Tax Relief and Other Government Assistance to Encourage the Construction of Residential Housing
Authored by Martin Gilbert, LL.B., Partner
With contributions by Stéphanie Lincourt, CPA auditor, Partner
As originally appearing in Espace Montreal, volume 32, #4, 2023.
Context
The housing crisis has been a concern for some time, particularly with regards to the challenges faced by tenants in their search for affordable housing. The situation has become more dire due to the concurrent rise in interest rates and the escalating costs associated with construction, encompassing both labour and materials, which has led to a substantial reduction in the initiation of new residential rental housing projects.
In response to these challenges, governments have implemented a range of measures and programs aimed at incentivizing the construction of residential housing. This article will delve into the proposed measures related to the Goods and Services Tax and the Harmonized Sales Tax (GST/HST), alongside several other programs that, while not tax measures, may be of interest to stakeholders in the real estate sector.
Enhanced GST Rental Property Rebate for Canada
Under the applicable GST/HST and Quebec Sales Tax legislation (QST), when the construction of a multi-unit residential building is substantially completed and the first tenant takes possession of their apartment, the builder is obligated to remit the GST/HST/QST based on the fair market value of the building to the government. This GST/HST/QST payment represents an additional cost for the builder. However, there is an opportunity for the builder to seek a partial refund of the GST/HST/QST for new rental residential complexes.
Prior to the announcement outlining the partial refund for new rental residential complexes, the rebate was restricted to 36% of the GST paid up to a maximum of $6,300. Moreover, no GST partial rebate was available when the value of the dwelling unit exceeded $450,000.
On November 14, 2023, Finance Canada announced the temporary enhancement of this GST rebate.
First and foremost, there’s a need for clarification. Several media sources have inaccurately labelled this measure as a GST rebate or exemption on building materials.
In reality, it represents an enhancement to the GST New Residential Rental Property Rebate, which we explained earlier. This temporary enhancement means that for eligible dwellings, the GST rebate will now cover 100% of the tax paid, as opposed to the previous 36%, and the previous $450,000 threshold will no longer apply. Consequently, GST paid on the construction costs will no longer constitute a cost for the builders.
In order to qualify for a full GST refund, the following conditions must be met:
- Construction must begin after September 13, 2023, and before January 1, 2031.
- Construction must be completed by December 31, 2035.
- The buildings will be required to have at least four private apartments or at least ten private rooms or suites.
- At least 90% of the units designated for long-term rentals.
At the time of drafting this article, we were still waiting for clarifications as to what constitutes the date of commencement of construction? (For example, is it when the first shovel hits the ground, or are there other factors to consider?) As a piece of information only (and we want to emphasize that the CRA has not given any indication to the effect it will be their position), the CRA B-87 Information Bulletin with dealing with the partial GST / HST rebate available for new residential rental property buildings says: “Generally, construction is considered to begin at the time the excavation work relating to the residential complex begins.”
Projects aimed at converting existing commercial buildings into residential complexes may also benefit from the enhanced rebate, provided they meet the conditions outlined above.
Furthermore, the Minister of Finance has confirmed that a person who is a cooperative housing corporation will qualify for the enhanced rebate when specific conditions are satisfied. It should be noted that the enhanced rebate does not apply to condominium units.
Ontario HST
On November 1, 2023, the Government of Ontario announced their alignment with the federal government’s decision to increase the rebate for the provincial component of the HST to 100%. As a result, for rental properties built in Ontario on or after September 13, 2023, builders will receive a full rebate of the HST at a rate of 13%.
These changes should be carefully factored into the development of your business plans, budgets, and project forecasts, as they represent a substantial reduction in costs. It’s noteworthy that these enhancements apply regardless of the value of the lodging units constructed, and they are not specifically geared towards fostering the construction of affordable rental housing.
QST
The Government of Quebec has not announced an increase of the partial QST rebate for owners of residential rental property.
This implies that the 36% partial rebate, which cannot exceed $7,182 per dwelling unit, remains unchanged. In addition, the partial rebate becomes nil if the value of the unit exceeds $225,000.
Other support programs
Québec Affordable Housing Program (PHAQ)
This program, sponsored by the Société d’habitation du Québec, provides financial support for affordable rental housing projects for low- and modest-income households as well as individuals with specific housing needs.
