Enhanced Rental Rebate

The Devil is in the Details

On September 14, 2024, the Government of Canada announced a new incentive for builders of residential complexes (houses, apartments, condos, etc) for long term rental that enabled them to claim an equal amount of tax back as a rebate as they were required to self assess for the conversion of the property from commercial to exempt activity (effectively creating a wash transaction). A little technical explanation, generally when real property that was last used in commercial activity (short term accommodations) changes use to exempt residential activity (long term rental) section 190 of Part IX of the Excise Tax Act kicks in to deem the person to be a builder for GST/HST purposes. After that, section 191 generally kicks in on the first rental as a place of residence to individuals to deem a sale on the fair market value of the property. This means that there is a tax liability created in that reporting period that must be accounted for by the builder (owner of the property).

“This is a major GST/HST liability problem for owners of these properties who voluntarily or involuntarily leave the short term accommodations business”

With that explained, when I first heard of the Enhanced Rental Rebate I immediately wondered if it would include change of use of short term accommodation properties in condominium buildings. The legislation as written suggested that it was possible:

Rebate for purpose-built rental housing (in part)

(3.‍1) The amount of a rebate under subsection (3) in respect of a taxable supply of purpose-built rental housing — being prescribed property — is determined in accordance with subsection (3.‍2) if prescribed conditions are met and if

• (b) the taxable supply is a supply by way of sale of a residential complex that is deemed to be made to a person that has converted real property for use as the residential complex and is, as a result, deemed under subsection 190(1) to be a builder of the residential complex and the construction or alteration necessary to effect the conversion begins after September 13, 2023 but before 2031 and is substantially completed before 2036.

The devil is in the details and I wanted to know if the regulations for the rebate allowed conversions of single unit short term accommodations properties typically seen on platforms like Airbnb and VRBO. This is a major GST/HST liability problem for owners of these properties who voluntarily or involuntarily leave the short term accommodations business (as will happen on May 1, 2024, or thereafter) and enter the long term accommodations business with the same properties (see previous post on this issue). Having seen the regulations, it appears that paragraph 4(2)(b) of the New Harmonized Value-added Tax System Regulations 2 prevents this rebate from being available where the following condition is not met:

“all or substantially all of the residential units that form part of the multiple unit residential complex are, at the particular time referred to in paragraph 256.2(3)(b) of the Act, qualifying residential units of the person that are held by the person for an eligible purpose.”

I had two strategies for helping owners of short term accommodation properties that changed use and unfortunately this one looks to be unavailable (however, I’m waiting for an official interpretation from GST/HST Rulings on the matter in case I have interpreted this incorrectly). Regardless, I still believe there is an additional means to avoid the tax liability. If you or someone you know is changing use of a short term accommodations property to long term accommodations, get in touch and we’ll discuss what we might be able to do for you.