On September 14, 2023, the Government of Canada announced that it would introduce legislation to enhance the goods and services tax ("GST") rental rebate on new purpose-built rental housing (the "Enhanced Rebate"). The Government of Canada said it hopes that the Enhanced Rebate will "incentivize construction of much-needed rental homes for Canadians."
Draft legislation released on September 21, 2023 confirms that the Enhanced Rebate will be available for certain purpose-built rental projects if (i) "construction ... begins" on or after September 14, 2023 and on or before December 31, 2030 and (ii) construction is substantially completed by December 31, 2035. The Government of Canada stated that the Enhanced Rebate will not apply to "individually-owned condominium units, single-unit housing, duplexes, triplexes, housing co-ops, and owned houses situated on leased land and sites in residential trailer parks."
We have reviewed the Government of Canada's announcement and the draft legislation. In an effort to ensure that the Enhanced Rebate effectively incentivizes construction of rental homes for Canadians as the Government of Canada intends, we wanted to raise three concerns for consideration by our readers – each intended to make the Rebate more effective at achieving its objective.
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Application/Retroactivity: the proposed
legislation, as currently drafted, would only capture projects
where construction begins on or after September 14, 2023. In other
words, there would be purpose-built rental projects where
construction has only recently begun—or where construction
previously began but is now on hold for financial or other
reasons—that would be ineligible for the Enhanced Rebate. As
a result, the builders of early-stage and stalled projects would
not be incentivized to continue or re-start construction on such
purpose-built rentals, which is what the Government of Canada is
seeking to encourage. Accordingly, without access to the Enhanced
Rebate, such builders may instead discontinue their purpose-built
rentals projects (and instead shift the development into a
condominium development, for example).
Since existing stalled projects are
the most "shovel ready" by definition, we recommend that
the proposed amendments apply to them as well. Our suggestion is to
either have the amendments (i) take effect retroactively to extend
the Enhanced Rebate to early-stage purpose-built projects (for
example, the Enhanced Rebate would apply to projects where
construction began on or after January 1, 2023) or (ii) extend the
Enhanced Rebate to any project completed on or after September 14,
2023 but on or before December 31, 2030 (i.e. completely remove the
condition for a project start-date). Such change would be
implemented by amending the dates in subsection 256.2(3.1) of the
draft legislation.
- Definition of
Construction:the phrase "construction ...
begins" should be defined or clarified in the proposed
legislation. Specifically, when construction of a project begins is
subjective and may be further complicated where projects have
multiple phases. Any ambiguity or uncertainty in the legislation
should be avoided as to whether a builder qualifies for the
Enhanced Rebate or not will be a fundamental consideration in
whether such builder should continue/complete a purpose-built
rental project or not. Accordingly, we recommend that the draft
legislation be amended to define what constitutes the start of
construction (e.g. whether construction begins when an agreement is
entered into with a supplier or contractor, when ground is broken,
etc.) and clarifies how projects with multiple phases can qualify
for the Enhanced Rebate. Specifically, we recommend that the
legislation be drafted to capture as many projects as possible so
as to incentivize builders to begin or continue purpose-built
rental projects in the early stages of construction. Such
definition could be added in subsection 256.2(1) of theExcise
Tax Act, or a separate subsection under section 256.2 could be
added to clarify what constitutes the start of construction for the
purposes of subsection (3.1). Of course, this change would not be
necessary if our suggestion to focus on completion rather then
start of construction is adopted.
- Application to
Condominiums:as mentioned above, the Government of Canada
stated that the Enhanced Rebate will not apply to, among other
types of housing, "individually-owned condominium units".
However, such a carve out would exclude supplies of individual
condominium units by builders that were made specifically for the
purpose of providing long-term residential leases. For example, a
builder may construct a condominium complex and then supply one or
more units in the condominium complex to a municipality, which in
turn leases the unit(s) to a non-profit corporation for the purpose
of providing affordable housing. Based on the Government of
Canada's statement, such supply of a unit in the condominium
complex would not be eligible for the Enhanced Rebate despite the
supply being for the purpose of "providing rental homes for
Canadians." Accordingly, we recommend that the legislation
include a list of "exceptions to the exception" that
would capture certain supplies of residential units made
specifically for the purposes of residential rental accommodation.
It can be a condition in this context that a unit is subject to an
agreement with the municipality assuring the use of the using for
affordable housing and securing the benefit through a mortgage in
the same manner as municipality secure affordability already. In
this regard, the benefit would only extend to condominium units
used to create affordable housing in accordance with the relevant
municipal definitions.
These changes would allow the Rebate to push more projects into production, avoid punishing developers who have already proceeded, and, help municipalities create more below market housing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
