In response to Ontario’s housing crisis, the provincial government unveiled plans to remove the full provincial portion of the Harmonized Sales Tax (HST) from new rental construction. This move follows the federal government's announcement to remove the Goods and Services Tax (GST) from new rental developments, offering a rebate directly to developers.

These combined federal and provincial tax breaks are set to considerably impact construction costs.

Purpose-Built Rental Housing Investment

The removal of the tax burden while not necessarily an incentive for investment, is a means to address the mounting costs associated with multifamily rental construction. To be eligible for this tax exemption, projects must be built with the sole intention of being rented out entirely.

New condo construction and condo conversion projects don’t qualify for this tax exemption. Additionally, projects must bring a minimum of 10 units to market.

Rental Property Inventory

While the policy to remove HST on new rental apartments is a step in the right direction, it’s important to remember that government policies take time to materialize results. Development, regardless of its scale, is a time-consuming process, and meaningful changes will be years in the making.

However, governments must continue to make policy changes that promote development to address the housing crisis effectively, otherwise, we can expect to see little to no change in the next five years.

Affordability

Affordability is one of, if not the most pressing issue for renters across the country, rooted in the lack of housing supply. The removal of HST on new rental apartments can improve affordability by increasing the total supply of housing, addressing the problems of high competition amongst renters, and diversifying available rentals in the market.

Creating greater diversity in the type and age of rental buildings can allow for more affordable options that cater to a broader range of income levels, alleviating pressure on existing units, and offering renters more options when looking for housing with the features they want; at the price they can afford. Additionally, construction stimulates economic growth, creates jobs, and contributes to local economies, indirectly enhancing affordability.

Other Provinces and Their Stances

Newfoundland and Labrador, Prince Edward Island, and Nova Scotia have also announced their intentions to waive provincial taxes for purpose-built rental housing. Quebec similarly offers a rebate for newly built rental apartments.

Manitoba previously had a rental construction tax credit, although it was discontinued in 2019. Alberta and British Columbia do not charge provincial sales tax on rental development, while Saskatchewan has not shown intentions to remove HST from new rental construction.

The Next Step: Addressing the Cost Inflation And Labour Shortage

While the removal of provincial taxes is a significant step in improving project viability, it only addresses one part of the cost inflation making development challenging.

Construction costs continue to rise due to inflation having a run-on effect wherein the cost of raw materials inflates the cost of construction materials. This is also related to income inflation, which is more complex as it relates to the supply of skilled labour. Due to a shortage of skilled labour, trades are in demand and this has the effect of driving up the cost of a particular trade as there is greater competition for the limited number of tradesmen available.

Bureaucracy

Municipal bureaucratic processes can also add complexity, time, and additional construction costs to a project. Municipal approvals are vital but can be influenced by planners, causing delays. A lack of clear guidelines and support can turn a viable project into an unviable one.

Municipalities often also require multiple permits, including zoning, demolition, building, environmental, grading, utility, and more - adding to delays.

Regulatory compliance with safety codes and regulations can add additional costs to projects, including some regulations being imposed by individual municipalities in addition to the conventional building standards.

Public Engagement

Municipalities will often require developers to engage in public consultations or hearings, which can add time and additional costs/ delays to a project. More often than not, the opinions expressed are to build less and further away because while everyone knows we need more housing, no one wants to see their neighbourhood change.

In conclusion, the root cause of many municipal failures in the realm of development can often be traced back to one common denominator: time. Whether it's the need for additional project reviews, untangling administrative red tape, or navigating a complex web of legal and regulatory hurdles. These time-consuming factors all contribute to extending project timelines and increasing the carrying cost of a project. This, in turn, raises the overall cost of a project and poses a challenge to the ultimate goal of increasing housing inventory and improving affordability.

To address these issues and make the development process more efficient, it is imperative to foster a more cooperative and streamlined relationship between developers and municipalities. One potential solution is the introduction of a development czar, a dedicated individual within city hall to act as a liaison between the municipality and its various departments, community stakeholders, and developers. This role could be crucial in minimizing delays by facilitating efficient communication and navigating bureaucratic obstacles, ultimately promoting faster and more cost-effective development.

Provincial governments must continue to take proactive steps as they have done with the removals of provincial tax to overcome the obstacles slowing our progress toward a healthy housing market. By reevaluating priorities and implementing meaningful strategies to reduce the financial burdens on new developments, we can better ensure that housing targets are met and that our communities thrive, ushering in an era of growth and progress. It is time for all levels of government to seize the opportunity and ensure we don't lose momentum in resolving our housing crisis.