About one in five new homes built in Ontario will see a six per cent price increase next year because of the provincial government's plan to merge the provincial sales tax and GST, says Mike Collins-Williams, policy director for the Ontario Home Builders' Association.

The province and federal government have agreed to harmonize the provincial sales tax and GST into a single 13 per cent sales tax by July 1, 2010, the province confirmed in Thursday's budget. The merged tax will replace the existing retail sales tax.

That would have the effect of boosting the tax on new homes (resales are excluded) by six per cent, the budget said.

For homes priced under $400,000, the province is proposing a rebate to offset the tax increase. For homes priced between $400,000 and $500,000, there will be a partial rebate. The details have not been released yet.

The government said the rebate would be worth about $1.1 billion a year to buyers of new homes.

Ontario new home sales 2008
Price Per cent of sales
Under $400,000 54.7
$400,000 to $500,000 22.6
Over $500,000 22.7
OHBA, citing federal statistics

Based on federal statistics for 2008, Collins-Williams said 22.7 per cent of new homes in Ontario sold for over $500,000, approximately the same number cost between $400,000 and $500,000, and slightly more than half were under $400,000.

But with the wide variations in home prices across the province, the effect will vary by community. In general, more homes in Ottawa and Toronto, where prices are higher, will be caught by the combined tax.

It is almost certain that more home sales will trigger the higher combined tax as time passes, because prices have gone up over the long term, the association said.

"Inflation and rising home prices will erode affordability over time as fewer and fewer new homes qualify for a rebate, making new homes priced over $500,000 among the most heavily taxed products," association president Frank Giannone said in a news release.

Collins-Williams pointed to the example of the federal goods and services tax, introduced in 1991. When it began, houses priced under $350,000 were exempt, and those under $450,000 got a partial break. The federal government said those figures would be indexed, but "that hasn't happened."

Many more home sales attract GST today because prices have risen.

He said builders looking at a house with a planned sale price of $410,000 might cut its size or reduce the amenities to duck the tax. Likewise, consumers may adjust their behaviour.

"You might be budgeting $399,000 and no more."