Urgent Call to Remove Sales Tax from Rental Construction Projects in Canada
The Canadian housing market is facing an unprecedented challenge with record-low vacancy rates and a pressing housing crisis. To address this urgent issue, Benjamin Tal, the deputy chief economist at the Canadian Imperial Bank of Commerce, is calling for the removal of sales tax from rental construction projects. Tal believes that this measure would create a significant supply of rental units, especially in Ontario, which retains a significant portion of the sales tax. In this article, we will explore the economic impact of removing sales tax from rental projects and how it can alleviate the housing crisis in Canada.
The Current State of the Rental Market:
According to the Canada Mortgage and Housing Corp., the national vacancy rate for purpose-built rentals dropped to 1.9% in 2022 from 3.1% the previous year, reaching its lowest level since 2001. Despite various companies' efforts to initiate substantial rental pipelines across the country, the current economic climate makes these projects financially unviable. Even with low capital costs, partnerships with Canadian pension funds, and a long-term investment horizon, developers struggle to make rental projects economically feasible.
The Pragmatic Step:
Benjamin Tal suggests that waiving or deferring the Harmonized Sales Tax (HST) payments on purpose-built rental projects would be the most pragmatic step in the immediate future. Specifically, he proposes removing the HST from first occupancy to the sale of the building. This would result in a substantial cost reduction for developers, making rental projects financially viable. Tal highlights the support for this measure in Ontario and estimates that removing the HST from a 400-unit building in Toronto would reduce the unit cost by approximately $60,000.
The Economic Impact:
Removing sales tax from rental construction projects would have a profound impact on the rental market. Lowering the unit cost would lead to a meaningful reduction in rent, making housing more affordable for tenants. Additionally, it would unlock tens of thousands of rental units across the country, providing much-needed supply in the market. By incentivizing developers to focus on purpose-built rentals, rather than condominium projects, the housing crisis could be alleviated.
Considerations for Developers:
While the removal of sales tax from rental projects offers an attractive proposition, smaller developers face inherent risks compared to their larger counterparts. Rental projects involve higher upfront equity and revenue uncertainty, as they are not pre-sold like condominium units. However, the economic benefits and potential demand for affordable rental housing make this proposal crucial for diversifying the housing market and addressing the needs of a growing population.
The Canadian housing market is at a critical juncture, with low vacancy rates and a pressing need for affordable rental units. Removing sales tax from rental construction projects is a bold and necessary step to unlock the potential of purpose-built rentals. By reducing costs for developers, this measure can lead to a meaningful reduction in rent and increase the supply of rental units across the country. It is imperative that the government takes action to address the housing crisis and ensure a sustainable future for all Canadians. Together, we can create a thriving rental market and alleviate the burden on tenants in need of quality housing.