Enhanced GST rebates on new purpose-built rental housing announced

Yesterday, the Department of Finance announced GST relief for new residential rental construction.  In addition to signaling a reduction in the cost of supplying new rental homes, the measure potentially reduces or eliminates a major source of friction between developers and the Canada Revenue Agency (“CRA”). This is a significant change for developers and their advisors.

Although there is no draft legislation just yet, the following is a summary of the expected changes based on the Department of Finance’s recent announcement:

• Finance is not revoking the “self-supply” GST rule. Rather, they are increasing the existing GST rebate for landlords from 36% to 100%.
• Although styled as a rebate (i.e., a recovery of tax paid), it will operate akin to a cancellation of the tax. This is because developers must report liability for the applicable GST when the building opens, but if they simultaneously file the rebate claim form, the rebate fully offsets the tax payment liability.
• The developer must fit within the existing rebate rule in the Excise Tax Act. The primary condition for the rebate is the landlord must reasonably expect that at the start of the rental, the tenant will be present for at least one year using the home as their primary place of residence.
• The value threshold in the existing rebate provision (i.e. the phase out for units valued between $350,000 and $450,000) is eliminated. Accordingly, there is no ceiling to the value of a unit which may qualify for the rebate.
• Unlike the current rebate for landlords, which is potentially available in respect of all leased residential rental units, the new extended rebate applies only to buildings with at least:
  • four private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas) or at least 10 private rooms or suites (e.g., a 10-unit residence for students, seniors, or people with disabilities); and
  • 90% of residential units are designated for long-term rental.

Based on those conditions, persons who build and rent a single-family home, for example, would at best qualify only for the 36% rebate.

• It appears that the rebate is only in respect of the 5% GST and not the provincial portion of the HST in Ontario and the Atlantic provinces. It remains to be seen whether those provinces request Finance to extend the rebate to the provincial portion of the HST.
• The rebate only applies to projects in respect of which construction begins on or after September 14, 2023. No details were provided as to when construction might be considered to begin for purposes of the proposed rules.
• The sunset provisions will require construction to begin before December 31, 2030 and complete before December 31, 2035.

Background on GST rebates on new purpose-built housing

When the GST was enacted in 1991, Parliament decided that residential rents should be exempt from the tax. However, to avoid the loss of GST revenue on residential construction, the tax liability was shifted from the tenant to the landlord. In essence, either the landlord pays GST on the purchase of the brand-new building or, if self-constructed, the landlord becomes subject to the so-called “self-supply” rule – the bane of so many developers’ existence – when the building opens. The developer-landlord must self-assess and pay GST on the fair market value of the property.  Absent a legislated test for determining value, many developers have been the subject of CRA audits and received sizeable reassessments imposing significant amounts of additional GST based on internally-generated CRA appraisals of the apartment building.

In 2001, a measure of relief was provided when the federal government enacted a partial rebate for landlords equal to 36% of the GST paid in respect of the residential unit.  The rebate paralleled the rebate already in place for individuals purchasing new homes. However, the legislation contains thresholds under which the rebate is reduced once the value of a unit exceeds $350,000 and eliminated entirely once that value reaches $450,000.  These thresholds have not changed since 2001 and, consequently, in large cities where real estate values have in particular grown dramatically over time, the benefit of the rebate has been severely diminished.

Conclusion 

For now, we eagerly await draft legislation that would implement yesterday’s announcement. Hopefully, that legislation will address many of the questions and uncertainties which the announcement has generated.

We also await news from the provinces.  Will Harmonized Sales Tax provinces seek an extension of the rebate to the provincial portion of the HST? Will non-HST provinces (such as B.C.) provide corresponding relief from any Provincial Sales Tax imposed on the cost of residential rental construction?

These questions, and many others, remain to be answered. In the meantime, property developers should contact their tax advisors to understand the implications of the enhanced rebate on ongoing and future projects.