Residential Rental Rebate: 2 GST Enhancements & 1 HST Hiccup
Published:
September 29, 2023
Author(s):
On September 21, 2023, Bill C-56, the Affordable Housing and Groceries Act, passed first reading. If passed, the Act will give developers of specific types of residential rental properties access to enhancements to the Goods and Services Tax (GST) Rental Rebate in a bid to increase available affordable housing in Canada. This measure alone will do little to address the additional hurdle created by the current nation-wide labour shortage in the construction sector, though it will alleviate one of the financial stressors on many builders. But it’s not yet clear how the four Atlantic Canada provinces with harmonized sales tax (HST) will deal with the provincial portion of the HST. And depending on the approach the provinces take, it could result in a GST/HST cash flow crunch for developers.
2 Key GST Rental Rebate Enhancements
Under the Excise Tax Act, residential rental property developers that become landlords must deal with GST or HST in two stages:
- Construction. During construction of residential rental properties, developers pay GST or HST (depending on the province) on labour, services and materials incorporated into the construction process. In turn, they typically claim ITCs for all, or a portion of, the GST/HST they pay on that labour, services and materials.
- Completion. Under the Excise Tax Act’s self-supply rules, developers that retain ownership of these newly constructed buildings, or buy them, and become landlords must then self-assess GST/HST on the fair market value of the rental property once it’s been substantially completed or the first tenant takes possession of a rental unit (whichever occurs last). The developer must remit the self-assessed GST/HST to Canada Revenue Agency (CRA). However, it can’t claim ITCs for it because the actual rental of residential units to tenants is an exempt supply under the Act.
To alleviate some of the financial impact of the GST/HST self-assessment process, the Excise Tax Act currently entitles developers to claim a GST Rental Rebate of 36% of the GST paid based on the self-assessment. But that entitlement could be either partially or completely phased out based on the rental building’s fair market value: where this value exceeds $350,000 the Rebate is reduced; where it exceeds $450,000 the Rebate is eliminated entirely. In the context of the rising value of Canadian residential property, these thresholds mean that practically, many developers aren’t entitled to the GST Rental Rebate at a time when Canada’s housing shortage is becoming acute. In a bid to respond, the Canadian government introduced Bill C-56 to amend the Excise Tax Act and implement two key enhancements to the GST Rental Rebate:
Increased Rebate. The Enhanced GST Rental Rebate will increase substantially: from 36% to 100% of GST paid.
Phase-Out Thresholds Phased Out. The phase-out thresholds based on the rental building’s fair market value will be removed for specific purpose-built rental housing projects. Developers of qualifying properties will reap the benefit of the Enhanced GST Rental Rebate no matter the fair market value of the building.
But not all rental property developers will be entitled to the Enhanced GST Rental Rebate – though they will continue to qualify for the existing GST Rental Rebate if they meet the applicable conditions.
Qualifying Properties. The Enhanced GST Rental Rebate applies only to apartment buildings, student housing, and senior residences built for long-term accommodation. Condominium units, single-unit housing, duplexes, triplexes, housing co-ops, and owned houses situated on leased land and sites in residential trailer parks don’t qualify for the Enhanced GST Rental Rebate.
Renovictions Evicted. To help protect tenants from “renovictions”, the Enhanced GST Rental Rebate won’t apply to substantial renovations of existing residential complexes.
Limited Offer. Only construction beginning after September 13, 2023 will qualify for the Enhanced GST Rental Rebate. However, the Enhanced GST Rental Rebate is a temporary measure only: the construction must begin before 2031 and be substantially completed before 2036.
1 HST Hiccup
Unfortunately, not all Atlantic Canada developers will necessarily benefit from the Enhanced GST Rental Rebate – at least not yet. Complicating matters in Atlantic Canada is the HST effective in each Atlantic Canadian province. Practically, Atlantic Canadian developers must self-assess 15% HST on the property’s fair market value – but because no Atlantic Canadian province currently offers them a rental housing rebate on the provincial portion of the HST, they can only claim a GST Rental Rebate (that under the Enhanced Rebate amounts to 100% of the GST paid) on the 5% GST portion. To address this, the federal government has asked the governments of each Atlantic Canadian province to remove the provincial portion of HST on new rental housing projects.
Current Status. There’s been some response to that request:
- Newfoundland and Labrador announced it will waive the provincial portion of the HST from purpose-built rental housing.
- Prince Edward Island and Nova Scotia have publicly indicated they plan to develop a complementary or a “mirror” program for purpose-built rental housing. However, it doesn’t appear there’s been any official announcement yet and the details aren’t clear.
- New Brunswick hasn’t yet indicated it’s position.
It remains to be seen how Newfoundland and Labrador, Prince Edward Island and Nova Scotia will eliminate the provincial portions of the HST or institute provincial rebate programs similar to the Enhanced GST Rental Rebate (in which case developers might be required to file two rebate forms or schedules). In either case, once necessary legislation is effected, the end result is the removal of HST from new residential rental property developments in those provinces.
GST/HST Cash Flow. Even when (or if) any Atlantic province removes the provincial portion of HST on new rental housing projects, developers must still self assess HST on the fair market value of the rental property once it’s been substantially completed or the first tenant takes possession of a rental unit. And depending on that date, developers could find themselves required to remit HST and then claim rental rebate(s) for the full amount of the remitted HST. However, if developers file the GST and the HST rebate claim form(s) when the building is substantially completed, the claimed rebates could fully offset the HST liability, eliminating any HST cash flow issue for the developer.
Please contact your McInnes Cooper lawyer or any member of our Construction & Property Development Team @ McInnes Cooper to discuss how your business can make the most of the enhanced GST Rental Rebate.
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