During his closing comments at the National Caucus Retreat on Thursday in London, Ontario, Canadian Prime Minister Justin Trudeau made the unexpected but very welcome announcement that the government will be abolishing the GST on new rentals project.
Developers of new rental buildings were formerly required under so-called “self-supply” requirements to pay the 5% GST on the project’s fair market value. This included construction expenses and land value, upon its completion. (Rebates are offered on properties with a fair market value of $350,000 and $450,000. Although many people don’t find that range to be very beneficial.) On the other hand, developers of strata condos could avoid GST by having purchasers pay it themselves.
While many people would like to see more rental housing constructed, the reality is that developers face several obstacles to doing so. The greatest of which is the Goods and Services Tax (GST) and its impact on the construction industry.
Although the GST is still 5%, construction costs have increased in recent years. Thus, the 5% is charged on the project’s fair market value, which factors in construction costs. Furthermore, resulting in an increase in the amount developers must pay. Renters and the general public are affected because those who can afford to pay the 5% tax and the greater expenses of financing and building, among other things, will have to charge more to recoup their losses.
After being elected in 2015, the Trudeau Liberals pledged to make the change, only to publicly back down in 2017 when they realised the promise would cost them an estimated $125 million year in tax income. When challenged about this reversal at today’s event, Trudeau said that the 2017 decision was taken because they thought the Rental Construction Financing Initiative was preferable.
“It was the right programme at the time,” Trudeau remarked of the initiative. “But now, with interest rates where they are, and given the challenges that people have in building new apartment buildings, we realise it’s the right time to step up with removing federal GST on purpose-built apartment buildings.”
According to Larry Greer, Senior Vice President of Government Relations for CAPREIT, who has made formal recommendations to the federal government to make this change in recent years during budget consultations, “the industry has been in broad agreement that this is a measure the government can implement to really encourage additional purpose-built [rental] construction.”
Greer believes the GST has always been a problem. However, it has worsened as the cost of building, borrowing money, and paying for local permits and licences has increased.
He also explains that “removal of the GST/HST will not allow all projects to pencil out.” In other words, “for some projects, it will take a lot more than that,” but “for some projects, I think that will move the needle for sure.”
Toronto-based Harbour Equity senior vice president of investments Josh Lerner says his company has been looking at rental projects where economic feasibility has been “tight” and adds that eliminating the GST will make a big impact.
To quote him: “For the GST, it usually works out to three or four percent of the project in terms of [total] costs, so if you take that out, it really does give you the margin you need to go ahead.” “Today I would feel much more comfortable making an investment that I wouldn’t have done yesterday.” According to Lerner, there have been speculations floating around the business over the last several weeks that something like this may be on the horizon, thus today’s statement was not entirely unexpected.
Minister of Housing Sean Fraser and Minister of Finance Chrystia Freeland made the statement, which suggests that the Ministry of Finance had a significant role given the topic’s potential tax implications. Although there is not too much small print in today’s statement, Cynthia Jagger, Principal at Vancouver-based brokerage Goodman Commercial and Vice Chair of the Urban Development Institute’s Rental Housing Issues Committee, believes that a few concerns still need to be answered.
The first concern is whether the GST removal would apply to recently finished building projects or only to projects that finish construction after today. There is also the matter of whether or not there will be restrictions on the size, kind, and construction of rental properties. Whether or if this policy shift, like the foreign buyer restriction, will have a sunset provision is likewise unknown.
Trudeau did not provide a timeline for the move, just that legislation will be introduced to implement it.
Most of these new rental projects need CMHC‘s funding programmes to get off the ground, so Jagger hopes the federal government will address the backlog with greater clarity on the abolition of GST. I’ve heard that there are now incredibly high wait times and that 4,600 applications were submitted before the deadline for the price rise. Still, it’s a step in the right direction for Canada’s rental housing market.
Michael Geller, a real estate consultant and developer based in Vancouver, says he is not surprised by the government’s action, despite the industry’s repeated requests over the past 20 years, and that the next step the Government of Canada should take is reviving the Multi-Unit Residential Building (MURB) programme from the 1970s and 1980s, which allowed investors to write off their real estate project expenses.