not all builders and vendors are automatically registered with TARION because they must pass a risk assessment.
For TARION to be available, buyers should also know that not all properties are covered by TARION. Some examples are custom-built homes by small builders on existing foundations, occupied for a short period of time, some new condominium projects, and more. This means that you may have to negotiate private contractual warranties and covenants from vendor or builder or both.
Make sure you always verify whether the home has a TARION registration number for both builder and home. This should provide buyers with the comfort of knowing that if something goes wrong, TARION can protect you against building defects, for instance.
Lastly, should things go sour, TARION also covers a portion of your deposit on the home. For purchase agreements dated after January 1, 2018, the deposit coverage depends on the sale price of the freehold home. For instance, if the sale price is $600,000 or less, the maximum deposit protection is $60,000. If the sale price is over $600,000, the maximum protection is 10% of the purchase price up to a maximum of $100,000.
Concluding Remarks
Clearly, buying a new home is not as simple as purchasing a used home or a ‘resale’. As a result, you should expect to pay more in legal fees for these types of real estate transactions (but not significantly more). Nonetheless, I trust this blog has equipped you with some legal knowledge to make your next new home purchase an educated one. There is nothing better than going into a real estate deal having an idea of what is going on.
For more information on new home purchases, resales, refinances or title changes, feel free to contact Lozano Law and we will be happy to assist you in the best way possible.
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