Tax Insights: Enhanced GST rental rebate for rental apartments that begin construction after September 13, 2023

Issue 2023-30

In brief

On September 14, 2023, the Department of Finance provided some additional information in its Backgrounder¹ relating to the federal government’s announcement to enhance the GST rental rebate. The enhanced rebate will relieve builders of their obligation to pay the federal component of GST/HST on newly constructed multi‑unit rental properties. It will be available to eligible projects that begin construction after September 13, 2023 and before January 1, 2031, and complete construction by December 31, 2035. It is also expected that the Ontario government will announce similar measures to relieve the builder from having to pay the provincial component of GST/HST on newly constructed apartment buildings in Ontario.

This Tax Insights explains the difference between the existing GST rental rebate and the newly enhanced GST rental rebate.

In detail

Deemed sale of newly constructed multi-unit rental properties

When a newly constructed multiple unit residential complex is 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.

Before the recently announced “enhancement” of the rebates, 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 GST/HST paid on properties in Ontario (up to a maximum of $24,000 per unit)

To claim the rebates on a deemed supply, builders must generally satisfy the following conditions:

• the units 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 units 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, and
• the residential units must contain a private kitchen facility, a private bath and a private living area (or other conditions are satisfied)

For projects to be eligible for the enhanced GST rental rebate, construction must:

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

Projects already under construction may be ineligible for the enhanced rebate. To qualify for the rebate, there must be at least four private apartment units (or 10 private rooms or suites) and 90% of the residential units must be designated for long-term rental. The enhanced rebate will not apply to individually owned condominium units.

For eligible projects, the newly enhanced rebate should result in the builder recovering 100% of the federal component of GST/HST that was paid on qualifying units. For eligible units valued above $450,000, this results in a 5% savings. The enhanced rebate may also be available in situations where non‑residential real estate (e.g. a hotel) is converted into a residential complex and the deemed sale rules in section 191 of the Excise Tax Act are triggered.

Potential concerns with the enhanced rebate

Although the newly announced measures should achieve the government’s objective of stimulating new supplies of rental units, builders that have already commenced a particular project may not be eligible to receive the enhanced rebate if construction has already started (even if ever so slightly). In situations where a project is in its early stages of development, the builder may decide to repurpose the project or cease construction altogether, which may have the unintended effect of reducing rental unit supply. A more equitable solution may be to allow the builder to claim the enhanced rebate with respect to the portion of the buildings that are constructed after September 13, 2023.

The Department of Finance’s Backgrounder states that the enhanced rebate will not apply to individually owned condominiums. Presumably, this means that the rebate will not be available in situations where an individual acquires a newly constructed condominium unit as a rental property; however, further clarification on what is meant by “individually owned” may be required as it would be helpful if newly constructed apartment buildings that are comprised of condominium units also qualified for the enhanced rebate.

The takeaway

Builders should determine whether their planned and current construction projects will qualify for the enhanced GST rental rebate and whether there is any additional relief for the provincial component of HST. 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 rebates are claimed with respect to the GST/HST that is owing on the deemed sale of an apartment building

^{1. Department of Finance Backgrounder “Enhanced GST Rental Rebate to build more apartments for renters” (September 14, 2023).}