Canada's Enhanced GST Rental Rebate: A Deep Dive into the New Boost for Purpose-Built Residential Rentals

The Canadian housing market has experienced significant turbulence over the past few years. The overarching issue? Affordability. As prices continue to surge and demand outweighs supply, the federal government has been under increasing pressure to intervene. Enter the enhanced GST rental rebate for purpose-built residential rental buildings.

Decoding the Enhanced GST Rebate for Residential Rentals

In a recent announcement on September 14, 2023, the Canadian Prime Minister laid out a plan to provide relief for the goods and services tax (GST) on the construction of purpose-built rental housing. This comes in response to nationwide calls for improved housing affordability.

What does this rebate entail? Effective immediately, landlords constructing new residential rental buildings will be eligible for this enhanced rebate. The relief applies to apartment buildings, student housing, and senior residences specifically designed for long-term rental accommodation. The construction window is from September 14, 2023, to December 31, 2030, with the project completion deadline set for December 31, 2035.

Breaking it down with Examples

Scenario Before the New Proposal:

• Land purchase: $300,000

• Construction cost: $700,000

• Total HST paid during construction: $130,000

• Estimated fair market value upon completion: $2,000,000

• Self-assessed HST on this value: $260,000

With the original GST/HST rebate framework, after taking the available rebates into account, the builder would end up paying $106,000 to the CRA for the GST/HST expenses on the fair market value of the building.

Scenario after the new proposal

If the new rules are to be applied to the same example, the builder’s out-of-pocket GST/HST expense could drop to a mere $5,000, translating into a savings to the builder of $100,000.

The Excise Tax Act & Its Impending Amendments

Although the specifics are still under wraps, we expect the Excise Tax Act to undergo amendments to accommodate this new rebate. Upon enactment, the rental rebate will jump from its previous rate of 36% to a whopping 100% of the GST and federal part of HST. This removes the existing GST phase-out thresholds for qualifying rental housing projects.

To qualify:

• Rental buildings must have a minimum of four self-contained apartments.

• Student and senior housing projects should consist of at least ten units.

• At least 90% of the building should be dedicated to long-term residential units.

• Construction must have started after September 14, 2023.

It's crucial to note that the enhanced rebate does not cover substantial renovations of existing residential properties. The government's focus is firmly set on boosting the overall housing supply.

A Background on Builder Entitlements & Provincial Sales Tax (PST)

Builders have historically been entitled to input tax credits on construction costs. Those who chose to sell or act as landlords for newly constructed buildings had to charge or remit the GST/HST on the fair market value at first occupancy or building completion.

Prior to these changes, only select entities like non-profit organizations, cooperative housing corporations, and charities could receive a full GST rebate on apartment buildings. However, these entities had to meet specific criteria.

The federal government has also requested provinces to align their provincial sales taxes (PST) with this federal relief. Ontario, Newfoundland and Labrador, and British Columbia have already showcased their intentions in line with this proposal.

Conclusion

The enhanced GST rental rebate signifies a monumental shift in Canada's construction and housing sectors. Builders and investors should gear up to maximize these benefits, while prospective renters can expect an increase in available housing options.

However, as the legislation specifics are still in the works, it's vital to keep an eye out for further announcements and consult with financial experts to understand the full scope of these changes.

**Note**: The scenarios provided are hypothetical and serve as illustrative examples. Actual costs and savings may vary based on individual circumstances and market conditions.