What Eliminating GST For Rental Projects Could Do For The Housing Crisis

Brent Sawchyn, the CEO of Vancouver-based developer PC Urban, thinks we need to get rid of the GST on rental housing. Benjamin Tal, the Managing Director and Deputy Chief Economist at CIBC, thinks we need to get rid of the GST on rental housing. The Canadian Home Builders' Association thinks we need to get rid of the GST on rental housing. This week, Vancouver Mayor Ken Sim and Councillor Sarah Kirby-Yung said that they think we need to get rid of the GST on rental housing.

Why?

Currently, under what's referred to as "self-supply" rules, once a developer completes construction on a new rental project, they have to pay the 5% GST on the fair market value of the project, which factors in the land value and construction costs, among other things.

"The purpose of the self-supply rules is to make sure that a builder who builds or substantially renovates housing and then leases the housing or uses it for their own personal use is treated in the same way as a person who is not a builder and who purchased new or substantially renovated housing," says the Government of Canada.

What that results in, says Cynthia Jagger, Principal at Goodman Commercial and Vice Chair of the Urban Development Institute's Rental Housing Issues Committee, is a reality where "even though you may have purchased the property for $1M back in 1990, if you complete today and it cost you $30M to build it and the land value is $20M, you have to pay the 5% on the $50M."

The crux of the problem, however, is how the GST works for rental projects in contrast to how it works for strata condominium projects.

To put it simply, when developers opt to go the strata condominium route, they do not have to pay the 5% GST at all, because it's paid by the individual homebuyers.

Because the GST does not apply to rental revenue — you do not pay a tax on top of your monthly rent to your landlord — this creates a reality where developers are stuck with paying the GST if they're building a rental project, but can pass the GST along to buyers if they opt to build a condo project.

Whether we like it or not, building housing is a business, and for practically all businesses, if it doesn't make money, it doesn't make sense. This contrast with the GST is one factor — among many others — that makes building rental housing make less sense.

The Dollars and Cents

In an interview with STOREYS, Sawchyn, of PC Urban, uses one of his own projects to illustrate how much money we're really talking about.

The project is 1605 Gordon Drive in Kelowna, which is set to have 198 rental units and is expected to complete construction by Q3 2025. The value of the project is $103,043,195, meaning the 5% GST would amount to over $5M.

That may seem like a small number for a developer that can afford to build a $100M project, but the GST is just one of several potential charges they have to pay, including development cost charges, various levies, and other fees.

Sawchyn estimates that approximately 15 to 20% of the total cost for a project — about $15M for the Kelowna project — goes towards these kinds of fees, which come before they can even get shovels into the ground.

"And because of inflation over the last few years, our costs of construction have gone up 30 to 35%, which means the GST has gone up 30 to 35%," Sawchyn says. "The federal government, not doing anything, has benefitted from the GST growth because of inflation."

Developers can't just eat the cost increases without doing anything, because it could hinder their ability to continue operating. They also can't always accept reduced revenues, because many developers have outside investors to answer to, which can include pension funds for the public sector. When it comes to the GST, they can't ask a buyer to pay it, because it's a rental and there is no buyer.

"So, it just gets passed on, and somebody has to pay more rent," says Sawchyn.

READ: Intracorp Project Sale Could Be A Sign Of Tough Rental Development Headwinds

The Solutions

"For sure, the easiest and most expedient way for the federal government to help is to have a deferral, or new purpose-built rental buildings don't have to pay the GST, or pay less," Sawchyn says. "It's such a no-brainer. But the federal government unfortunately is talking about creating opportunities to facilitate more rental housing, but at the same time, they still have their hand out to collect the GST."

Jagger agrees that eliminating or deferring the GST on new rental construction would be one of the simplest changes the government can make to spark rental housing, but adds that she doesn't think this change on its own would be enough to move the needle anymore, considering all the other economic factors and headwinds.

Lowering these kinds of fees for developers may not necessarily lower your rent to a level that makes it affordable — that train has likely left the station and cannot be stopped — but it could lower the rate at which your rent increases.

Sawchyn points out that if developers do not show up to build rental projects, which the country desperately needs, there would be no GST revenue for the government in the first place, so eliminating the GST on new rental construction is not exactly a true "loss."

"Could the government afford to completely forego GST on rental buildings?," he asks, rhetorically. "I would think so. Maybe a somewhat more palatable step is to reduce the GST."

Whether it's a reduction, a deferral, or a full elimination, Sawchyn points out that the "loss" wouldn't be felt by the federal government all at once because of various development timelines, how long it generally takes projects to get to completion, and the current shortage of construction workers.

During the 2016 election, one of Justin Trudeau's promises on the housing front was "eliminating all GST on new capital investments in affordable rental housing." In 2017, the Liberals publicly changed their mind, after estimating that waiving the GST would amount to waiving $125M in revenue a year.

Sawchyn says his company has interfaced with both the federal and provincial governments about the GST issue, but he feels that it is falling on deaf ears, despite often getting sympathetic nods. He says local municipalities have tried to help with exemptions or tax holidays, but this is undoubtedly an issue for the federal government.

"The feds clearly need to step up and do more," he says. "They have the ability to make the biggest impact."