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GST exemption for new rental projects promises benefits

Questions remain, but the net effect should be positive
A proposed federal sales tax waiver for new rental construction could enhance the viability of projects like Chard Development's 575-unit project at 622 SW Marine Drive in Vancouver.

A long-standing plea of the multifamily sector is a step closer to being met this week.

The federal government will exempt new rental apartment buildings from paying GST on construction costs, Prime Minister Justin Trudeau announced Sept. 14.

A statement from the prime minister’s office said the exemption “will apply to new purpose-built rentals, meaning apartment buildings, student housing, and senior residences built specifically for long-term rental accommodation.”

“This is another tool to create the necessary conditions to build the types of housing we need, and that families want to live in,” the statement said, with Trudeau urging BC and other provinces to follow Ottawa’s lead in exempting new rental construction from sales taxes.

A specific timeline wasn’t given for passing the legislation, but the legislation is likely to be introduced when business in the House of Commons resumes next week.

Trudeau originally proposed a sales tax exemption for new rental construction during the 2015 election campaign but scrapped it because, he claimed this week, the newly elected government felt there were better options for encouraging housing.

Now, with inflation having increased the cost of new construction, the Liberals believe exempting projects from the 5 per cent GST will remove a significant barrier to construction.

“We need to change the economic equation so builders who are facing higher construction costs as a result of global inflation have the financial incentive to build projects that wouldn’t otherwise go forward,” said federal housing minister Sean Fraser in the announcement from the Prime Minister’s Office. “Removing the GST will encourage Canadian home builders to build more homes in communities across Canada, which will bring the cost of rent down for ordinary Canadians in communities across the country.”

Byron Chard, president and CEO of Chard Development Ltd. in Vancouver, agrees. The combination of various government charges and rising construction costs make rental construction a tough go, he told Western Investor earlier this year as the company broke ground on a 575-unit rental project at 622 Southwest Marine Drive in Vancouver.

Giving developers a tax break should see more units constructed, ultimately benefiting supply.

“This initiative is going to unlock a significant number of rental projects that were on the fence to start construction given the current interest rate and cost environment,” he said.

But tenants won’t see the benefits for up to four years.

“The impact of this policy will not be realized for the end renter until the projects complete; however, the increased supply will help to stabilize rental rates and rental rate growth in the years ahead,” he said.

Cynthia Jagger, who specializes in multifamily property sales as part of the Goodman Team, says builders will have several questions, including when the change takes effect. While the Department of Finance says projects that begin construction on or after Sept. 14 will qualify, the required legislative changes have yet to be tabled and criteria could change. 

“If a project stops and restarts, perhaps moving from condo to rental, does this meet the criteria for waiver?” she asked. “Given the hundreds of thousands of units that are needed, there should be no restrictions attached to this waiver.”

Moreover, the measure expires Dec. 31, 2030, meaning it is temporary rather than permanent.

Questions aside, Jagger welcomes the exemption.

“It’s excellent to see the government begin to move on this file, even if it’s taken much longer than it should have,” she said. “It’s likely there will be an immediate positive impact for many projects. Some may even flip from condo to rental, especially if other levels of government join the effort to support rental construction – or, at least, stay out of the way.”