Full GST Rebate for New Rentals: What The New Changes Mean For Toronto Real Estate Investors

Introduction

We continue to see improving housing policies for real estate investors who are willing to create, and this latest one with the federal government announcing that they will waive the GST portion of new rental construction is a pretty big one.

So in the video, let’s break down the details of what this actually means. Stay tuned and keep watching!

Background

First up, let’s talk about the big news. The federal government has announced that they will be waiving the GST portion, which is 5%, on new rental builds. This is fantastic news for anyone looking to invest in making multiplexes in Toronto because it means you’ll save that 5% on the GST side.

Let’s backtrack and look at why. According to a CIBC study from June 2023, the numbers just don’t make sense for developers right now.

If a developer builds a condo, they could make a 12.5% profit. But if they opt for a rental project, they could end up losing 20%. If these numbers don’t work out, purpose-built rentals are definitely being lagged behind.

And now that interest rates are much higher than before, there’s even less of a reason for developers to do this so that’s a big reason why rents have been skyrocketing so much lately – which is an issue that our government needs to address to keep housing affordable.

So, why don’t rental numbers work? There are a few reasons.

Property taxes is the big one, but chances are this won’t go away because our municipalities need the money and are even trying to fight for more these days.
Development charges is the next big one and
HST, which eats up another ~7% of the profit margin.

Changes To GST / HST New Rental Construction Rebates

It seems like the Trudeau government has finally recognized this issue, so that’s why we’re seeing them waiving the 5% of the GST for new rental constructions.

Right now, this is the Federal government taking action but it’s up to the individual provinces to see if they’ll follow suit. And here in Ontario, we do have the incentives in place already.

Under the GST/HST New Residential Rental Property Rebate, before the announcement, there will a bit of a rebate on the GST side of up to $6,300 on a $350,000 property (1.8% rebated before), and it goes to zero for properties over $450,000. This will be changing.

On the Ontario side, the maximum is $24,000 on a $400,000 property (that’s 6% rebated here on $400,000). So if you keep your total costs around $400,000, then you’re looking to save around 11% now after the new GST changes come into place.

Old GST/HST New Residential Rental Property Rebate

I think the timing is a bit late but definitely will be helpful.

Ever since interest rates have see the step rise, we’ve seen a big drop in construction because it’s getting much tougher to qualify for enough financing. And even if developers can secure funding, it’s still very tough to carry the costs during the construction phase, even if future rents can justify it.

This change is great in Toronto – when combined with other new housing policies like the ability to build 4 units in each house and the waiving of development charges for up to 4 units, so all of these combined definitely do improve profit margins substantially.

Once you create more units, the numbers can potentially work very well. For instance, buying a single-family home for $1.15 million and converting it into 3 units by spending approximately $200,000, you can get a total of rents of $8,300 or a monthly cash flow of over $1,700 a month afterwards.

What Types of New Rental Units Qualify

Now, you might be wondering about the specifics of these new GST rules.

Unfortunately, this is pretty restrictive right now and only allows for new units in homes with at least 4 units or roomning houses with at least 10 rooms.

But if things get more lenient and follow more so to what the current GST/HST New Residential Rental Property Rebate allows, then this can open things up to smaller multiplexes, basement apartments, laneway suites and garden suites.

How We Can Help

If you’re interested in learning more but don’t know where to start or how to get this done, our team is here to help!

We’re a real estate sales brokerage that specializes in investing in freeholds in Toronto.

Don’t hesitate to take the first step by booking a Zoom discovery call with us.

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