Understanding the Latest GST Rebate on Purpose-Built Rental Housing

The legislative reform comes under the federal Government's response to ever-rising Canada's housing prices and a shortage of affordable homes whether to buy or rent. On September 14th, 2023, Prime Minister Justin Trudeau announced that the Federal Government would eliminate GST on new purpose-built rental housing to stimulate the construction of desperately needed rental homes in Canada. New purpose-built rental accommodation, including apartment buildings, student accommodation and senior residences built for long-term rental accommodation, will benefit from GST exemptions.

Background

 Builders are entitled to claim input tax credits for their construction costs. Those who end up selling or acting as landlords of newly constructed buildings are required to charge or otherwise remit the GST/ HST on the property's fair market value at first occupancy. The use of residential units or student apartments in an apartment building on long-term rentals represents the use of that building as an exempt supply. The GST/ HST, therefore, form a cost at completion for the landlord.
Prior to these alterations, GST rebates on apartment buildings could only be granted to non-profit organizations, cooperative housing corporations, public bodies, or charities, provided certain conditions were met.

The New Rebate Changes

The new rebate will increase from 36% to 100%. This new rebate means the builder is to be fully reimbursed for the federal 5% GST (as well as the corresponding federal HST). Importantly, the new legislation will also lift the GST Rental Reimburse phase-out threshold for these purpose-built rental housing projects. The previous phase-out thresholds reduced and then removed the rebate for units valued at $350,000 to $450,000. This new rebate, which is applicable to projects completed before 2031, is designed to encourage the construction of purpose-built rental units nationwide. One of the focus areas of this rebate is purpose-built student accommodation, which is an essential part of meeting the housing requirements of students in different educational institutions.
Purpose-built student accommodation is a type of housing that is specifically designed to meet the specific needs of students. Apartments, dormitories and other residential buildings are designed to provide a comfortable living environment for students in their studies. The increased GST rebate incentivizes developers to build purpose-built student accommodation to meet the growing demand for student accommodation.
The new rebate changes are already having an effect and are paving the way for more cost-effective rental units and student accommodation to be built across Canada. Several condominium projects are re-evaluating for rental housing as well. The new legislation will make it easier for interested parties to overcome barriers and take on the cost of building these types of dwellings. For example, developer Dream Unlimited Corp. announced plans to build 5,000 purpose-built rentals in Toronto and Ottawa, as well as in Calgary and Saskatchewan.

Enhanced GST Rental Rebate Details

An enhanced rebate is proposed to be available to landlords of new residential rental buildings. This rebate, which is effective immediately, will apply to certain apartment buildings, student housing, and senior residences built for long-term rental accommodation. Let’s take a look at some of the major points covering the detailed information on enhanced GST rebates.

1. This measure would still necessitate builders of purpose-built residential rental buildings to estimate the fair market value of the residential element of the building and to self-assess GST/HST based on the fair market value. However, the self-assessed GST/HST is fully offset by the increased federal (and probably provincial) rental rebate. Therefore, it is absolutely imperative to qualify for the rental rebate.

2. The increased rebate is valid for projects that start on or after September 14th 2023, end on or before December 31st 2030, and complete construction by December 31st 2035.

3. New residential units would only be eligible if they meet the following criteria:

• Have at least four private apartment units with private kitchens, bathrooms, living areas, or at least 10 private rooms or suits (for example, a 10-unit residence for students/seniors/people with disabilities). 
• 90% of residential units are designated for long-term rental.

4. The enhanced rebate will not apply to individually owned condominium units, single-unit housing, duplexes, triplexes, housing co-ops, owned houses, land leased houses and sites in residential trailer parks. However, these housing will continue the existing rental rebate.

5. The increased rebate does not apply to large-scale refurbishments of existing housing stock. The announced incentive is for the purpose of increasing new supply rather than removing supply

Implications for Developers

The Goods and Services Tax (GST) and Harmonized Sales Tax (HST) stand in the way of new rental buildings being built. In British Columbia, the elimination of GST will result in a 5% reduction for eligible new rental builds. Industry leaders have identified three main challenges to getting a project started:

• Increasing the cost of land
• Government fees
• High-interest rates 

The elimination of GST / HST may alleviate some of the concerns regarding government fees. Some have speculated that the elimination of GST/ HST will bring back projects that were put on hold or cancelled because of high-interest rates to help boost the housing supply in Canada.
The announcement comes after months of pressure from the Government to do something about the skyrocketing cost of housing and rentals. The federal Government wants all provinces to follow their lead, which could mean more savings on the horizon. So far, only Ontario has said they plan to follow the federal Government. Currently, Ontario's HST rate is set at 13%, which is a combination of the province's 8% sales tax and the federal Government's 5% tax. Under Ontario's plan, the entire 13% HST would be eliminated for qualifying new rental builds.
The 100% GST rebate presents a great deal for developers who want to invest in purpose-built student accommodation. The higher the GST rebate, the greater the financial incentive to build purpose-built student housing. The higher the incentive to build, the more investment there will be in purpose-built student housing, which will help fill the housing gap for students across Canada.

To sum up, the Federal Government's announcement of an enhanced GST Rebate on Purpose-built Rental Property is a major step towards incentivizing purpose-built rentals, including student accommodation in Canada. These rebates provide an important financial incentive to developers, and are expected to boost the real estate industry by helping to meet the growing demand for specialized rental housing. The relief announced, especially for new residential rentals, is a sign that the Federal Government is committed to a strong rental and student accommodation market. These measures are designed to encourage builders to construct student accommodation along with residential units that meet certain criteria. The effect is expected to have a significant impact on shaping the landscape for rental and student housing across the country. This proactive approach is in line with the Government's broader efforts to improve housing accessibility and affordability, which will benefit both developers and those looking for quality rental accommodations.

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