On September 14, 2023, the Department of Finance Canada issued a news release (the "News Release") regarding proposed legislation to be enacted in order to enhance the existing GST New Residential Rental Property ("NRRP") rebate on certain new purpose-built rental property. The proposed modifications to the existing NRRP rebate aim to incentivize construction of new rental homes for Canadians.
It is noteworthy that the enhancement rules provided for in the News Release apply only to the GST (5%) on the NRRP rebate (or, in provinces with harmonized sales taxes, to the equivalent federal part of the HST). In other words, the proposed rules do not affect the existing Ontario NRRP rebate regarding the provincial part of the HST on rental property that is situated in Ontario (which is available even if the fair market value of the housing is $450,000 or more) or to the provincial part of the HST on rental property located in the Atlantic provinces.
Although the News Release indicates that the enhanced NRRP rebate should be effective as of its date of publication (September 14, 2023), the enhancement will not officially be in place until the implementing legislation has received royal assent. As of this writing, the Department of Finance Canada has not released a draft bill.
The Existing Rebate
The rental of a residential complex or a residential unit in a residential complex is generally exempt for GST/HST purposes. Accordingly, residential landlords cannot claim input tax credits ("ITCs"), notably, to recover GST/HST paid or payable on the purchase of a residential complex from a builder or that they accounted for on the "self-supply" of the complex.
However, under the existing program, eligible residential landlords may claim the NRRP rebate for some of the GST (or the federal part of the HST) up to a maximum of 36% of the GST payable on the purchase or self-supply of a residential complex. In theory, each residential unit for which an eligible landlord is claiming the NRRP rebate should be a qualifying new residential unit ("QRU"). Generally, a residential unit may be a QRU if it is first used as an individual's primary place of residence for a period of at least one year.
The NRRP rebate is equal to 36% of the GST paid (the "Rebate Percentage") on each QRU for a maximum GST rebate of $6,300. The amount of the rebate is progressively reduced when the fair market value of the QRU exceeds $350,000. Once the QRU has reached a fair market value of $450,000 or more, no NRRP rebate is available.
How the Rebate is Being Enhanced
The enhanced NRRP rebate (the "Enhanced Rebate") will be available for certain specific eligible QRUs only (an "Eligible QRU", see below for further explanations). The Enhanced Rebate is based on three main proposed changes to be made to the existing NRRP rebate regime:
- The Rebate Percentage will be increased from 36% to 100%.
- The phasing-out of the NRRP rebate for QRUs valued between $350,000 and $450,000 will be eliminated in the case of Eligible QRUs.
- The ceiling for QRUs valued at $450,000 or more will no longer be applicable in the case of Eligible QRUs. Although it is not explicit in this respect, the News Release provides for an example involving an Eligible QRU valued at $500,000 where the Enhanced Rebate will be available.
Eligible QRUs
The Enhanced Rebate will not be applicable to all QRUs that are currently eligible for the existing rebate. In order to be eligible for the Enhanced Rebate, a QRU will have to meet all the following conditions:
- Construction will have to begin on or after September 14, 2023, and on or before December 31, 2030;
- Construction will have to be completed by December 31, 2035;
- It is a QRU under the existing NRRP rebate regime; and
- It is in a building 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 per cent of residential units designated for long-term rental.
Accordingly, the Enhanced Rebate is not designed to apply to QRUs that are single-unit housing (such as houses or condominium units), duplexes, triplexes, housing co-ops, and owned houses situated on leased land and sites in residential trailer parks.
With regards to already existing buildings that would be renovated or converted, the News Release also specifies that the Enhanced Rebate will be available for non-residential real estate (such as an office building) converted into a residential complex. However, in order to protect tenants from renovictions, existing residential complexes to which substantial renovations would be made will not be eligible to the Enhanced Rebate.
Impact in the HST Provinces
As indicated above, the News Release does not affect the distinct Ontario NRRP rebate regarding the provincial part of the HST for rental property that is situated in Ontario or the provincial part of the HST for rental property located in the Atlantic provinces.
Ontario
With respect to Ontario, although its provincial NRRP rebate is more generous than the existing federal rebate, it remains to be seen whether Ontario will also enhance its rebate to match the proposed modifications. However, with the housing crisis currently affecting the province, the Ontario government will likely be under pressure to harmonize its rules.
Atlantic provinces
Regarding the Atlantic provinces, as they do not currently offer a provincial NRRP rebate, it is unlikely that the News Release will precipitate the creation of such a rebate.
Impact on Québec's NRRP Rebate
The News Release also does not directly affect the rules applicable in Québec for the purposes of the Québec sales tax ("QST") regime. In Québec, there is a distinct NRRP rebate for the QST that can reach up to 36% of the QST paid on each QRU for a maximum rebate of $7,182.
Like the existing GST NRRP rebate, the QST rebate amount is progressively reduced when the fair market value of the QRU exceeds $200,000 and no rebate can be claimed once the fair market value reaches $225,000.
It is noteworthy that the QST regime is generally fully harmonized with the GST/HST legislation in accordance with the Comprehensive Integrated Tax Coordination Agreement ("CITCA") entered into with the federal government.
However, CITCA permits certain deviations with the federal GST/HST rules and Québec enjoys flexibility with respect to specific elements. Section 11 of Annex A of CITCA notably provides that any differences between GST/HST rules and the QST rates, thresholds, phasing-out or maximums for a QST rebate in respect of new rental housing are not considered to be deviations in the tax bases of the two taxes. However, Section 11 requires that such QST rebate "match[es] the administrative, structural and definitional parameters of the corresponding GST/HST rebate."
It is unlikely Québec will be bound by the proposed modifications to the GST NRRP rebate under CITCA considering such modifications only affect (1) the rate, (2) the phasing-out rules, and (3) the ceiling threshold, and the administrative, structural and definitional parameters of the GST NRRP rebate are not modified.
That being said, from a political point of view, as the Legault government had been urged to address the province's housing crisis, it is to be expected that Québec will follow in the federal footsteps.
Key Takeaways
- Although effective as of September 14, 2023 (subject to the relevant legislation being enacted), draft legislation has not been made public yet.
- The Enhanced Rebate offers an increased rate of 100% that is not subject to any phase-out thresholds.
- The Enhanced Rebate also does not appear to be subject to any cap or ceiling in terms of maximum fair market value per unit.
- Not all qualifying new residential units eligible for the existing NRRP rebate will qualify for the Enhanced Rebate. Notably, single-unit housing, duplexes, triplexes, housing co-ops, and owned houses situated on leased land and sites in residential trailer parks will not qualify.
- The Enhanced Rebate is not applicable to the provincial part of the HST and Ontario has not announced yet whether it will harmonize its distinct HST NRRP rebate with the proposed federal rules. It also remains to be seen whether the existing QST NRRP rebate will be modified in response to federal announcement. In both cases, political pressure will likely force provincial governments to implement such changes as well.
The authors would like to thank Oriane Roy, articling student, for her collaboration.
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.
