While a shortage of rental housing has contributed to the current housing crisis, the problem is not a new one. After booming in the 1960s, construction of purpose-built rental housing stagnated following the rollback of federal tax incentives in the 1970s, as rental housing became less lucrative for developers.
Since then, tax rules affecting rental housing investment have become progressively less favourable to building new units. This includes changes in capital cost allowance (CCA); the tax treatment of losses due to CCA; allowable soft costs (any costs not considered direct construction costs); the deferral of taxes payable on recaptured depreciation upon reinvestment; and capital gains at the time of sale have all fundamentally reduced the attractiveness of investing in rental housing. The application of the Goods and Services Tax /Harmonized Sales Tax (GST/HST) to the full cost of new rental housing created an even higher barrier to building rental units.
As progressive deterioration in the tax environment drove further decline in the private provision of new rental housing, the Federal government stepped in and spent large sums to support rental housing production across the country. This was accomplished primarily through the funding of social housing projects, which required sizable ongoing subsidies. Following budget cuts in the late 1990s, however, additional subsidy funds were no longer available and the federal government pulled back on funding new affordable housing.
Today, we’re dealing with the consequences of these decisions. The result? If a significant amount of new rental housing is to be built, it will have to be funded through investment from the private sector.
A closer look at the enhanced GST rental rebate
After years of stalled purpose-built rental housing construction, activity picked up in 2014. More recently, as interest rates began to climb upwards after an extended period of historic lows, progress stalled once again as purpose-built projects were put on hold.
On September 14, Canada’s Department of Finance announced plans to enhance the GST Rental Rebate on new purpose-built residential rental housing, to incentivize construction of much-needed rental homes for Canadians. The rebate will apply to new rental housing, such as apartment buildings, student housing, and senior residences built specifically for long-term rental accommodation.
The rebate will also apply to buildings that have been extensively renovated to provide rental accommodation, but not to existing residential rental complexes (to protect Canadian renters from ‘renovictions’). Similarly, since the rebate is intended to stimulate supply of new residential rental units, it will not be available for individually owned condominium units, single-unit housing, duplexes, triplexes, housing co-ops, or owned houses situated on leased land and sites in residential trailer parks.
This move effectively increases the existing GST Rental Rebate from 36% to 100%. The enhanced rebate will apply to qualifying projects that begin construction between September 14, 2023, and December 31, 2030, and complete construction by December 31, 2035.
Although there is no draft legislation yet, the following changes are expected:
- 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 enhanced rebate applies only to buildings with at least:
- four private apartment units (such as a unit with a private kitchen, bathroom, and living areas) or at least 10 private rooms or suites (such as a 10-unit residence for students, seniors, or people with disabilities); and
- 90% of residential units designated for long-term rental
- The value threshold in the existing rebate provision is eliminated with the result that there is no ceiling to the value of a unit that may qualify for the rebate.
While the rebate is only in respect of the 5% GST and not the provincial portion of the HST, several provinces have indicated their intention to provide a rebate on their portion of the harmonized sales tax.
The GST rebate is a good first step in incentivizing the construction of purpose-built rental units. Hopefully there will be enough skilled workers available to get these buildings completed.
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