Federal government to remove GST from construction cost of rental homes

Apartment building under construction. (Shutterstock)

In an effort to get more new secured purpose-built rental housing projects over the line into financial viability, Prime Minister Justin Trudeau announced today the federal GST will be removed for such projects.

This follows growing calls for the governing Liberal party to add the measure in a bid to help address Canada’s worsening housing affordability and supply crisis.

However, such a move was first proposed by the Liberals nearly a decade ago during the 2015 federal election campaign. In 2017, they shied away from making this policy, instead suggesting they would explore other more effective strategies to catalyze more affordable housing.

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

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During today’s press conference, Trudeau explained that his federal government previously believed the Rental Construction Financing Initiative of providing low-cost loans to builders and developers of secured rental housing was “the right program at the time,” and it is something the federal government will continue through Canada Mortgage and Housing Corporation.

“Given the interest rates, where they are now, and challenges, we realize it’s the right time to step up with removing the federal GST on rental buildings,” said the prime minister.

Federal housing minister Sean Fraser added that “as circumstances change, so too must our response change.”

“By actually moving forward with the federal GST at this point in time, we’re going to change the equation, and it’s not only going to grow supply immensely across this country, but it’s also going to change the kinds of homes people build,” said Fraser, before asserting secured rental homes carry monthly rents that are as much as a few hundred dollars than condominiums used as unsecured rental housing.

According to Fraser, based on one estimate, the removal of the federal GST could catalyze 120,000 new secured rental homes within the Greater Toronto Area alone over the next 10 years.

Fraser added 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.

The exact framework of the policy has yet to be released, but Trudeau hinted it could have a framework that also encourages developers to create more larger units suitable for families, which are deemed as units with at least two bedrooms.

In 2015, it was estimated the removal of the federal GST from the cost equation for new secured rental homes would carry an estimated annual cost of $125 million in forfeited GST revenues.

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, a theoretical $10 million project would see added costs of $0.5 million for the 5% GST.

With secured rental housing carrying narrower margins, such added costs could push projects into the realm of financial unviability, especially with other cost-driving factors such as the escalating cost of construction materials, equipment, and labour, and the high cost of construction financing due to the Bank of Canada’s elevated policy interest rate.

The high costs discourage builders and developers from pursuing more rental housing projects — pushing them towards building more condominiums.

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

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