The assistance comes in the form of a subsidy, which is calculated based on the construction costs of the eligible area and is subject to a subsidy rate ranging from 10% to 60%. Moreover, additional subsidies may also be available.
When a project is eligible for this program, the property owner is required to commit to maintaining the rental rates at or below the “maximum rents”. These maximum rent levels are determined by the SHQ and are subject to annual adjustments.
However, in practice, entrepreneurs have highlighted several obstacles that can significantly delay the projects.
Firstly, the process where the SHQ completes and prepares the Request for Financial Assistance (commonly known as “DAF”) is both lengthy and complex, often prone to errors. These errors can include miscalculations of square footage, which have occurred on multiple occasions, leading to significant alterations in the granted subsidy. Such discrepancies can jeopardize the financial viability of projects. Furthermore, the delay in receiving the final version of the DAF document, including the granted subsidy amount, is also extensive, taking approximately one year. These delays heavily impact project timelines and funding.
Secondly, in the context of financing, the SHQ informed the applicants that their subsidy must be backed by a first-ranking mortgage if the lending institution chosen by the applicant is not the financial institution selected by the SHQ. This implies that either the entrepreneurs’ usual financial institution, and, by way of consequence, the Canada Mortgage and Housing Corporation (CMHC), which guarantees the loan in the APH SELECT program, must agree to a second mortgage interest. This additional requirement further complicates the process of securing funding for a project.
While discussions about a pari pasu may occur, the total property value often does not allow for both claims to hold a first-ranking position.
Consequently, applicants are indirectly required to approach the financial institution selected by the SHQ for their financing needs. However, there may be instances where the interest rate offered by this financial institution is less favourable compared to what can be secured through a different lender and the APH SELECT program, which we will elaborate on below.
In the current circumstances, when we factor in elevated interest rates, rising construction costs, substantial land acquisition costs, and the rental rates permitted by the PHAQ, the financial equation frequently becomes unviable.
Furthermore, applicants often have to make a substantial down payment, which can be particularly difficult for organizations dedicated to social housing, leading to a considerable funding gap.
Therefore, the applicant must strive to make up this deficit by establishing patient capital, which would facilitate the finalization of the financial framework. However, securing such patient capital can be challenging, as only a few financial institutions are inclined to provide it. Consequently, the program lacks sustainability.
An upward revision of this program, coupled with the government’s implementation of a financial tool to address the “shortfall” issue, specifically in the form of patient capital, would be a highly valuable and welcomed initiative.
Municipal subsidy
Projects eligible for the PHAQ also qualify for a municipal subsidy from the cities where the social housing initiatives will be located. This municipal subsidy amounts to 40% of the SHQ’s granted subsidy.
Additionally, an agreement has been established between the Société d’habitation du Québec (SHQ) and the Fonds de Solidarité FTQ for the construction of affordable housing units. Cities also play a role as stakeholders, providing an additional grant equivalent to 40% of the amount granted by the Fonds de Solidarité FTQ.
Furthermore, a similar arrangement has been made between the SHQ and Desjardins. It’s important to note that for projects benefiting from this agreement with Desjardins, cities have some discretion regarding the municipal subsidy amount, which could potentially lead to a reduced subsidy and, consequently, pose challenges for certain projects.
APH SELECT Program
This program offers developers a reduced interest rate and an extended 50-year amortization period, thanks to the Canada Mortgage and Housing Corporation (CMHC) securing the loan for the mortgagee. These two reliefs are instrumental in achieving favourable financial outcomes. However, it’s worth noting that CMHC’s response times can range from 4 to 24 weeks, potentially causing significant project delays. If CMHC’s response time becomes too long, there’s a risk that the pricing provided by the general contractor may no longer be valid, as prices quoted by general contractors are often fixed for a 60-day period. In such cases, developers may have to go back to the drawing board and face the possibility of higher costs.
It would be greatly appreciated by the entrepreneurs involved in affordable housing projects if they could have direct access to CMHC for social housing initiatives.
The reader will understand this section does not constitute an exhaustive list. In addition, various levels of government have expressed their commitment to making substantial investments to stimulate residential housing construction. Consequently, we can anticipate the launch of new programs in the future.