Office conversions eligible for federal GST rebate on new rental housing projects

Sep 18 2023, 10:47 pm

Some of the specific policy details for the federal government’s elimination of its GST on the construction cost for new secured purpose-built rental housing have been released.

Prime Minister Justin Trudeau and federal housing minister Sean Fraser announced the Enhanced GST Rental Rebate last week as a measure to help push struggling projects across the line into the realm of financial viability amidst the very tough economic and inflationary environment.

This will expand the existing GST Rental Rebate from 36% to 100% and remove the current GST Rental Rebate phase-out thresholds for purpose-built projects with units valued between $350,000 and $450,000.

As well, the removal of the GST will be eligible for not only general secured purpose-built rental housing projects but also for specific projects for student housing and senior residences.

Even the conversion of office buildings into secured purpose-built rental residential uses will be eligible.

But renovations of existing residential buildings are ineligible due to renoviction concerns and the intent of the program to stimulate a net gain in supply.

Moreover, qualifying projects must have at least four units — a unit with a private kitchen, bathroom, and living areas — or at least 10 private rooms or suites, such as for student housing. At least 90% of the units must be designated for long-term rental.

Unsecured rental housing, such as individual-owned condominium homes, are not eligible.

With the federal 5% tax effectively eliminated, builders and developers would save $25,000 on the construction cost of each two-bedroom secured rental unit valued at $500,000, for example.

The rebate will apply to projects that begin construction on or after September 14, 2023, and on or before December 31, 2030. Construction must reach completion by the end of 2035. More specifics are expected to be released when the draft legislation is made available.

Last week, Fraser stated that the provincial governments of Ontario, BC, and Newfoundland and Labrador have already indicated they will follow the federal government’s move by removing their HST/PST on new rental construction.

In reaction to the policy announcement, Vancouver-based real estate firm Goodman Commercial believes the rebate is a “positive step,” but there should be no restrictions attached, given that hundreds of thousands of units are needed nationwide to make a real dent in the housing crisis.

“If a project is designated rental housing, the feds should let it run. Additionally, the government should credit recently completed (and GST-paid) rental projects. The country needs all those developers to stay in the field, and yet we are aware of several who, having just completed projects amidst the highest cost increases we’ve seen, are now unwilling to look at delivering more, citing too much work and too much risk,” states Goodman.

They believe there will likely be an immediate positive impact for many projects, with some even flipping from strata condominium uses to secured purpose-built rental housing uses. This will be the case if other levels of government make similar incentives.

They expressed concern that some municipal governments may see this as a potential windfall for community amenity contribution (CAC) negotiations by increasing their demands on new projects that benefit from the federal GST rebate.

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.

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