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Residential Rental Rebate: 2 GST Enhancements & 1 HST Hiccup

Published:

September 29, 2023

Author(s):

• Robert MacGregor

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Updated February 9, 2024.

On December 15, 2023, Bill C-56, the Affordable Housing and Groceries Act, became law, giving 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 all 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:

• 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 input tax credits (ITCs) for all, or a portion of, the GST/HST they pay on that labour, services and materials.
• 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, the developer can’t claim ITCs for it because the actual rental of residential units to tenants is an exempt supply under the Excise Tax Act.

To alleviate some of the financial impact of the GST/HST self-assessment process, the Excise Tax Act entitles developers to claim a GST Rental Rebate of 36% of the GST paid based on the self-assessment. But that entitlement is 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 passed Bill C-56 to amend the Excise Tax Act and implemented two key enhancements to the GST Rental Rebate (Enhanced GST Rental Rebate):

Increased Rebate. The Enhanced GST Rental Rebate for qualifying properties increased 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 are removed for specific purpose-built rental housing projects. Developers of qualifying properties reap the benefit of the Enhanced GST Rental Rebate no matter the fair market value of the building.

But not all rental property developers are entitled to the Enhanced GST Rental Rebate – though they 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 Excluded. To help protect tenants from “renovictions”, the Enhanced GST Rental Rebate doesn’t apply to substantial renovations of existing residential complexes.

Limited Time Offer. Only construction that commenced after September 13, 2023, qualifies for the Enhanced GST Rental Rebate. Also, the Enhanced GST Rental Rebate is a temporary measure only: the construction must begin before 2031 and be “substantially completed” before 2036. Both the qualification date and the completion date limitations have been criticized as limiting the value of the Enhanced Rebate as a tool to achieve its stated objective.

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 qualifying properties.

Current Status. There’s been some response to that request:

• Newfoundland and Labradorannounced it will remove the provincial portion of the HST (10%) from purpose-built rental housing. However, it does not appear it has yet taken steps to implement this initiative.

• Prince Edward Island announced an HST rebate program for the provincial portion of the HST (10%) on qualified rental housing projects. However, in contrast to the federal Enhanced GST Rental Rebate program, P.E.I. will cap the amount recoverable by applying the program to only the first $350,000 in value per unit. It intends to harmonize its program with that of the federal government to streamline the application and administration process, most likely by instituting a schedule with the GST Rental Rebate Form similar to the Ontario approach. However, P.E.I. hasn’t yet implemented legislation to implement its approach.
• Nova Scotia will rebate the provincial portion of the HST from construction of new rental units and has amended its Sales Tax Act.

• New Brunswick still hasn’t yet indicated its position, although there are calls for it to act.

It remains to be seen whether Newfoundland and Labrador 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 a GST Rebate Form together with a schedule). In either case, once necessary legislation is effected the end result is the removal of HST from new residential rental property developments in Newfoundland and Labrador.

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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