Affordable housing has been at the forefront of concern for Canadian officials since the pandemic, with housing prices up 12% in 2023 alone. Couple a growing rental base with limited supply, and the housing issues in Canada continue to climb.
In an effort to make housing more affordable, Prime Minister Justin Trudeau announced the removal of the 5% consumption sales tax on new apartment buildings. This adjustment has the potential to impact hundreds of new apartment building developers.
Understanding the 5% Consumption Tax
Under current legislation, the Canadian Government can charge a 5% goods and service tax (GST) on most items sold within Canada. In conjunction with the Federal 5% tax, provinces can charge an additional tax of up to 9%.
New apartment real estate developers were previously charged GST on supplies and materials purchased and used in the construction of buildings, such as lumber, drywall, and insulation. This new adjustment allows developers to bypass the 5% Federal tax.
Currently, the removal of the 5% GST only applies to new apartment buildings. Projects currently in development can take advantage of cost savings going forward. There is no retroactive adjustment available at this time.
Why is the 5% GST Removed?
The goal of removing the 5% GST is to lower the construction and operating costs for residential real estate developers, with the hope that these cost savings are passed down to tenants. For example, if real estate developers are able to save 5% in GST on supplies, they may be able to lower rent by 5% for future tenants, making housing more affordable.
Additionally, the Canadian Government is incentivizing the construction of new apartment buildings by lowering expected expenses and taxes. Real estate developers that are considering constructing a commercial or residential building might choose the latter because of GST savings.
With an average building cost of CA$102,000 to CA$240,000 per unit in Canada, GST can quickly add up. For example, an apartment building might purchase around CA$5,000,000 in supplies. This equates to CA$250,000 in GST tax savings.
What This Means for Real Estate Developers
Real estate developers should carefully consider the impact of GST before deciding on the building type to construct. It might be more favorable from a tax standpoint to construct a residential apartment building compared to a commercial building.
Additionally, even small residential apartment building undertakings might be able to bypass Federal GST. The CRA has not yet released the size qualifications of new residential apartments. This means that even a small project can potentially bypass Federal GST.
Summary
The circumstances surrounding the removal of the 5% Federal consumption tax are still being worked out by Canadian officials. We expect more details in the upcoming week. However, if you think you might be able to leverage this new tax saving opportunity, reach out to one of our team members at NRK Accounting right away.
We can help you maximize your GST savings while still ensuring complete compliance with the CRA. Schedule your free consultation today.