Tax Insights: Enhanced GST/HST rebate for purpose-built rental housing ─ Recent developments and observations

Issue 2024-27

In brief

On June 27, 2024, the Real Property (GST/HST) Regulations (the Regulations) were finalized. The Regulations provide additional information on the particular projects that will qualify for the enhanced purpose‑built rental housing GST/HST rebate that relieves builders of their obligation to pay:

• the federal component of GST/HST, and
• the provincial component of GST/HST in the provinces of Nova Scotia, Newfoundland and Labrador and Ontario, and up to a maximum of $35,000 per unit in Prince Edward Island,

on newly constructed multi-unit residential rental properties. The enhanced rebate is available for eligible projects that:

• begin construction after September 13, 2023, and before January 1, 2031, and
• are completed by December 31, 2035

The rules to qualify for the enhanced rebate are quite complex. This Tax Insights provides an overview of the GST/HST rental rebates and the conditions that must be met to be eligible for the enhanced rebate. It also summarizes important considerations for owners and builders of rental housing.

In detail

Deemed sale of newly constructed multi-unit rental properties  

When a multiple unit residential complex (MURC) is newly constructed or substantially renovated, the builder is generally deemed to have made a taxable sale of the property and to have collected GST/HST on the fair market value of the property on the later of two dates:

• the day construction or substantial renovation are substantially completed
• the day possession or use of a unit is given to a person pursuant to a lease, licence or similar arrangement

For residential condominium units, there is a separate deeming rule that applies on an individual unit‑by‑unit basis at the time each unit is occupied.

GST/HST rental rebates

Before the GST/HST rental rebate was enhanced, the GST/HST cost of constructing rental properties was significant, because the rebates that the builder was eligible to claim were limited to:

• 36% of the federal component of GST/HST that was paid on each unit (up to a maximum of $6,300 per unit), with:
  • the rebate amount being phased out on units that had a fair market value exceeding $350,000, and
  • no rebate available for units valued above $450,000, and
• 75% of the provincial component of HST paid on properties in Ontario (up to a maximum of $24,000 per unit) and no rebates in the other HST provinces for the provincial component of HST that was payable

With the enhanced GST/HST rental rebate, there should be no GST/HST payable for qualifying residential units relating to the construction of MURCs in:

• the non‑HST provinces (i.e. Alberta, British Columbia, Manitoba, Quebec, Saskatchewan) and territories, or
• the HST provinces of Nova Scotia, Newfoundland and Labrador and Ontario

For projects in Prince Edward Island, the provincial component of HST will be payable on the value of units that exceed $350,000, because the rebate for the provincial component of HST (10%) is limited to $35,000 per unit.

Claiming the GST/HST rental rebates

To claim GST/HST rental rebates, including the enhanced rebate that is provided under subsection 256.2(3.1) of the Excise Tax Act (ETA), the newly constructed rental units must satisfy all the following conditions:

• the unit must be held for purposes of making exempt supplies of property or a service that includes giving possession of the units to individuals as a place of residence
• the first use of the unit will be, or can reasonably be expected to be, for the primary place of residence of an individual who is given continuous occupancy of the unit, under one or more leases, for a period of at least one year
• the residential unit must be a “self-contained residence” (e.g. contain a private kitchen facility, a private bath and a private living area; or be a suite or room in a residence for students, seniors, individuals with a disability or other individuals)

It is also important to note that the GST/HST rental rebates are for the GST/HST that is paid on:

• a deemed sale by the builder pursuant to “self‑supply” rules in section 191 of the ETA, or
• the purchase of a newly constructed rental property

As such, in situations where the GST/HST is payable pursuant to the “change of use” rules, there are no GST/HST rental rebates available. For example, if an existing apartment building contains 100 long‑term rental units and 10 units that are used for “short‑term accommodation” and the owner begins to use the 10 short‑term rental units exclusively in an exempt activity (i.e. renting long term), there would be GST/HST payable pursuant to the change of use rules, but there would be no GST/HST rental rebates available for these 10 units.

Conditions to be eligible for the enhanced GST/HST rental rebate

For projects to be eligible for the enhanced GST/HST rental rebate, all the following conditions must be met:

• construction (or the conversion) must begin after September 13, 2023, and before January 1, 2031, and be completed by December 31, 2035
• GST/HST must be payable on a taxable supply of “purpose‑built rental housing – being prescribed property”
• prescribed conditions must be satisfied

When does construction commence?

