Published: December 11, 2023
Introduction: Decoding the 2023 Fall Economic Statement
On November 21, 2023, the government of Canada released the 2023 Fall Economic Statement, which acknowledged and addressed what the government identified as its most urgent challenge: meeting the housing demand in Canada. Specifically, the 2023 Fall Economic Statement recognizes the needs for “concrete steps to get more homes built, faster, and to help making housing more affordable across the country.” Canada’s population has grown by more than double its pre-pandemic pace as a result of Canada’s pro-immigration policy. However, housing supplies have grown much slower than the population and cost of living increased rapidly due to inflation, resulting in skyrocketed housing costs in cities where people are most likely to obtain employment.
To resolve the housing challenge, the government of Canada proposes the Canadian Housing Action in the 2023 Fall Economic Statement, aiming to increase housing supplies and to ultimately reduce housing costs in Canada. This article is Part I of the Decoding 2023 Fall Economic Statement series, examining the tax policies in the Canadian Housing Action that are proposed for resolving the housing challenge in Canada.
Canadian Housing Plan
Recognizing that there is no single measure that will solve Canada’s housing challenge, the government of Canada is introducing a series of measures and proposes policies to incentivize the construction of new rental homes while providing financial assistance to first-time home buyers. Some of the measures are already in place as of December 1, 2023, including the introduction of First Home Savings Account (FHSA) and the removal of the Goods and Services Tax (GST) from new purpose-built rental housing projects. The 2023 Fall Economic Statement revealed that, as of October 31, 2023, more than 250,000 Canadians have already opened a FHSA. The FHSA is the latest addition to incentives offered to first-time home buyers in Canada. Previous first-time home buyer incentivizes offered by the federal government included:
- The First Time Home Buyers’ Tax Credit, a non-refundable tax credit of up to $1,500;
- GST/HST new housing rebates, potential rebates for GST/HST paid by first-time home buyers when purchasing their first homes;
- The Home Buyer’s Plan (HBP), an interest-free loan of up to $35,000 from a first-time home buyer’s Registered Retirement Savings Plan (RRSP); and
- The First-Time Home Buyer Incentive, a loan from the government of Canada of up to 10% of the purchase price of a first home with market-value-based repayment requirement.
Additionally, there have been other provincial, territorial, or municipal measures in place to fund first-time home purchases. For example, in Ontario, a qualifying first-time home buyer is eligible for up to $4,000 in provincial land transfer tax refunds. If this home is a newly-build or a resale residential property locates in the City of Toronto, the buyer may also qualify for a rebate of up to $4,475 in provincial land transfer tax.
The 2023 Fall Economic Statement also announced that co-operative housing corporations that provide long-term rental accommodation would also be eligible for the removal of the GST on new rental housing, subject to certain exceptions. One of the exceptions concerns co-operative housing corporations where occupants have an ownership or equity interest will not qualify for the new policy. To protect Canadian renters, this policy will also not apply to substantial renovations of existing residential complexes, aiming to avoid or to discourage “renoviction”. The government of Canada has additionally called on provinces to eliminate provincial taxes on new rental housing or goods and services used in the construction of new rental housing. As of December 1, 2023, Ontario, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador have all announced plans to respond to the federal government’s measures.
As part of the efforts to increase long-term rental housing supplies, the federal government also intends to deny income tax deductions for expenses incurred to earn short-term rental income, including interest expenses. This policy applies either in provinces and municipalities that have prohibited short-term rentals or in those that have licensing, permitting, or registration requirements, when short-term rental operators are not compliant with the applicable requirements. The proposed measure is expected to take effect from January 1, 2024, and as of December 1, 2023, there is no detailed implementation plan. Nevertheless, the denial of income tax deductions for expense will likely result in short-term rental income becoming fully taxable. The proposed measure has received criticisms from both businesses and individual homeowners since its announcement. One key issue, as some has pointed out, is that many Canadians need the extra income through home sharing to make ends meet, facing increasing inflation, mortgage rates, and overall costs of living. Furthermore, many have noted that reducing short-term rental supplies is a mere distraction from the real solution to housing supply shortages. The real solution to the housing crisis in Canada, even the federal government has admitted, involves a massive increase in rental housing supplies.
Who Will Be Affected By The Proposed Changes?
The proposed changes will primarily affect the following individual and businesses:
- Builders and Co-operative Housing Corporations; and
- Short-term Rental Operators, including those who plan on operating short-term rentals by 2024.
