Top three tax considerations for Canada’s real estate sector

Authored by Gabriel Baron, Partner, Tax, Private Client Services Practice and Perry Yuen, Partner, EY Private Tax

Explore key tax updates for Canada's real estate sector and their impact on your business strategies.

In brief

• Canada’s 2024 federal budget measures will continue to influence real estate in the months and years ahead, along with other recent moves to drive construction.
• Understanding what these measures mean for your bottom line can help you adjust strategies now to seize opportunities, mitigate risk and foster resilience.

With the dust settled on Canada’s federal budget, it’s time for commercial real estate business and property owners to focus on what these updates could mean for the bottom line. Doing so now can help you tap into opportunities while bolstering your foundation against additional disruption.

Here are three tax areas to keep in mind:

1. A temporary increase to the current capital cost allowance (CCA) could hold opportunity for purpose-built rental projects.

What’s new? The budget’s proposed temporary increase bumps the tax depreciation CCA rate from 4% to 10%. This applies across new purpose-built rental projects. Shovels must hit the ground between April 16, 2024 and December 31, 2030 for a project to meet the eligibility threshold.

What’s the potential? Canada could see a significant uptick in eligible purpose-built rental projects among property owners, as commercial real estate organizations seek to ensure buildings are built within the noted time frame. That said, so many new projects flooding the system at once could lead to delays in city permit approvals.

What’s the takeaway?

• If you’ve already kickstarted construction on projects that will be kept for rental purposes — not sold as inventory — double-check whether any significant costs incurred to date are eligible for the 10% rate, pursuant to the qualifying period.
• Double down on accuracy in records and bookkeeping. You’ll need to capture all eligible costs for self-constructed rental projects. Being fastidious with the details now helps your claims get accepted later so you don’t inadvertently leave money on the table.
  
  

2. The government intends to restrict the purchase and acquisition of existing single-family homes by very large corporate investors.

What’s new? To rebalance supply and demand in the face of a deepening Canadian housing crisis, the federal government is attempting to make it easier for people to own or rent a home by announcing its intention to restrict certain investors from purchasing single-family homes. This approach could be similar to the existing “foreign buyers’ ban” on Canadian residential real estate.

What’s the potential? As the government confronts the financialization of housing in this way, it’s anticipated that we’ll see fewer potential purchases and bidding wars on listed, single-family homes.¹ This is intended to drive greater housing affordability overall. That said, we may also see an uptick in home purchases by large corporate buyers intent on making a move before the restrictions come into effect.

What’s the takeaway?

• Watch for additional details on how these restrictions may impact corporate investors when the government tables the 2024 fall economic statement. Ideally, that update will include a clear definition of what constitutes “large corporate investors” and which entities will fall into this category going forward.
• If you’re a corporate investor, you may need to carefully reevaluate property mixes. True, too, for potentially delaying the sale of existing residential properties in light of emerging ownership restrictions.
• If you’re a residential landowner, explore whether you should apply to rezone as commercial, multi-use or another classification besides residential. This could attract large, corporate owners.
• Across the board, think about how this move could generate greater demand for commercial or multi-use properties among large corporate investors — and how you might ride that wave of possibility.
  

3. The elimination of GST and HST on purpose-built rentals could drive new activity while bringing down the cost of building.
What’s new? This incentive actually predates the 2024 federal budget, but it has important tie-ins to today’s reality. In September 2023, the federal government announced legislation to enhance the GST rental rebate on new, purpose-built rental housing.

What’s the potential? Increasing the GST rental rebate from 36% to 100% and removing the existing GST rental rebate phase-out thresholds for purpose-built rental housing projects applies to construction between September 14, 2023 and December 31, 2030. The project must be finished by December 31, 2035. This measure increased the GST rental rebate on new purpose-built rental housing from the current 36% to 100% with no phase-out thresholds and no limits on the amount of the rebate.

The previous GST rental rebate has a phase-out for qualifying residential units valued between $350k and $450k, with no rebate available for units valued at $450k or more. That represents a significant motivator for real estate developers looking to build more apartment buildings, student housing and senior residences built specifically for long-term rental accommodation.

What’s the takeaway?

• Bill C-56 expands the entitlement to the GST rental rebate to public service bodies (PSB’s) that were previously not entitled to it if they were eligible for the PSB rebate. If you qualify as a public service body, you should explore the value of this new rebate and determine if it would be more beneficial to since you now have the option to choose the more beneficial of the two rebates.
• If you are an investor or developer, given the current high costs of real estate, now may be the appropriate time to build more apartments, student housing and senior residences built specifically for long-term rental purposes to take advantage of no dollar value limits on the amount of the rebate.
• Developers should consider construction projects in provinces that have also introduced similar enhanced rental rebates for the provincial portion of the HST. Subject to meeting the requirements, these provinces include Ontario, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.