How will new tax laws affect the rental housing industry?
By David Gargaro
Over the last few years, the federal and provincial governments have introduced various policy measures to help spur new property development to increase the housing supply. Some of these policy changes include tax breaks aimed at making it more affordable to build more purpose-built rentals. How have these tax laws affected the rental housing industry, and what new laws are expected in 2025 and beyond?
Looking back to 2023
In September 2023, the federal government significantly changed its tax policy to help boost rental housing development. They removed the federal Goods and Services Tax (GST) / Harmonized Sales Tax (HST) from the cost of new purpose-built rental construction. The Ontario, Nova Scotia, and Newfoundland & Labrador provincial governments followed suit by removing the provincial portion of the HST. British Columbia also removed the provincial sales tax (PST) from some construction costs for purpose-built rentals, while New Brunswick recently joined the other provinces in removing the provincial portion of the HST from new construction costs.
At the time, these policy changes were seen as a positive move in helping to promote more purpose-built rental development. According to data from Urban Toronto, the proportion of new rental unit construction starts in the Greater Toronto and Hamilton Area (GTHA) increased from 16 per cent in the second quarter of 2023 to 27 per cent in the third quarter (i.e., when the federal government announced the GST cut). Purposebuilt construction also reached record levels in Canada’s six census metropolitan areas (CMAs), accounting for 42 per cent of all apartment construction in 2023.
However, it appears the results might have been short-lived, at least in some markets. Rental construction starts in Toronto accounted for 51 per cent of all new housing starts after the announcement (more than triple the number of starts in the previous quarter). Even though
Ontario announced the PST cut in the following quarter, rental construction starts across the GTHA dropped to pre-tax-break levels by the end of 2024. Under this new tax regime, looking at the GTHA, the total number of units that began construction declined and developers proposed fewer rental units when compared to all housing units proposed.
When you look at Canada as a whole, rental starts are up in 2024. According to CMHC, multifamily rental projects increased Canada’s total housing starts by two per cent in 2024. In fact, purposebuilt rentals made up 47 per cent of all housing starts in Canada’s six largest CMAs, thanks mostly to Edmonton, Calgary, and Montreal. It’s difficult to say whether cutting GST from the cost of new rental construction made an impact on developers’ decision-making.
Although cutting the GST and PST helped to address some of the costs of developing purposebuilt rental housing, it does not seem to have had a lasting or incrementally positive impact on the industry. The tax cuts could not overcome other cost factors, such as the effect of inflation on the costs of construction materials and increases in local development charges. Other key factors impacting rental supply included interest rates and immigration policy. Some rental properties (e.g., triplexes) do not meet the criteria to receive the tax rebate, and developers may unintentionally disqualify themselves from receiving enhanced tax relief.
When a non-Canadian resident sells property in Canada, the person who buys the property must withhold 25 per cent (or 50 per cent if it is depreciable property) of the gross selling price to cover potential tax liabilities.
“The purpose-built rental housing rebate may not cover all of the GST/HST a developer incurs on construction costs,” said Bruce Goudy, Director, Indirect Tax, BDO Canada. “There is no rebate of GST/HST incurred on any costs to complete construction after residential tenants move into a substantially completed building. For example, this may include costs related to finish the upper floors of a substantially completed multi-unit building and perhaps landscaping after the occupancy date.”
New and updated tax laws for 2025
Federal – Capital gains inclusion rate
In Budget 2024, the federal Liberal government announced changes in the income tax treatment of capital gains. The main change was to increase the capital gains inclusion rate from 50 per cent to 66.67 per cent for capital gains realized annually above $250,000 by individuals, and for all capital gains realized by corporations and most types of trusts. The capital gains inclusion rate represents the portion of capital gains that is brought into income and thus subject to income tax.
This change was to take effect on June 25, 2024. However, many business organizations and others opposed the increase in the capital gains tax. This change was kept separate from main Budget measures and has yet to be enacted. On January 31, 2025, Dominic LeBlanc, Minister of Finance and Intergovernmental Affairs, announced a deferral of the change to the capital gains inclusion rate until January 1, 2026, which will occur after the next federal election.
