Big Potential Tax Savings for Purpose-Built Rental Housing Providers in British Columbia

In recent years, governments at both the federal and provincial levels have rolled out a number of programs and initiatives aimed at boosting construction of new purpose-built rental housing. The use of tax exemptions is a vital component of the government’s toolbox to make rental projects more economically viable for builders and operators, which in theory should incentivize their construction.

Builders and operators of rental housing in BC should look to take full advantage of the following tax exemptions and familiarize themselves with all the conditions and eligibility requirements for each:

The potential tax savings from the above exemptions can be significant. Just as an example, if a BC rental housing operator acquires a new purpose-built rental building for $10 million (a transaction which will trigger both the GST and PTT) and it fulfills all the conditions for the above tax exemptions, then the tax savings would be:

$500,000 in GST; and
$418,000 in PTT (including both the general PTT and the further 2%).

Considering the typical operating margin for the rental housing industry, this nearly $1 million in tax savings for a $10 million building may very well be the difference between a viable and a non-viable project.

We will summarize below key elements of these tax exemptions to help you plan ahead.

GST/HST rebate for purpose-built rental housing

Background

Announced on September 14, 2023 and entered into force three months later, the GST/HST purpose-built rental housing rebate was an enhancement of the earlier GST/HST new residential rental property rebate. The eligibility requirements for the purpose-built rental housing rebate are more stringent than those for new residential rental property rebate, but the enhanced rebate offers much greater potential tax savings.

Historically, GST has been a significant factor for rental housing operators’ pro forma, as there was no way to avoid it. An operator either pays GST on its purchase of a new rental building or, if self-constructed, it would be subject to the self-supply rule, which requires the builder-operator to self-assess and pay GST on the fair market value of the property upon completion.

Eligible properties

The purpose-built rental housing rebate is only available for a residential rental project that meets all the following conditions:

the units in the project qualify for the current new residential rental property rebate;
the residential units form part of a multi-unit residential complex that has at least:
- 4 residential units, each of which contains a private kitchen, private bath, and private living area; or
- 10 private rooms or suites;
at least 90% of the residential units are held for long-term residential rental;
construction of the project commences after September 13, 2023, but on or before December 31, 2030; and
the project is substantially completed on or before December 31, 2035.

However, the purpose-built rental housing rebate is NOT available for:

condominium units;
single-unit housing;
duplexes;
triplexes;
owned houses situated on leased land and sites in residential trailer parks; or
substantial renovation of an existing residential complex (note, however, a project that converts an existing non-residential complex, such as an office building, to a residential complex may be eligible for the purpose-built rental housing rebate, if all other conditions are met).

Notably, unlike the earlier GST/HST new residential rental property rebate, the new purpose-built rental housing rebate does not have a $450,000 fair market value limitation per unit and also offers a 100% rebate of the GST rather than the former’s maximum 36% rebate.

Clarifications by CRA

In June 2024, the CRA published new GST/HST Notice 336 and provided commentaries and clarifications on the new GST/HST purpose-built rental housing rebate, including Q&A on specific scenarios. Notably, the CRA is of the view that the construction of a residential complex is generally considered to begin at the time that excavation work relating to the residential complex begins.

BC Property Transfer Tax exemptions for purpose-built rental buildings

Background

The property transfer tax in BC is consisted of:

general property transfer tax;
further 2% on residential property over $3,000,000; and
additional property transfer tax for certain foreign entities.

For the purpose of this blogpost, we will focus on 1 and 2 above.

In BC, the PTT exemptions available for purpose-built rental buildings had a similar trajectory in its conception and rollout as the federal GST rebate. Budget 2023 of BC first introduced an exemption from the further 2% tax for new qualifying purpose-built rental buildings. Then, Budget 2024 followed up with further exemption from also the general property transfer tax with slightly more stringent conditions and requirements that were intentionally aligned with the federal GST rebate to a substantial extent.

Eligible properties

In BC, eligible purpose-built rental buildings are those that are newly constructed, non-stratified, and held as rentals on a monthly basis or longer, for at least 10 years following the initial acquisition. The residential portion of the building must be entirely used for rental purposes and have at least 4 separate apartments. Lastly, the transaction cannot be a resale and the building cannot be previously occupied as a residence.

If a rental housing operator purchases an eligible purpose-built rental building on or after January 1, 2024, it may qualify for the exemption from the further 2% property transfer tax on the amount of the residential property value that exceeds $3,000,000.

To also qualify for the exemption from the general property transfer tax, a rental housing operator must purchase an eligible purpose-built rental building between January 1, 2025 and December 31, 2030.

Use requirements

To ensure that the benefits of PPT exemptions truly go toward increasing rental supplies, the BC government imposes continuing obligations on the part of rental housing owners who are granted such exemptions at the time of acquisition. Failure to comply with such obligations may result in penalties that cancel out any benefit from the exemptions.

Notably, to keep the PTT exemption, a rental housing operator must:

within 92 days of registration in the Land Title Office, rent or offer to rent the entire residential portion of the building on a monthly basis or longer for at least 10 years; and
not change the use of the apartments (e.g. change the use to short-term rentals, stratified condominiums, or demolish the building).

If there is a change in use or a sale of any portion of the building within the 10-year period, the owner must report to the administrator in writing within 92 days of that change, and will need to repay a portion of the exemption.

However, the full exemption still applies if the change in use is a result of:

circumstances beyond the owner’s control;
reasonably required renovations or repairs; or
up to 2 apartment units being occupied by the owner or building manager, as long as the rest of the residential portion contains at least 4 units and is entirely rented or offered for rent on a monthly or longer basis.

As the exemption from the general property transfer tax is relatively new, we expect more clarifications and commentaries from the BC government going forward.

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Law is fact-specific and contextual and general summaries and articles like this one does not contain, and cannot be construed as, legal advice. This is legal information only and is general in nature. If you need legal advice, consult a lawyer.

For more information about eligibility requirements and any related inquiries for the GST rebate for purpose-built rental housing or BC Property Transfer Tax exemptions for purpose-built rental buildings, feel free to contact James Struthers or Desmond Wang.