In a bit of a surprising, but very welcome, turn of events, the Government of Canada is eliminating the GST on new rental construction, Prime Minister Justin Trudeau announced on Thursday in London, Ontario, in his remarks to close out the National Caucus Retreat.
Previously, under what was referred to as “self-supply” rules, developers of new rental buildings had to pay the 5% GST on the fair market value of the project — factoring in construction costs and land value, among other things — upon completion.
(Rebates are available on units with a fair market value between $350,000 and $450,000, but many find the number too low to be helpful.)
However, developers of strata condominiums could, essentially, bypass the GST because it’s paid by the individual homebuyers.
Building housing is a business, whether we like it or not, and for businesses, if it doesn’t make money, it doesn’t make sense, and this GST issue was a big reason — but not the only reason — why building rental housing didn’t make a lot of sense for developers, despite many having the desire to do so.
As previously reported by STOREYS, as much as 15% to 20% of the total cost for a rental project consists of fees that have to be paid before construction can even begin, and although the GST is still 5%, construction costs have gone up in recent years and the 5% is charged on the fair market value of the project, which factors in construction costs, meaning the amount developers have to pay has gone up.
For those who can bear the 5% — along with the elevated costs of borrowing and construction, among other things — and go through with their projects, they inevitably have to charge higher rents to make back their money, so the issue affects renters and the general public as well.
The change was initially promised by the Trudeau-led Liberals, only for them to publicly change their mind in 2017 — after being elected — after realizing they’d be foregoing an estimated $125M in tax revenue per year. During today’s announcement, Trudeau was asked about this flip-flop, and said that the 2017 decision was made because they decided the Rental Construction Financing Initiative would be a better move.
“It was the right program at the time,” Trudeau said. “But now, given interest rates where they are, given the challenges that people have in building new apartment buildings, we realize it’s the right time to step up with removing federal GST on purpose-built apartment buildings.”
It’s better late than never, and the move is being welcomed by most, if not all, in the industry.
“The industry has been in broad agreement that this is a measure the government can implement to really encourage additional purpose-built [rental] supply construction,” says 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.
Greer says the GST has been a longstanding issue, but has become a bigger and bigger issue as other costs for projects — construction, borrowing, municipal fees — have also escalated.
“Removing of the GST/HST won’t allow all projects to pencil out,” he adds. “For some projects, it will take a lot more than that, but I think for some projects, it will move the needle for sure.”
Josh Lerner, Senior Vice President of Investments at Toronto-based Harbour Equity, says that his firm has been looking at rental projects recently where the economic feasibility has been “tight” and removing the GST certainly makes a difference.
“For the GST, it usually works out to 3% or 4% 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,” he said. “An investment that I wouldn’t necessarily have made yesterday, I would feel much better about making today.”
Lerner also says that there had been some rumours swirling within the industry in recent weeks that this may be coming, so the announcement today was not a complete surprise.
As the issue is related to taxation, the move likely deeply involved the Ministry of Finance, and Minister of Finance Chrystia Freeland was in attendance at the announcement along with Minister of Housing Sean Fraser.
There does not appear to be too much fine print in the announcement today, but a few questions still need to be addressed, says Cynthia Jagger, Principal at Vancouver-based brokerage Goodman Commercial and Vice Chair of the Urban Development Institute’s Rental Housing Issues Committee.
First is the question of whether the GST elimination will be retroactive to projects that recently completed construction, or if only projects that complete construction after today will benefit. Another question is whether there will be any regulations regarding the type of rental product, or construction type, or size. It’s also unclear if this policy change will have a sunset clause, such as the foreign buyer ban.
Trudeau also did not announce when the change will actually be coming in effect, only that they will be introducing legistlation to make the change.
“Following further clarification on the removal of GST, I’m hopeful the Feds will fix the backlog at CMHC as most of these new rental projects require their financing programs to get out of the ground,” Jagger says. “It’s my understanding that 4,600 applications came in ahead of their deadline for premium increase and that wait times are extremely long at present. But all in all, it is a positive step for new rental housing construction in Canada.”
Vancouver-based real estate consultant and developer Michael Geller says that he is also not surprised the government is doing this, despite it being something the industry has been asking for repeatedly for about 20 years, and adds that he thinks the next step the Government of Canada should take is bringing back the old Multi-Unit Residential Building (MURB) program from the 1970s and 1980s that allowed people to invest in real estate projects and write off those investments, similar to charitable donations.
But that’s a conversation for a different day; and everyone in the rental development community seems content to enjoy this win today.