When the GST/HST was enacted, there were federal sales tax rebates available under the ETA for residential complexes that began construction before January 1, 1991, and the Canadian International Trade Tribunal (CITT) concluded that construction commences when excavation begins. The CITT stated as follows in Clarke v. M.N.R. [1994] G.S.T.C. 19:

In the Tribunal's view, it is appropriate to adopt the meaning of construction that is used by the construction industry. In advancing the industry's definition of the word "construction," the appellants provided numerous publications that consistently included excavation within the activity of construction of a building.

Consistent with this view, the Canada Revenue Agency (CRA) has stated in GST/HST Notice No. 336 (June 2024) that, “[g]enerally, the construction of a residential complex is considered to begin at the time that excavation work relating to the residential complex begins.” Informally, the CRA has also said that work performed in preparing a site for development, obtaining building permits, demolishing structures and performing environmental remediation work may not result in the commencement of construction.

What is prescribed purpose-built rental housing?

Under the Regulations, a “prescribed property” must meet all the following conditions:

• the residential complex must be a MURC
• the MURC must contain:
  • four or more stand‑alone apartments, each with a private kitchen, bath and living area, or
  • 10 or more residential units
• all or substantially all (i.e. 90% or more) of the units in the MURC must be “qualifying residential units” that are held for an “eligible purpose” (i.e. long‑term rental to an individual as their primary place of residence)

A MURC is defined to exclude a “condominium complex,” which is generally defined as a residential complex that contains more than one residential condominium unit; this generally means that an apartment building containing units that are, or intended to be, designed or described as a separate unit on:

• a registered condominium or strata lot plan, or
• a description registered under the laws of a province,

will not qualify for the enhanced GST/HST rental rebate. Also, because an “eligible purpose” requires the builder to be holding the units to make exempt supplies of the units, the requirement for “all or substantially all” of the units to be used for an “eligible purpose” may also pose problems for smaller projects that have owner‑occupied units.

What are prescribed conditions?

The “prescribed conditions” for being eligible for the enhanced GST/HST rental rebate are provided for in the Regulations. For newly constructed MURCs, the prescribed conditions are intended to stop “renovictions” by requiring that the taxable supply of a MURC not be an “excluded renovated housing supply,” which is generally defined in the Regulations as:

• a taxable supply of a MURC that was deemed to occur as a result of a substantial renovation of a residential complex that was used, or held, as a residential complex immediately before the beginning of the substantial renovation, or
• the taxable purchase of a MURC that was substantially renovated and that was used, or held, as a residential complex immediately before the beginning of the substantial renovation (e.g. situations where an existing MURC is substantially renovated and then sold to a landlord)

For conversions, there are prescribed conditions that require the property being converted into a residential complex to have existed on September 13, 2023, and on that same date, to not have been in the process of being constructed and/or used as a residential complex.

Summary of important considerations

Some important considerations for owners and builders of rental housing follow:

• Construction is generally considered to commence when excavation begins; however, work conducted in advance of excavation (including site preparation) should not disqualify a project from qualifying for the enhanced GST/HST rental rebate.
• All or substantially all (i.e. 90% or more) of the newly constructed units must be held for an eligible purpose (e.g. long‑term rental to an individual as their primary place of residence) for the project to potentially qualify for the enhanced rebate.
• MURCs that contain four or more stand-alone apartments with private kitchens, baths and living areas, or 10 or more residential units should qualify for the enhanced rebate.
• The construction of an apartment building that contains one or more residential condominium units does not qualify for the enhanced rebate.
• Converting existing units within a MURC from a commercial use (e.g. short‑term accommodation) to long term residential use does not qualify for the rebates.
• Converting a property that is not a MURC (e.g. a hotel) into a MURC should qualify for the rebates.
• The construction of an addition to an existing MURC should qualify for the rebates.
• Substantially renovating an existing MURC does not qualify for the enhanced rebate, because there are renoviction restrictions.

The takeaway

Builders should determine whether their planned and current construction projects will qualify for the enhanced GST/HST rental rebate. Although what constitutes the “fair market value” of an apartment building should be less contentious if the GST/HST paid is fully recoverable, builders are still required to determine the value of each unit on a unit‑by‑unit basis and file the respective rebate forms for qualifying residential units within the two‑year limitation period. PwC can help you ensure that:

• eligible input tax credits are being claimed on property and services that are acquired before a deemed “self‑supply” of a newly constructed apartment building, and
• eligible GST/HST rental rebates are claimed with respect to the GST/HST that is owing on the deemed sale of an apartment building