Updates on GST Rebate for Builders

Are you a multi-family builder that’s been waiting to learn more about the GST Enhanced Rebate conditions for projects that began construction or alteration? We have been getting several questions from our multi-family builder clients and network about some updates from the Canada Revenue Agency (“CRA”) since the enhanced rebate was first announced last fall. The big one of course is, “does this new project qualify for new rebate?” Given that the cutoff date of September 14, 2023, it is critical for multi-family builders to avail themselves of the full benefit of the rebate.

On June 24, 2024, the Draft Real Property (GST/HST) Regulations released originally in late December 2023, were finalized as the Real Property (GST/HST) Regulations and are expected to be passed into law shortly. Quickly after this, the CRA released their own interpretation of these rules under GST/HST Notice – 336 (the “Notice”) along with a brief list of questions and answers (“Q&A”) regarding some typical questions that the CRA has been receiving.

In this blog, we explore some of these questions and query whether and how the “A” in the Answers, will be enforced or further interpreted by builders and the tax advisory community. Some of our perspectives come from multi-family builders that still have questions about the Q&A, as do we. Let’s kick it off with the big one on everyone’s mind for the last several months, but if you need some context and background, please check out our initial article on the enhanced rebate, from our fall 2023 blog here.

The Notice’s Q&A starts off with the following question and answer about when “construction” begins.

1. When is the construction of a residential complex considered to begin?

Generally, the construction of a residential complex is considered to begin at the time that excavation work relating to the residential complex begins.

Seems simple enough right? But how will an auditor see this when looking at the first rebate come in? Let’s unpack this a bit under a few possible scenarios. For instance, let’s say that there were several older houses on four different lots where a new multi-family complex of 30 units is going to be constructed.

Let’s assume that the older homes were demolished one day before the effective date of September 14, 2023, but the basement foundation where the underground parkade will be, is not actually started until September 15, 2023, after the remains of the older homes have been removed.

Is the demolition service date of September 13, 2023, the “start of construction” and excavation or is it the 15^th when the excavator machines start digging the “full foundation hole”? Will the service start date be “thee date” or will the invoice date be “thee date” and what if the excavator or demolition company does not accurately state this on the invoice? Will there be some other back-up to support “thee date”?

We can imagine all kinds of other potential scenarios and which our builder clients have explored and for which we’ve considered some interesting planning ideas to benefit from the rebate. We can be sure that CRA auditors will be watching very closely, the first few rebates around the implementation date; and by extension, the cut-off date for the “end of the rebate” construction or alteration starting prior to 2031, with substantial completion before 2036.

2. A housing project consists of two separate multiple unit buildings where the construction of one building began on August 31, 2023, and the construction of the other building began on September 30, 2023. Would the PBRH rebate apply to the entire project or would it apply only to the building where construction began on September 30, 2023?

Generally, a person may be entitled to the PBRH rebate for the GST or federal part of the HST paid in respect of a multiple unit residential complex where the construction of the complex begins after September 13, 2023, but before 2031, and is substantially completed before 2036.

The first building, in respect of which construction began on August 31, 2023, is not eligible for the PBRH rebate. However, the person may be entitled to the GST/HST NRRP rebate for a portion of the GST or federal part of the HST paid on the first building, provided all conditions are met for that rebate.

A person may be entitled to the PBRH rebate for the GST or federal part of the HST payable or deemed paid and collected in respect of the second building in respect of which construction began on September 30, 2023, provided all conditions for the rebate are met.

This is a common scenario with phase 1+ type of projects on a single or multiple legal parcels/lots, so this should be straightforward right? In practice, builders of projects in a two+ phase project with multiple complexes spread over a single physical parcel (multiple legal descriptions of the land may be involved), don’t always keep separate and distinct budgets and actual costs amongst the separate buildings, so this poses a problem in the cut-off issue described above. How does a builder accurately separate the “before and after” costs from the building(s) that had their excavation started before the September 14, 2023, cutoff date (i.e., ineligible) and those that started excavation after?

