Renewed calls to remove GST from rental housing construction costs

Construction cranes in downtown Vancouver. (Shutterstock)

In recent months, there have been a number of renewed calls for the Government of Canada to remove its Goods and Services Tax (GST) on the cost of building secured purpose-built rental housing.

Advocates calling for the move assert it would have a meaningful impact on the financial viability of building much-needed rental housing, enough to push projects across the line into the realm of viability amidst the highly challenging market and inflationary conditions.

Michael Geller, a prominent Vancouver-based planner and an adjunct professor at Simon Fraser University’s Centre for Sustainable Development, says it would be a “game changer” by removing a “big upfront cost.”

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Moreover, new condominium projects already benefit from not having to pay the 5% in GST. The homebuyer, not the developer, ultimately covers the GST, he says.

Such a policy change would essentially expand this relief for developers into new rental housing projects.

“Fundamentally, when you build a rental project, because of the way the tax regime is structured, you have to pay the GST. If you keep that building, and often a developer will keep it, that GST is effectively a cost component. You cannot claim it back,” Geller told Daily Hive Urbanized in an interview.

For condominium projects, he pays GST on bills, but then after a few months, he gets it back a few months later, and occasionally some interim financing is needed to cover the GST amount.

The existing GST regimen for rental housing can add millions of dollars in additional costs to even a mid-rise rental housing building or tens of thousands of dollars per unit. For example, he says, a theoretical $10 million project would see added costs of $0.5 million for the 5% GST.

Geller says the GST, or HST in some provincial jurisdictions, has been a sticking point for the development industry for decades, and discourages builders and developers from pursuing more rental housing projects — pushing them towards more condominiums.

This GST is also applied to soaring construction costs. A recent RBC Economics report estimates residential construction costs have soared by 51% since the start of the pandemic in early 2020, due to the escalation in costs for materials, equipment, and the limited labour pool of skilled trades. Higher development fees and levies by municipal governments are also another emerging cost pressure.

The Bank of Canada’s heightened policy interest rate has also made it more challenging for developers to borrow the construction financing required to cover their costs of getting shovels into the ground. The federal government has acknowledged this by providing significant low-cost construction financing to builders of secured purpose-built rental housing projects, on a project-to-project basis.

The combined total costs of high borrowing, construction, and taxes also add to housing affordability issues by pushing up rents even further to recover such growing costs.

Expanding GST rebate incentives to rental housing was seriously considered by the federal Liberal party. They included the policy direction in their 2015 election campaign platform, which at the time carried an estimated annual cost of $125 million in forfeited GST revenues. But in 2017, they shied away from making this policy, instead suggesting they would explore other more effective strategies to catalyze more affordable housing.

The GST rebate on new rental housing re-emerged again in 2021 as a campaign promise by the Liberals for the 2021 election.

“Purpose-built rental development is one of the only solutions to the affordability crisis we have,” CIBC World Markets Deputy Chief Economist Benjamin Tal told CBRE president and CEO Jon Ramscar during a Toronto industry event in February 2023.

“We need rental units. Therefore I believe we should eliminate the GST on purpose-built and Development Charges –- I speak to many builders about this. And the government can afford (the GST cut) if you designate this as a crisis, which it is. And it’s getting worse.”

Some of Vancouver’s municipal politicians — Mayor Ken Sim and City Councillor Sarah Kirby-Yung — shared on social media this week that they have been lobbying the federal government to expand the GST rebate to new rental housing.

Glad to hear this idea was raised to the federal government at their retreat.

ABC councillors and I been advocating for almost a year to eliminate GST on housing, as part of an all-hands-on-deck approach to make housing more affordable.

We will continue to advocate for…

— Mayor Ken Sim (@KenSimCity) August 22, 2023

Waiving the GST on purpose-built rentals would be key move to help bring thousands of badly needed new #rental #housing homes online.

Such a move would shave ten of thousands of $$$ from the cost of each unit making development more viable, & help alleviate skyrocketing rents. https://t.co/tNP29cxYwX

— Sarah Kirby-Yung 楊瑞蘭 (@sarahkirby_yung) August 22, 2023

Vancouver builder Richard Wittstock says the GST is payable regardless of whether the new rental housing building is sold, and likened the current regime to being “double taxed.”

The added cost of up to 5% with the GST is “a massive hit that is often the difference between a project pencilling and not,” he added.

Thank you for advocating strongly for this. This was a promise that Mr Trudeau made in 2015 but then backed off from in 2017. Waiving GST would definitely move the needle for rental viability. It is a massive hit that is often the difference between a project penciling and not.

— Richard Wittstock (@rwittstock) August 23, 2023

GST on rental is a very distortive tax. Charged not just on build costs…but also on land! And if value of the new building is deemed higher than what it cost to build, we pay GST on any notional profit as well. And no ITCs like any other manufacturer, because rent is GST-exempt.

— Richard Wittstock (@rwittstock) August 23, 2023

GST is payable REGARDLESS OF WHETHER WE SELL THE BUILDING OR NOT.
Imagine you make yourself a sandwich, and you have to self-assess whether the sandwich is worth more than the sum of its ingredients. And then you pay the CRA 5% of that number, even though you just want to eat it.

— Richard Wittstock (@rwittstock) August 23, 2023

This is true even if you grow the wheat and bake the bread yourself! You pay tax based upon fair market value of the sandwich.

— Richard Wittstock (@rwittstock) August 23, 2023

(And here’s where I really stretch the analogy) say you make a sandwich but your kid doesn’t eat it. It goes bad & becomes compost. Some of the value of that sandwich is recycled into new wheat that becomes a new sandwich. You still have to pay GST on 2 whole sandwiches at FMV!

— Richard Wittstock (@rwittstock) August 23, 2023

In effect you’re being double taxed on the part of the old sandwich that is recycled into a new sandwich (that’s the land value in my analogy). CRA is trying to collect GST on a second go-around on land even though GST may have been paid once before already on the previous bldg.

— Richard Wittstock (@rwittstock) August 23, 2023

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