On September 14, 2023, the federal government announced a welcome relief that will affect owners and developers of purpose-built rental buildings, student housing or seniors housing.
New residential developments are subject to GST or HST. For rental developments, a builder is required to pay unrecoverable GST or HST on a "self-supply" of the building — a deemed sale by the builder to itself — based on the building's fair market value at the later of substantial completion and first occupancy. To help alleviate some of this cost burden, GST and HST rebates are available for qualifying rental units. Prior to this announcement, the rebate for the 5% GST (or federal portion of the HST) was 36% of the tax, but it was reduced depending on the value of the unit, down to C$0 for any unit over C$450,000. In today's market conditions, this left many units in Canada's major cities unable to qualify for any GST relief. Notably, Ontario provides a rebate of 75% of the provincial portion of the HST, to a maximum of C$24,000, which is not reduced for higher-priced units.
Proposed GST Rebate
With the goal of increasing residential rental supply, the federal government has proposed an "enhanced" GST rental rebate for new purpose-built rental developments, increasing the GST rebate to 100% and removing the phase-out thresholds. This means a full recovery of the GST (or the 5% portion of HST) on qualifying rental units.
This enhanced rebate will apply to projects that commence construction between September 14, 2023, and December 31, 2030, and complete construction by December 31, 2035. There are also two additional criteria that must be met:
- The building must have at least four private apartment units (with a kitchen, bathroom and living area) or at least 10 private rooms or suite (e.g., a 10-unit residence for students, seniors or people with disabilities); and
- 90% of the residential units in the building must be designated for long-term rental.
The enhanced rebate will not apply to substantial renovations of existing residential complexes (purportedly to protect Canadian renters from "renovictions"), but it will apply to conversions of commercial and industrial properties to residential rental buildings.
Currently, GST or HST rebates are claimed on a unit-by-unit
basis, meaning that each unit must qualify for the rebate, or it is
excluded. With the new requirement that 90% of the building be
designated for long-term rental, the unit-by-unit analysis for
rebates may be obviated. There is also some question whether
condominiumized buildings to be used for rental purposes will have
the same status as apartments — the announcement only
excludes individually owned condominium units. Currently, the
rebates for rental condominiums are subject to different timing
rules from apartments, and the rebate must be repaid if the
building (or any unit that was eligible for the rebate) is sold
within one year. Draft legislation, which has not yet been
released, should hopefully clarify some of these uncertainties and
provide guidance on what it means to commence construction.
Presently, residential developments in an HST province and Quebec will still have a tax burden. The federal government is encouraging the provincial governments in these provinces to follow suit, which would fully mitigate the unrecoverable GST or HST.
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