It’s been widely speculated that most condo-owners don’t quite understand how the new Harmonized Sales Tax will affect their monthly maintenance fees.

I recently came across this great explanation by John Warren who writes for “Condominium Manager Magazine.”

Only cool people like me subscribe to “C.M.M.”….

Implications for Condos of the Harmonized Sales Tax (HST)

By: John Warren, CA

HST on items not previously subject to provincial sales tax (PST) goes to individuals, while condominiums will have to pay more for most goods and services. Assessment increases in 2010 will be significantly higher than past increases in many cases and owners will find it confusing to separate that part of the 2010 monthly assessment increase due to imposition of the HST from the part caused by inflation and other cost increase factors.

It is early days as yet, but hopefully we can provide some insight into at least some of the issues that need to be considered and communicated to owners. There will be two offsetting components to cost increases.

First, actual costs for materials should go down because the 8% PST previously paid by suppliers when they purchased materials will disappear as of July 1, 2010. 

Second, costs will increase as 13% HST will then be added to all items now subject to 5% GST. This does not mean that invoice amounts will go down 8% as the PST disappears and then go up 8% for the increase from 5% GST to 13% HST (that would be entirely too simple). This is because PST is charged to suppliers only on the material component of their invoices.

For example, if $10,500 of roof repairs are comprised of materials of $3,000 (including PST), labour, administration and profit of $7,000 and GST of $500, then under HST the cost of materials should decrease by the PST paid on them, approximately $225 and, all else being equal, the invoice total declines to $9,775 which, with 13% HST, will bring the total to $11,046, a 5.2% increase.

However if, say, closed circuit cameras were replaced for $10,500 comprised of $7,000 for cameras and parts, $3,000 for labour, administration and profit and $500 GST, then under HST material cost should decrease approximately $520, the total invoice becomes $9,480, which with HST totals $10,712, a 2% increase.

The amount of the cost increase is somewhat a function of the material component of the invoice, the larger the material component the smaller the cost increase should be.

I have deliberately said “should” and “all else being equal” because my examples assume that suppliers will reduce prices by the amount of the PST that is no longer part of their costs, but that is hardly automatic. I suspect that many suppliers will not do so unless they have to and that in many, if not most, instances costs will rise closer to the 8% additional tax of the HST. So what might this mean for a condominium?

First, reserve fund study providers estimate that almost all reserve fund expenditures, both actual after June 30, 2010 and projected for future years in reserve fund studies, will increase by approximately 5% to 7% due to the imposition of the HST, assuming most of the PST savings are passed on. Condominiums should update their reserve fund studies during 2009 so that the increased reserve contributions that will result from the increase in taxation can be considered in the 2010 budget.

Second operating costs will increase.

Current estimates are that electricity, gas, communications, cable television and contracts for management, concierge, elevator and mechanical equipment maintenance, landscaping, cleaning and similar services will increase by close to 8%; water costs should not change as they are not presently subject to PST or GST, nor will they be subject to HST, repairs and supplies – 5% to 7%; professional fees – 8%; office – 5% to 7%; and, finally, insurance should not change as it is presently subject only to PST, which tax will continue and insurance will not be subject to HST.

There are also other issues to consider. In Toronto, the garbage levy is included in the water billing if collection is by the City and the HST will not presently be levied on this cost. However, if the condominium opts for private waste collection rather than City collection, HST will apply to the contractor’s invoices after July 1, 2010, and this should be one of the factors considered in deciding which method of waste collection to use.

Long-term all-inclusive contracts for such services as cable television, elevator and mechanical equipment maintenance that go beyond June 2010 should also be looked at as they include some provision for material costs that include PST that will not be charged after June 30, 2010. This could result in some reduction in the contract cost if negotiations for such a change are possible under the terms of the contract.

Salary and wage costs will not be subject to HST but, as mentioned above, HST will likely cause contract costs for services such as cleaning, landscaping, management, concierge and the like to increase by close to 8% after June 30, 2010. Condominiums may therefore conclude that it would be cheaper to hire directly, rather than contracting for these services with an outside company. Care should be taken in making this decision as there are considerations other than the HST that will increase costs if direct hiring is chosen and they should not be ignored. Employees hired directly means Workplace Safety Insurance Board premiums and CPP and EI contributions by the corporation.

Employees will expect at least the same benefit package as that offered by contractors and the condominium may not be able to get those features at the same cost; there are costs for employee supervision and scheduling, sickness, holiday and vacation coverage and absenteeism to consider; there is administration and paper work required and if employees do not work out there are termination costs.

Contracts have long been the choice of most condominiums with good reason and care should be taken to assess the risks and other costs if a change to direct hire is contemplated. As mentioned, it is early days yet and the effects will certainly become clearer as time goes on, but it is never too early to start to prepare owners for 2010 as, I think, increases could reach 10% or more depending on the composition of costs in each condominium, the effect of inflation and cost increases caused by factors other than the HST, such as increasing energy or material costs and new costs such as the garbage levy.

If boards wait until all the details are known, there may not be enough time for owners to come to grips with the necessity for the increase in their 2010 monthly fees and if they do not, boards will bear the brunt of owner dissatisfaction.

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There is not ONE condominium in the city that won’t see an increase in the monthly maintenance fees from 2010 over 2009.

It simply cannot be avoided thanks to the new HST being levied on July 1st, 2010.

Most condo-owners have no clue how the HST will actually affect their maintenance fees, and I’ve heard some people (who really have no clue) profess that their actual fees will be taxed at a rate of 8%!

John Warren does a great job of explaining the actual effects of the new tax.

It’s the expenses of the condominium that will be increasing, but not all of these expenses just lump on an extra 8%, as John describes.  The condominium budget’s will all be increased, and thus so too will your monthly maintenance fees.

But know this: if your monthly fees go up by more than 8%, that’s not all because of the HST.

My building in particular is seeing a “modest” 5% increase in fees, and something like 3.4% can be attributed to the new HST and the remainder to inflation and increased operating expenses.