In some scenarios we have seen, there are 2 to 4 distinct “buildings” that will be constructed on the surface over a period of several phases or years, with a common underground parkade and general project “envelope”. That is, the entire subsurface of all buildings to be constructed, is fully excavated first and the underground parkade completed all at the same time, prior to any “above-surface” construction starting. The actual construction of Buildings 1 and 2 may then be started above ground but then economic conditions may become such that the next two are put on hold for a few months or many years.

How would this play out? Based on the CRA’s “interpretation” of when construction begins, if the backhoes come in on September 13 to excavate the entire parkade envelope, notwithstanding that buildings 2, 3 and 4 may not be completed for another 2-3 years, all four buildings (once finally constructed) would NOT appear to qualify on the surface. In other words, “excavation” of all four buildings’ subsurface structure (i.e., the entire parkade) began before the effective date of the enhanced rebate.

Similarly, as the enhanced rebate will not apply for buildings whose construction commences after December 31, 2030, so as this date approaches, builders will need to be cognizant of the same cut-off rules around “excavation starting”. Also, such buildings where construction starts before 2031, must also be substantially completed (~90%) before 2036. As these rebates get filed (assuming the legislation is still in place) we expect CRA to be watching for non-qualifying projects that don’t fit with these dates and some “interpretation” of what “substantially completed” means to them.

3. An office building is being converted into a multiple unit residential complex where the units will be rented to individuals as their place of residence. The conversion began after September 13, 2023. Will the PBRH rebate be available for the GST or the federal part of the HST deemed to have been paid and collected as a result of the conversion?

The PBRH rebate may be available for the GST or the federal part of the HST deemed to have been paid and collected on the self-supply of the multiple unit residential complex that was converted from an office building. The construction or alteration necessary to affect the conversion must begin after September 13, 2023, but before 2031, and be substantially completed before 2036. In addition, on September 13, 2023, the property met all of the following conditions:

• it was in existence
• it was not in the process of being constructed
• it was not being used as a residential complex

This example is becoming quite common-place in downtown cores across Canada (Calgary in the last several years) as office-space is giving way to residential spaces, assuming the buildings’ characteristics fit the multi-family requirements. That is, not every office building (new or old) has the right requirements to become (for building code purposes) a multi-family project. For instance, some older office towers don’t have enough elevators, fire escapes or parking spaces to accommodate current building codes, notwithstanding placement and layout of floor plates, supporting pillars, etc.

So, the criteria above around “existence”, etc., seem easy enough to determine right? Like the issue above for “newly-constructed” buildings/projects, when does an “alteration” or “construction “begin for an existing office tower? The Q&A doesn’t answer this other than to say that “construction begins when excavation begins”, which will not apply to a conversion from an office building to a multi-family residential complex.

Will there be a special “cut-off” date of when the “demolition” begins of the office building’s interior space? Who will define that date? Will it be when the first demolition or renovation/conversion permit is issued for the owner? Even if the demolition permit is issued by the local authority, what if there’s a delay of several days or weeks until the first demolition starts? What if there are asbestos issues which can delay the work of demolition in some of Canada’s older buildings that often used this product?

Our takeaways

We expect that between the industry having many nuanced situations that the Q&A has not yet contemplated, there will be many more questions than answers come up in the next year or so as these projects finish up. We hope that tax advisors (and builders) will keep providing scenarios to the CRA to help build up a more comprehensive Q&A over time. This will help provide everyone with more certainty about the rebate eligibility in the early days, but also to give builders some better assurance as the rebate sunset kicks in at the end of 2030.

Lastly, the good news thus far, is that Ontario, Nova Scotia, and New Brunswick have assured multi-family builders that their existing rebate systems for new residential rental properties will rebate the provincial component of the HST. PEI has said they will also follow suit but will cap the rebate at $35,000 total HST per qualifying unit. Quebec has announced that it will not mirror the rebate under its sales tax regime.