“The two main contenders to become the next Liberal leader have said they will not proceed with the increase in the capital gains tax,” said John Dickie, Partner, Dickie and Lyman Lawyers LLP and Chair, Eastern Ontario Landlord Organization (EOLO). “On February 5, Mark Carney said he will scrap the proposed increase to Canada’s capital gains tax. Shortly after announcing her bid to lead the Liberal Party, former Finance Minister Chrystia Freeland said she wouldn’t go forward with the tax
changes. Conservative Leader Pierre Poilievre has also rejected the tax change.”
As a result of these statements, almost all commentators expect the capital gains increase will not take place on the indicated future date. This is a relief to rental investors, who rely heavily on capital gains to make their overall returns on investment.
Federal – Withholding tax
When a non-Canadian resident sells property in Canada, the person who buys the property must withhold 25 per cent (or 50 per cent if it is depreciable property) of the gross selling price to cover potential tax liabilities. The rate is intended to approximate the combined federal and provincial tax payable on capital gains at the highest marginal tax rates. The amount is held in trust until the CRA provides a Certificate of Compliance.
Federal – Capital cost allowance rate (2024)
The capital cost allowance (CCA) rate for eligible purpose-built rental projects has increased from four per cent to 10 per cent. The CCA rate applies to projects that begin construction between April 16, 2024, and January 1, 2031. Developers can gain access to more cash flow through higher upfront tax deductions, which should improve after-tax returns on purpose-built rental housing developments. Although the total CCA that can be claimed over a building's lifespan does not change, the accelerated rate enables developers to depreciate the assets more quickly, which results in deferring tax obligations. Projects must meet specific criteria to qualify (e.g., at least four private apartment units or 10 private rooms or suites), and 90 per cent of the units must be used for long-term rentals. The goal is to stimulate rental property construction, increase housing supply, and lower rental prices over the long term, as well as encourage developers to explore other types of housing markets (e.g., student housing, senior living facilities).
Federal – Carbon tax
On April 1, 2025, the federal carbon tax will be increasing from $80 per tonne to $95 per tonne. This affects fuel charge rates, including natural gas and fuel oil. As a result, heating costs will increase for rental property owners and tenants. For example, the cost of natural gas will increase by 15.25 cents per cubic metre.
British Columbia – Property transfer tax
Companies or individuals who purchase residential, commercial or industrial real estate in BC must pay a provincial property transfer tax (PTT). In general, the amount of the PTT is one per cent on the first $200,000 of the property’s fair market value (FMV), two per cent on the amount between $200,000 and $2 million, three per cent on the amount between $2 million and $3 million, and five per cent of the remaining FMV.
Effective January 1, 2025, BC created a new exemption from its PTT for purchases of new secured purpose-built-rental buildings valid until December 30, 2030. The qualifications are as follows:
• All residential uses of the building must be used exclusively for rental purposes
• The building is required to contain at least four non-stratified apartment units
• It must be used as rentals for at least 10 years “The new exemption will clearly assist in drawing out more rental housing development,” said Dickie. “Many rental developments are built by ‘merchant builders’ who are expert at the development of new rental buildings and at leasing them up but then want to sell the properties and move on to the next development project. Eliminating the property transfer tax will result in the supply and demand for rental buildings meeting at a higher development level, producing more rental unit for would-be renters
to rent. That should have a moderating effect on rents, without reducing the returns to developers, or those who invest in rental property for the long term.”
British Columbia – Home-flipping tax
The government has introduced a new 20 per cent home-flipping tax, which is imposed under the Residential Property (Short-Term Holding) Profit Tax Act. The tax applies to the profit realized from properties sold in British Columbia that were owned for less than 730 days. BC’s home-flipping tax is separate and distinct from the federal property flipping tax. This could affect the overall real estate market and might increase the supply of long-term rental properties.
British Columbia – Tax credit for renters
BC residents are eligible for a tax credit that can be applied to housing costs. Renters who have adjusted incomes of up to $63,000 can claim up to $400 per year off their taxes, with partial credits available for incomes up to $83,000. This tax credit provides renters with direct financial relief, which will help them to pay their rent.
Conclusion
Canada’s tax policies have had a mixed impact on the rental housing industry. Removing the GST, HST, and PST from the cost of new construction did provide some initial relief, but inflation and other factors seem to have reduced their longterm effectiveness. Upcoming changes to capital gains taxes could provide more financial stress for rental property owners and investors. The federal and provincial governments seem to be trying to address the housing shortage by introducing new tax incentives for purpose-built rentals and providing renters with financial relief. However, it will likely take more comprehensive and collaborative measures to fully address the challenges of building more rental housing stock.