Responding to demands from the development community and recommendations from housing analysts, Canada’s Federal government announced Thursday that it will eliminate GST on the construction of new rental apartments. Effective immediately, the new tax regime is said to be part of a suite of incentives intended to build more homes and enhance housing affordability in Canada. With rental vacancy rates at a two-decade low, and Canada’s rental housing stock sitting in a severe shortage, any measure to boost rental apartment construction is certainly welcome.

The 5% 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. Since tenants aren’t obligated to pay the 5% GST on top of their regular rent, developers are typically left holding the tax bill. GST on condos, on the other hand, is generally baked into the purchase price of the unit, allowing the builder to offload the tax burden onto the new homebuyer.

While the removal of GST on rental construction projects will improve their financial viability – and with it, hopefully spur more development – it isn’t likely to lower rents in short order. With Canada’s rental market in a severe deficit position, and given the time it takes to build new supply, the measure won’t be a silver bullet. 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, streamline the permitting prices for new construction, and ensure other fees, taxes, and policies are in line with the broader goal of expanding the rental housing stock in Canada.

Rachel Battaglia is an economist at RBC. She is a member of the Macro and Regional Analysis Group, providing analysis for the provincial macroeconomic outlook.

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