Vancouver pushing for feds to waive GST on rental builds

There are growing calls from Vancouver City Hall for the federal government to waive taxation during the construction of purpose-built rentals.

Currently in Canada, a Goods and Services Tax (GST) is applied during the construction process for buildings that will be made up exclusively by rental units. However, the tax is not levied during the construction of condominiums.

Sarah Kirby-Yung, a Vancouver city councillor, says waiving that tax for rental builds would be a good first step in getting more housing built specifically for renters.

“We’re at an unprecedented level of affordability. When you’re now north of $3,000 for a one-bedroom in the city of Vancouver, those are crazy rents that are really challenging for anyone to be able to afford. If there was ever a time to pull the trigger on eliminating the GST, this is it,” she told CityNews.

Waiving the GST on purpose-built rentals would be key move to help bring thousands of badly needed new #rental #housing homes online.

Such a move would shave ten of thousands of $$$ from the cost of each unit making development more viable, & help alleviate skyrocketing rents. https://t.co/tNP29cxYwX

— Sarah Kirby-Yung 楊瑞蘭 (@sarahkirby_yung) August 22, 2023

The councillor says the GST is deterring many developers from committing to purpose-built rental projects.

“When you add that GST to the additional cost but not adding that to stratas, for example, you’re making it less attractive to the industry to deliver that badly needed housing,” she said.

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Michael Geller, a longtime urban planning consultant in Vancouver, says the GST levied during the building of rental units has been a longstanding hurdle for developers.

“It further exacerbates the situation. It makes it a little more difficult and, as a result, I think most developers have tended to build condominiums,” he said.

For condo developments, Geller says the GST is levied when individual units are sold. However, because purpose-built rental projects don’t involve the sale of a unit, the tax must be collected during the building process.

For those who don't fully understand SKY's tweet, if a developer builds a condo project, he doesn't have to pay GST. But if he builds a rental project, he must. This is one more reason why many developers prefer to build condos. Feds should definitely make this change. https://t.co/6K1zN69vOz

— Michael Geller (@michaelgeller) August 23, 2023

He says this can even have an impact on the price of rent when a rental build is completed.

“The cost of creating something is a significant factor in what you sell or rent it for. So adding $15,000 or more to the cost of an apartment does get reflected in your rent,” Geller said.

Despite the calls for the government to bring in changes, another housing expert points out that the solution may not be as simple as eliminating the tax altogether.

‘These revenues have to come from somewhere’

Tom Davidoff, an associate professor at the University of British Columbia’s Sauder School of Business, says waiving GST for rental builds could be too drastic of a move for the federal government.

“If you didn’t have the GST, condos would get taxed and rentals wouldn’t and that wouldn’t necessarily make sense,” he said.

Someone pays either way. Reasonable compromise would be to charge on actual or ex-ante estimated net operating income as it comes in over time for new rentals.

— Tom Davidoff (@TomDavidoff) August 23, 2023

One solution, he says, would be to delay the taxation of rental units for five years, so the price of a build isn’t affected by GST.

“Maybe the right way to go with purpose-built rental would be to have GST on rent net of expenses every year. That would be pretty close to economically equivalent of charging upfront GST on the process,” he explained.

“If developers generally don’t have enough cash upfront to complete deals, and that’s what’s holding up deals, then transferring the payments down the road in the future makes some sense.”

Davidoff says if the focus of the federal government is to quickly get rental units built, waiving the GST would be a good start.

“That’s basically the government saying, ‘We’re willing to take a little bit of [a loss] on the revenue side in order to make sure there are more rentals and fewer condos,'” he said.

However, he stresses the government will likely want to recoup the lost revenue from somewhere else.

“There’s no free lunch. These revenues have to come from somewhere. Either there’s fewer benefits available to people with low incomes, or people who work for a living pay more where there’s higher sales taxes,” he said.

GST cited as top issue by developers in Vancouver: councillor

Despite potential knock-on effects from waiving GST, Kirby-Yung says Vancouver simply needs fewer barriers for developers looking to build rental units.

“Our biggest hurdle is just actually getting the rental housing built,” she explained.

“If it’s less attractive to build the kind of housing that we need the most, which is the rental housing and non-profit, as opposed to strata that is more and more out of reach for most people to afford, let’s start there and get the housing built and then let’s figure out what the tax implications may be. But right now, we know it’s an impediment to actually getting it built.”

Kirby-Yung says the GST is the top issue she hears from developers, saying it’s prohibitive enough that some will shift their focus elsewhere.

“I talk to a lot of developers who are doing a lot of rental projects in Seattle, for example, because it’s easier to deliver it there,” she said.

The issue of taxes on rental builds was discussed during the federal cabinet retreat that wrapped up Wednesday. It was among the 10 recommendations provided to the government on what can be done to address housing affordability.

Vancouver Mayor Ken Sim tweeted about the topic, saying he is “glad to hear” the idea was raised during the retreat.

“ABC Councillors and I been (sic) advocating for almost a year to eliminate GST on housing,” the mayor wrote.

Glad to hear this idea was raised to the federal government at their retreat.

ABC councillors and I been advocating for almost a year to eliminate GST on housing, as part of an all-hands-on-deck approach to make housing more affordable.

We will continue to advocate for…

— Mayor Ken Sim (@KenSimCity) August 22, 2023

With files from The Canadian Press