Canada’s Bold Move: Unlocking Rental Housing Supply by Eliminating GST on New Construction

In a pivotal moment for Canada’s beleaguered housing market, the federal government has announced a significant policy change: the removal of the Goods and Services Tax (GST) on the construction of new purpose-built apartment buildings for renters. This decisive action comes just days after the Canada Mortgage and Housing Corporation (CMHC) issued a stark warning about a severe and escalating housing shortage across the nation, underscoring the urgency of addressing the supply deficit.

The elimination of GST will specifically target new purpose-built rentals, encompassing apartment buildings, student housing, and senior residences meticulously designed and constructed for long-term rental accommodation. This strategic exemption aims to revitalize a sector that has long struggled to keep pace with demand, offering a glimmer of hope for millions of Canadians grappling with unaffordable rents and limited housing options.

A Decades-Long Impediment Removed: Industry Praises Federal Initiative

The Canadian Home Builders’ Association (CHBA) has lauded the federal government’s move, recognizing it as a direct response to a deeply rooted issue that has stifled the construction of much-needed rental housing for decades. Highlighting the immediate and tangible benefits, the CHBA stated that the impact of this policy change would be “immediate” and far-reaching.

For years, the viability of purpose-built rental projects has been eroded by a combination of factors, including the inherent taxation system and, more recently, soaring interest rates. These economic headwinds forced many crucial new housing supply projects onto the backburner. The abolition of the GST is expected to be the catalyst needed to pull these projects off the shelves and back into active development, breathing new life into the rental housing pipeline.

Kevin Lee, CEO of the CHBA, articulated the significance of this policy shift: “This is something we have called for for a long time and is a measure that will continue to be necessary for many years to come to ensure much more rental housing supply is built. Purpose-built rental is an important part of the housing continuum and a must to be among the 5.8 million homes that Canada needs to build over the next decade to make up the housing deficit.”

Lee further elaborated on the systemic challenges: “The business model for purpose-built rental has been broken for decades just with the taxation system around it. We saw it in terms of purpose-built rental starts over the past 20, even 30 years. There just hasn’t been enough, and it’s because the model didn’t work. So being able to change the taxation regime around purpose-built rental will make a big difference, especially right now because we’ve seen with high-interest rates a lot of rental projects that would have gone forward just being shelved.”

The CHBA CEO expressed optimism that an immediate surge in purpose-built rental supply would have a direct and positive impact on rental rates across the country. He underscored the critical issue of Canada’s massive housing shortage across all forms of housing and tenure, leading to incredibly low vacancy rates that inevitably drive up both rents and homeownership prices. “By building more purpose-built rentals, we’re going to hopefully see less tight markets, and that should get rental rates down to a more reasonable level moving forward,” Lee asserted.

Addressing the Affordability Crisis: CMHC’s Stark Warning and Developer Response

The urgency of the federal government’s action is underscored by recent data from the CMHC, which projects that Canada requires approximately 3.45 million additional housing units by 2030 to restore a semblance of affordability nationwide. This daunting figure highlights the immense scale of the challenge and the necessity of immediate, impactful interventions.

The real estate development community has reacted with widespread enthusiasm. Kendal Harazny, co-founder and principal of Wexford Developments in Calgary, succinctly captured the sentiment in a social media post, declaring: “This is huge. I estimate we will build 1000 units that were on hold solely due to this.”

In an interview with Real Estate Magazine, Harazny elaborated on the dire conditions developers have faced over the past two years. “With interest rates tripling on construction debt, it’s chipped away at the feasibility of pretty much any rental project in almost any market in the country,” he explained. While a few niche projects managed to proceed, the industry as a whole experienced a significant slowdown, making it difficult to construct apartment buildings with reasonable returns.

The GST removal, which translates to a decrease in costs ranging from 3.6 to 5.0 percent, is precisely the stimulus needed. “That’s enough to move the needle on a significant number of projects that are in the pipeline across the country,” Harazny stated. He believes hundreds of projects, previously stalled due to unfavorable financial models, will now immediately move forward. “This makes up for the massive increase in costs and interest rates we’ve seen, and so I do think you’ll see this program spark construction across the country.”

“While the GST has been removed, it’s not like we all of a sudden have increased our capacity of trades in the country.”

– Kendal Harazny, Wexford Developments

Navigating New Challenges: The Bottleneck of Skilled Trades

Despite the widespread optimism, Harazny tempered expectations with a crucial concern: the country’s capacity of skilled trades. “Before this announcement, on projects we were doing all over Western Canada, we were still struggling to find trades and get reasonable bids. While the GST has been removed, it’s not like we all of a sudden have increased our capacity of trades in the country. I think that will be the biggest bottleneck,” he cautioned. This potential shortage of labor could impede the rapid acceleration of construction, even with improved financial viability.

