To help address a growing shortage of rental housing, the Canadian government announced, on September 14, 2023, an enhancement to the Goods and Services Tax Rental Rebate ("GST Rental Rebate"), commonly referred to as the landlord's rebate. The enhanced GST Rental Rebate will provide full relief for the 5% GST (or 5% federal component of the Harmonized Sales Tax ("HST")) paid by builders and purchasers of new "purpose-built rental housing" such as apartment buildings, student housing, and senior residences for use as a place of residence by individuals provided certain conditions are met.
Landlords that are builders of new residential housing are required to self-assess GST/HST, which is generally non-recoverable, on the fair market value of residential housing at later of the time of substantial completion and the building is first occupied. Alternatively, landlords that purchase new residential housing that has not yet been occupied by tenants are also required to pay GST/HST, which is generally non-recoverable, on the purchase price of the residential housing. Prior to the announcement, the Excise Tax Act (Canada) (the "ETA") allowed landlords to claim a partial rebate equal to 36% of the GST paid by subject to the phase-out thresholds described below. The purpose of the enhanced GST Rental Rebate is to encourage the development and construction of new residential rental housing by reducing in full the unrecoverable GST paid by builders and landlords of new rental housing.
Although draft legislation has not yet been released, the government indicated that the new measures are effective as of September 14, 2023.
The Details
The enhancement will increase the GST Rental Rebate from 36% to 100% of the GST paid and remove the existing phase out thresholds, which in general, incrementally reduce the rebate for rental units with values between $350,000 and $450,000 and fully eliminate the rebate for rental units with value of $450,000 or more. Given the housing costs in major Canadian cities, the $450,000 was a significant barrier to the rebate. As a result of the enhancement, all new residential housing that meets the conditions described below will qualify for a 100% rebate of the 5% GST with no restriction related to the value of the rental units.
To qualify for the enhanced GST Rental Rebate, a residential housing project must meet the following conditions:
- The residential units in the building qualify for the existing GST Rental Rebate, (i.e., the residential units meet the existing conditions under section 256.2 of the ETA);
- The building must have at least: a. Four private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas), or b. 10 private rooms or suites (a 10-unit residence for students, senior or people with disabilities);
- At least 90% of the residential units in the building are designated for long-term rental; and,
- Construction of the project begins between September 14, 2023 and December 31, 2030 and is completed by December 31, 2035. Projects that began construction prior to September 14, 2023 will not qualify for the enhanced rebate. We expect further details to be provided on what might qualify as the "beginning of construction" once the draft legislation will be released. Will it capture current projects that have not yet broken ground?
The enhanced GST Rental Rebate will be available for projects that convert existing non-residential real estate, including office buildings, into residential housing if the above conditions are satisfied. The enhanced rebate will also be available to public service bodies, such as charities, municipalities and universities. However, the enhanced rebate will not apply to substantial renovations of existing residential housing to protect renters from "renovictions".
The existing GST Rental Rebate will continue to apply to residential housing that qualifies for the rebate but does not meet the conditions for the enhanced GST Rental Rebate, such as buildings with less than four residential units and residential housing undergoing a substantial renovation.
Additional Thoughts
The enhanced GST Rental Rebate is welcome news to the residential rental industry. However, uncertainty remains with respect to certain aspects of the rebate, particularly its implementation. For example, when does construction of a project begin? Does it begin when a developer enters into agreements with suppliers and contracts, when the first shovel enters the ground or when the actual construction of the building takes place? Unless the government makes further announcements, the answer may have to wait until the draft legislation is released.
It is also important to note that the enhanced GST Rental Rebate only applies to the 5% GST or 5% federal component of the HST in Ontario and the Atlantic provinces. Therefore, the existing landlord's rebate will continue to apply to the provincial portion of the HST (8% in Ontario and 10% in the Atlantic provinces). It will be interesting to see whether there will be enhancements to this rebate and whether the Quebec government introduces enhancements to the Quebec sales tax landlord's rebate.
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