For builders and co-operative housing corporations, the removal of GST is excellent news, complementing other policies that facilitates funding and accelerate the construction of new long-term rental accommodation. However, depending on the provinces and/or territories the builders and co-operative housing corporations operate, the removal of GST may lead to unexpected complications in tax obligations. For example, in the case of a mixed project, namely a construction project with both residential and commercial portions, calculation of applicable GST may be quite challenging, especially when identifying the expenses incurred specifically for building long-term rental accommodation. Similarly, if a housing project includes both units for rent and units for sale, only a portion of the expenses can be exempt from the GST. This is another example of the government introducing unneeded tax complexity to our already overwhelmingly complex tax system.
For short-term rental operators, the past few years have been challenging as an increasing number of provinces and municipalities have imposed restrictions on short-term rentals. Alongside varying registration and operational requirements, the definition of short-term rentals also varies. For example, in the City of Toronto, a short-term rental is defined as all or part of a dwelling unit rented out for less than 28 consecutive days in exchange for payment, excluding hotels and motels. In Vancouver, a short-term rental can be an entire home, or a room within that home, that is rented for less than 30 consecutive days at a time. Meanwhile, in Montreal, a short-term rental means renting all or part of the property to tourists for fewer than 31 days. While the federal government has not released the definition of short-term rentals with regards to the newly proposed deduction rules, it is reasonable to expect that, for tax purposes, the definition of short-term rentals will likely align with existing ones, emphasizing the duration of consecutive property rental. As mentioned above, the introduction of these rules will adversely affect homeowners who rent out one or more rooms in their home to help make ends meet.
Recommendations For Affected Taxpayers
Navigating and understanding new tax policies can pose challenges for ordinary taxpayers. It is crucial for affected taxpayers to take a proactive approach in preparing for these changes, particularly once the detailed rules of the tax policy have been announced. For instance, individuals operating or considering short-term rentals should have a comprehensive understanding of their responsibilities. This includes being aware of tax filing obligations, licensing or registration requirements, and limitations on the property.
For more tax-related issues or any concerns regarding the upcoming tax policy changes, please contact our top tax lawyers in Toronto for legal advice tailored to your specific case.
Pro Tax Tips – Ensure Compliance At All Levels
Canada have primarily three levels of government, federal, provincial/territorial, and municipal. Each level of government can impose specific rules concerning rental accommodations, construction, and applicable taxes related to any property or construction project. In particular, a property owner or a builder may find it challenging to understand the full scope of tax obligations. However, taxpayers will be affected by these measures on January 1, 2024, whether or not the taxpayers have sufficient time to study the new rules. For example, if you are operating a short-term rental unit in Toronto, you should be aware of the following tax-related issues that could significantly increase your operating costs: 1. Vacant home taxes and the requirement to declare occupancy status; 2. The city’s restriction on short-term rental units; and 3. The possibility of being subject to the federal underused housing tax (UHT).
To ensure compliance with rules imposed by all levels of government, contact our expert Canadian tax lawyers for legal advice specific to your case. We can assist you in better understanding your obligations as a homeowner, a builder, or a short-term rental operator.
What is the New Policy Against Short-term Rentals Listings on Platforms Like Airbnb and VRBO?
Short-term rental operators must adhere to provincial and municipal requirements with regards to short-term rentals; otherwise, expenses incurred to generate short-term rental income cannot be used to deduct the operators’ short-term rental income. Specifically, no deduction will be allowed in provinces and municipalities that have prohibited short-term rentals. If a province or a municipality has licensing, permitting, or registration requirement, a short-term operator who has not satisfied all applicable requirements also cannot deduct expenses incurred to earn short-term rental income. The proposed new restriction is set to be effective starting from January 1, 2024.
For example, consider A who lives in Toronto and earns $20,000 from his listings on Airbnb that are not A’s principal residence, with $8,000 in expenses. Since Toronto only permits short-term rentals for an individual’s principal residence, A is not compliant with the municipal requirements. Consequently, A will be required to include the full $20,000 on his tax return and cannot deduct the $8,000 in expenses.
What Kind of Housing Projects Qualifies for the GST Exemption?
New purpose-built rental housing projects and co-operative housing corporations that offer long-term rental accommodation qualify for the GST Exemption. However, co-operative housing corporations where occupants have an ownership or equity interest will not meet the criteria for this new exemption. This exclusion is implemented to ensure that the benefit is directed towards increasing housing availability for renters rather than owners.
To further safeguard Canadian renters, this policy explicitly excludes substantial renovations of existing residential complexes from the GST exemption. This measure is designed to prevent “renoviction,” a term coined to describe situations where tenants are displaced due to extensive renovations. By excluding renovations from this policy, the government aims to maintain stability in existing rental housing and protect tenants from potential displacement resulting from significant refurbishments. This strategic approach aligns with the broader goal of creating a more robust and affordable long-term rental market in Canada.
This article provides information of a general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian tax lawyer.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."