A New Dawn for Rental Housing in Canada: Unpacking the GST Rebate Proposal
In a landmark announcement on September 14, 2023, the federal government of Canada introduced a proposal aimed at addressing the critical issue of housing affordability. The initiative centers on providing substantial goods and services tax (GST) relief for the construction of new purpose-built rental housing. This move could be a game-changer for the real estate sector, but it raises important questions about its actual impact and long-term sustainability. Here's a deep dive into this significant policy change.
The Core of the Proposal
The proposed rebate, if enacted, would drastically increase the existing rental rebate from 36% to 100% of the GST and the federal portion of the Harmonized Sales Tax (HST). Targeted at apartment buildings, student housing, and senior residences, the initiative aims to stimulate the development of long-term rental accommodation. The qualifying criteria specify that rental buildings must have at least four self-contained apartments, and senior or student housing must consist of a minimum of 10 units. Additionally, at least 90% of the building must be used for long-term residential units. This measure will be effective for projects that begin construction between September 14, 2023, and December 31, 2030, and complete by December 31, 2035.
Historical Context and Legislation
Prior to this proposal, only non-profit organizations, co-operative housing corporations, public institutions, and charities could claim a full GST rebate on apartment buildings under specific conditions. The current legislation requires landlords who opt to keep newly constructed buildings for rental purposes to remit the GST/HST based on the fair market value upon first occupancy or substantial completion. However, since renters do not pay GST or HST, landlords bear this cost, creating a financial burden that this proposal seeks to mitigate.
It is expected that the Excise Tax Act will be amended to allow for this new rebate, although the specific timeline for this remains uncertain.
The federal government has also urged provinces to remove their provincial sales taxes (PST) from the equation. Ontario, Newfoundland and Labrador, and British Columbia have signaled their intention to align with this federal initiative. The removal of provincial taxes would bolster the impact of the federal rebate, creating an even more favorable environment for new rental construction.
The proposal has been largely well-received within the real estate industry. Michael Cooper of Dream Unlimited Corp. called the legislation a "game-changer," citing that his company could develop 5,000 new rental units across various cities due to the cost reduction by 7%. Cooper emphasized that this tax relief would make it much easier to obtain construction loans as financial institutions would find these projects more economically viable.
Concerns and Questions
Despite the overwhelming positive reception, several questions linger. Cynthia Jagger, a specialist in multifamily property sales, raised concerns about the qualifying criteria. For instance, it remains unclear what would happen if a project switched from a condominium to rental housing during construction. Furthermore, the measure is not permanent; it expires on December 31, 2030.
Byron Chard, CEO of Chard Development Ltd., also indicated that tenants might not experience immediate benefits, as the effects of the policy would only be realized upon project completion. Nonetheless, the increased supply of rental units is expected to stabilize rental rates in the years to come.
The Road Ahead
While this proposal has been hailed as a vital step toward housing affordability, it also exposes gaps that need further exploration. There's a palpable urgency for the formal introduction and passage of legislation to provide clarity and security for developers considering new projects. It also calls for additional incentives at various government levels to sustainably address the housing crisis.
The initiative has the potential to unlock significant investment in rental housing, thereby alleviating some of the pressure on housing costs. However, questions surrounding its implementation and longevity make it clear that this is merely a first step in a long journey.
Canada's proposed GST rebate for new rental housing construction has set the stage for a more robust and diversified housing market. It's a laudable move, aimed at both encouraging new projects and making them financially viable for developers. However, to realize its full potential, the government needs to swiftly formalize this proposal into law, provide clarifications on lingering questions, and perhaps most importantly, look into making this a long-term solution rather than a temporary fix.
As Canada grapples with soaring real estate prices and limited housing supply, this proposal could serve as a vital catalyst for change, but its ultimate impact will be determined by how it is implemented and integrated into a broader housing strategy.