On September 14, 2023, the Canadian government announced that it will introduce enhanced rebates which will eliminate the GST/federal component of the HST (i.e., the 5% component of the 13% HST) for newly constructed purpose-built rental housing, such as apartment buildings, student housing and senior residences built specifically for long-term rental accommodation. Following this announcement, the Province of Ontario indicated it will similarly scrap the 8% provincial component of HST (i.e., the 8% component of the 13% HST).
Under the existing rules, builders of new or substantially renovated purpose-built residential rental buildings are required to self-assess the GST/HST on the fair market value of the residential component of the building, which is only partially offset by new residential rental rebates.The federal component of the rebate is equal to 36% of the 5% federal component of HST, with a maximum rebate of $6,300 (all figures CAD) for units valued at $350,000 (and, as the unit value increases to $450,000, the federal rebate phases down to nil, such that units valued at more than $450,000 are not entitled to the federal rebate).
The Ontario component of the rebate is equal to 75% of the 8% Ontario component of HST, and it is capped at $24,000 for units valued at $400,000 (which means that if a unit is valued at $800,000, the Ontario rebate would still remain at $24,000). In the best-case scenario (i.e., where per-unit values are $350,000 or less), the total combined federal and Ontario rebates would only rebate 7.8% of the 13% HST, with the net result being that builders of purpose-built rental buildings need to pay 5.2% of the residential building's fair market value to the Canada Revenue Agency once the building is fully constructed and tenants start moving in.This unrecoverable cost represents one of the largest disincentives for builders to build purpose-built residential rental buildings.
Enhanced GST Rental Rebate Details
As a result of the federal government's new measure, the rental rebate would temporarily be increased to 100% of self-assessed tax.This measure is intended to encourage widespread construction of new purpose-built residential rental buildings.
According to the Department of Finance Canada Backgrounder released on September 14, 2023 (available here):
- This measure would still require builders of purpose-built residential rental buildings to determine the fair market value of the residential component of the building and self-assess the GST/HST on that amount. However, the self-assessed GST/HST can be offset in full by the enhanced federal (and likely provincial) rental rebate, which means that it is absolutely critical to meet the conditions of the rental rebate.
- The enhanced rebate will apply to projects that begin construction on or after September 14, 2023, and on or before December 31, 2030, and complete construction by December 31, 2035. Following this date, and absent further legislative amendments, we would presumably revert back to the rules from pre-September 14, 2023.
- Qualifying new residential units would be those that qualify for the existing rental rebate and are in 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 designated for long-term rental.
- Projects that convert existing non-residential real estate, such as an office building or hotel, into a residential complex would be eligible for the enhanced rebate if all other above conditions are met.
- Public service bodies would also be eligible to access the enhanced rebate.
- The enhanced rebate will not apply to individually owned condominium units, single-unit housing, duplexes, triplexes, housing co-ops and owned houses situated on leased land and sites in residential trailer parks, but this housing would continue to qualify for the existing rental rebate where the conditions for the existing rebate are met.
- The enhanced rebate will not apply to substantial renovations of existing residential complexes.The announced measure is intended to stimulate new supply, not to take supply off the market.
While the above measure only applies to the federal component of HST, the Province of Ontario will likely implement the same measure in respect of the provincial component of HST.
Bill C-56, which includes some of the proposed legislative amendments implementing the federal measure, was tabled for first reading in Parliament on September 21, 2023.Notably, the proposed legislation suggests that certain terms may be prescribed by regulation once these provisions are enacted.
Although the announced measure is welcome news, there are still unanswered questions regarding the measure, such as:
- Given that the enhanced rebate will only apply to projects that "begin construction" on or after September 14, 2023, and given that the current draft legislation does not define when construction begins, how will that term be interpreted?This becomes relevant for projects that may have commenced on or around the announcement date.
- What, if anything, will the government do in respect of purpose-built rental buildings that have just recently commenced construction and ostensibly would not benefit from these new measures?
- What will the regulations ultimately say?
Quite simply, we must wait for the government to enact the final legislation (including the regulations) before we can answer these questions.
The Tax Group at Aird & Berlis LLP will continue to monitor the impact and development of these rebates. Please contact one of the authors or a member of the group if you have questions or require assistance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.