Bad Public Policy Underlies Rental Construction Vacuum: GST Discourages Investment, Encumbers Tenants 

By Tex Enmark

Much of the existing rental housing stock is deteriorating prematurely, because of a combination of poor tax policy, poor provincial legislation and market opportunity. Prior to 1972, the federal government had a tax policy that favoured investment in rental housing.

Throughout the '50's and '60's, we produced a large number of new rental units.  By 1971, 55% of housing [starts]... more than 65,000 units of housing built that year, were rental units.  By 1976, the number had decreased to 34,000 units and 25%. 

Since then, there has been a steady downward trend. Net of demolitions, Canada is unable to accommodate its growing population, 40% of whom rent. Demographic projections endorsed by the Canadian Federation of Municipalities predict a national need for 50,000 new rentals every year, for each of the next 20 years, 30,000 of which should be purpose built.

These projections also demonstrate that tenants have declining incomes. Yet, tax policies affecting tenants are skewed against them and favour homeowners, which in turn discourages investment in new rental construction.

DISCRIMINATORY FEDERAL TAX POLICY
It is tax and regulatory policy that treat rental housing as if they were unprofitable public utilities, rather than as businesses that must be competitive. Our federal tax law specifically discriminates against rental investment.  For example:

The rental business is not accorded "small business" status even if it is an owner-operated small business as most rentals are.

• Rental ownership is not considered an "active business" unless it has six or more employees. Because the rental business is capital inclusive, and primarily uses contractors, by the time there are six employees, it is no longer a small business.
• When a rental investment is sold, full taxes are paid on any capital gain and on any recapture of capital cost allowance, regardless of the long-term ownership and the erosion of capital through inflation. Since that rental business "grows" by selling smaller buildings and buying larger ones, the     tax penalty in sale has effectively stopped growth by confiscating most of the gain, most of which is not true gain, just inflation. Prior to 1972, when an investor sold and reinvested, the tax consequences were rolled over into the     next property.  This is still the case with motels and family farms. 
• A market rental pays 7% GST.  A non-profit rental gets a rebate of 50%, [paying just] 3.5% GST.  A homeowner gets a rebate of 2.5% and pays 4.5% GST. Rental owners, unique in the GST tax system, cannot claim the GST tax input credit.

Return to PPMA Articles