The typical building cycle for a major project, Harazny noted, spans four to five years from conception to completion, heavily influenced by municipal processes. For Wexford Developments, approximately 400 residential units are ready to proceed, while others require reassessment and re-underwriting. The fluctuating construction costs, fueled by this new surge in demand, remain a significant unknown.

Jennifer Keesmaat, founding partner of Markee Developments in Toronto, echoed the positive sentiment, tweeting that the GST forgiveness will serve a dual purpose: it will reactivate new housing developments previously put on hold due to high-interest rates, leading to increased supply, and it will incentivize developers to prioritize building rental housing over condominiums. She hailed the federal decision as significant, potentially marking “the beginning of a sea change” in Canada’s housing landscape.

Chris Guerette, CEO of the Saskatchewan Realtors Association, also welcomed the federal initiative as a crucial step towards alleviating housing supply challenges in a province facing a substantial gap in housing inventory to accommodate future growth projections. “Inventory levels continue to be a concern across all segments of our housing continuum, and we know this type of rebate can work in our province,” she affirmed.

“Similar support is also needed for first-time homebuyers so that renters who want to can achieve their dreams of homeownership.”

– CHBA statement

A Call for Collaborative Action: Beyond Federal Policy

While the federal GST elimination is a monumental first step, industry stakeholders emphasize that it cannot be a standalone solution. The CHBA underscored the critical importance of provincial governments following suit by removing their own respective sales taxes on purpose-built rentals. This harmonized approach across jurisdictions would maximize the policy’s impact and create a more uniformly favorable environment for rental development.

Furthermore, the CHBA strongly advocated for municipalities to significantly reduce their development taxes, not just for purpose-built rentals but for all housing forms, including homeownership. They highlighted an alarming trend: municipal development taxes have surged by an astonishing 700 percent over the past two decades, now accounting for as much as 30 percent of the price of a new home. This exorbitant burden, they argue, must be reformed to truly address affordability.

The CHBA also stressed the interconnectedness of housing solutions: “With some financial relief to now enable more rental housing to be built, similar support is also needed for first-time homebuyers so that renters who want to can achieve their dreams of homeownership.” This holistic view recognizes that a healthy housing market requires mobility across the housing continuum.

Economic Perspectives: Not a Silver Bullet, But a Crucial Foundation

Rachel Battaglia, an economist at RBC Economics, provided an incisive analysis of the policy’s implications. With rental vacancy rates at a two-decade low and Canada’s rental housing stock facing a severe shortage, any measure designed to boost rental apartment construction is unequivocally welcome. Battaglia explained the historical disincentive: “The five percent GST on new rental construction (including land value and construction costs) discouraged developers from pursuing purpose-built rental apartment projects. In fact, developers have long preferred to build condominiums over rental housing projects on the basis of higher profitability and the possibility to reinvest proceeds into subsequent construction projects.”

The core of the issue, Battaglia noted, lay in how the GST burden was distributed. For rental projects, developers typically absorbed the GST bill since tenants are not obligated to pay it on top of their rent. Conversely, the GST on condos is generally embedded into the unit’s purchase price, effectively shifting the tax burden to the new homebuyer. This fundamental difference made condos a more financially attractive venture for builders.

While acknowledging that the removal of GST will undoubtedly improve the financial viability of rental construction projects and hopefully spur more development, Battaglia cautioned that it “isn’t likely to lower rents in short order.” She emphasized that this policy is not a “silver bullet.”

Instead, Battaglia argued for a comprehensive approach: “More policy action — at all levels of government — will be needed to really move the needle on rental supply and affect rent. This includes modernizing zoning by-laws to accommodate high-density development, streamlining the permitting processes for new construction, and ensuring other fees, taxes, and policies are in line with the broader goal of expanding the rental housing stock in Canada.”

Conclusion: A Path Forward for Canada’s Housing Future

The federal government’s decision to remove the GST on new purpose-built rental construction marks a pivotal and welcome step in addressing Canada’s deepening housing crisis. It directly tackles a long-standing financial barrier that has discouraged developers from building the rental units the country so desperately needs. While the immediate impact is expected to reactivate hundreds of stalled projects and incentivize new ones, the path to widespread affordability is complex and multifaceted.

The success of this federal initiative hinges on the collaborative efforts of provincial and municipal governments to align their own policies, streamline bureaucratic processes, and address the critical shortage of skilled trades. By fostering a truly supportive ecosystem for housing development, Canada can move closer to its ambitious goal of restoring housing affordability and ensuring adequate shelter for all its residents. This policy is not the end of the journey, but a crucial and promising beginning.