Government taxes and fees are a major contributor to high house prices, making up as much as 31 percent of the sale price of a home in some regions. And while most of these taxes come at the municipal level, GST (and in some provinces, HST) is also charged. One of the ways the Federal Government can help affordability is by updating the GST rebate on new homes for inflation – something that was supposed to happen regularly, but never has.
How the New Housing Rebate works
Since the GST was introduced in 1991, buyers of new construction homes have been required to pay GST. Understanding that a home is a very large purchase, the government of the day also introduced a New Housing Rebate to attempt to limit the impacts on housing affordability for entry-level homes by refunding some of the GST that a new home buyer pays. Homes priced under $350,000 were made eligible for the full rebate (which is 36% of the GST, amounting to a rebate maximum of $6,300), and the rebate was ratcheted down for homes over $350,000 on a declining scale to $0 for anything over $450,000. In this way, the GST rebate had thresholds that made it apply to most entry-level homes (and even average-priced homes) of the day. But these days, that is clearly no longer the case, because the thresholds have never changed to keep up with inflation. Today (as it was in 1991), if you were to buy a home for $450,000 or more, you would not receive any GST rebate. The difference is that in today’s market, that price point is still very much an entry-level home in many areas of the country.
When the GST was first introduced, the federal government made a commitment to adjust the New Housing Rebate thresholds every two years to reflect changes in housing prices, to protect affordability over time (see Technical Paper on the GST, 1989, pg.19) as house prices inevitably rose. Since then, house prices have increased substantially. The New Housing Price Index, which measures the change in newly constructed house prices over time, was 56 in 1991. It’s now 125—in other words, home prices have more than doubled. However, the New Housing Rebate has never been adjusted. Given current home prices, this means that buyers in most of the country are not receiving the New Housing Rebate.
Given today’s housing affordability and supply crisis, it is long past time to increase the New Housing Rebate thresholds to reflect the increased price of housing and help lower costs for would-be new home buyers.
Increasing the New Housing Rebate thresholds
There are very few measures that can reduce the cost of new housing for Canadians immediately, but increasing the thresholds of the New Housing Rebate is one of them. Since the New Housing Price Index has more than doubled since 1991, the simplest approach would be to double the rebate thresholds as well, to $700,000 and $900,000. Ideally, it would be much more appropriate to adjust the thresholds according to house prices in each market, so that entry-level houses in every market, including our largest cities, would be eligible for the rebate—that would be more complicated, but would mean they could be made higher for markets like the greater areas of Toronto and Vancouver, for example.
The impacts for buyers and Canadians
Adjusting the GST thresholds would reduce costs to new home buyers, improving affordability and fairness to the current and future generations of home buyers. It would also help encourage more construction of new homes, which is much needed given Canada is in a housing supply shortage.
In addition, it would not take away from the government’s tax revenue. In fact, the government would stand to increase GST revenue through more housing construction.
For the purposes of assessing the potential increase in GST revenues, we can look at a simple doubling of the thresholds, which would move the thresholds for the rebate from $350k (upper limit for full rebate of 36% of the GST owed) and $450k (upper limit for any rebate) to $700k and $900k respectively. As suggested above, more nuanced indexing would have it higher for regions like the GTA (e.g. $1M and $1.2M), while other regions would be closer to doubling, and some would be less.
The government’s concern with correcting the thresholds to reflect today’s housing prices has always been that it will result in lost GST revenue. That concern would be true if the assumption was that we will continue to build the same number of houses. However, adjusting the GST thresholds can be an important part of improving affordability and enabling more supply, along with actions the government has already taken and CHBA’s suite of other policy recommendations to support affordability and supply. With more supply comes more GST revenue, and that is how the GST updating should be assessed.
More housing starts will generate revenue for the government, even with GST thresholds increased
Based on the GST data available for 2022, a year where Canada had 271,000 housing starts, CHBA estimates that net revenue for the GST to the government was $5.05 billion (total GST payable minus GST rebates). If the GST thresholds were doubled and starts remained the same, the foregone revenues would be over just over $760 million less than $5.05 billion. However, the government has committed to increasing housing starts (the goal is to more than double our annual starts), and therefore GST revenues will actually increase, not decrease. This is how changes to the GST thresholds should be assessed in terms of impacts on GST revenues.
As we look at increasing housing starts, CHBA estimates it would only take an increase in housing starts of 18 percent to cover the foregone revenue from doubling the GST thresholds, meaning net GST revenues would remain the same, while many more buyers enter the market, continuing to drive more construction and supply. Carrying on from there towards the government’s higher targeted housing starts, even with thresholds doubled, an increase of 50 percent in housing starts would see net revenue for GST increase to $1.4 billion. Doubling of housing starts would increase net GST revenue by 3.5 billion.
Updating the GST thresholds is not only fair for the next generation of home buyers, but by contributing to improving affordability and driving more supply, it will actually help to increase GST revenue for the government, which means more money to support other government priorities, like investing in infrastructure.