One small policy change that could fix Canada’s housing crisis

In 2023, the federal government expanded the HST rebate for purpose-built rental housing. This policy was subsequently matched provincially in Ontario and a few other provinces. The policy was straightforward in its intent. If governments want more rental homes, especially in high-cost cities, reducing taxes on new rental construction is one of the most direct ways to encourage private investment. Prior to this policy, upon completion of a new residential rental building, the developer would have to self-assess the value of the completed building and write a 13 percent (in Ontario) cheque to the Canada Revenue Agency. In principle, eliminating this punitive tax on new housing through a rebate makes sense. In practice, one aspect of how the rebate is written and interpreted is creating an unintended but meaningful problem. Under current legislation and the way it is applied by the CRA, two projects that produce the same amount of new rental housing can be treated very differently for tax purposes. Consider a simple example. A developer buys a single-family house and replaces it with a small five-unit multiplex. If the original house is fully demolished and the new building is constructed entirely from scratch, the project is considered new construction and qualifies for the full HST rebate. However, if the same developer keeps any portion of the existing structure (a part of the foundation or an exterior wall) and then builds the same five rental units, the project would then be classified as a major renovation. In that case, the HST rebate is denied. From a housing perspective, the outcome is identical. One detached house is removed, and five new rental units are added. From a tax perspective, the difference can be substantial (an approximately $200k to $400k tax bill). Why this distinction matters The distinction between new construction and major renovation might sound technical, but it has real consequences. In many small infill projects, retaining parts of an existing building is not about cutting corners or preserving aesthetics. It is often the most practical option. Existing foundations may be structurally sound. Site conditions or zoning rules may make partial retention simpler. In some cases, keeping a portion of the structure can reduce costs, shorten construction timelines, and limit disruption in established neighbourhoods. The current rebate rules punish these practical decisions. Developers are pushed toward full demolition even when partial reuse would be more efficient. The impact on missing middle rental housing Large apartment towers built on vacant land are generally unaffected by this rule. They start from a clean slate and clearly qualify as new construction. The impact falls on small and mid-sized developers working in existing neighbourhoods. These builders are responsible for much of what is often called missing middle housing. This includes multiplexes and small apartment buildings that add rental supply without dramatically changing the character of a street. These projects are already difficult to deliver. They face higher per-unit costs and more financing constraints than large developments. Removing a major tax rebate from these projects can easily determine whether they move forward at all. This matters because missing middle rental housing is one of the few ways to add supply incrementally in the places where people already live and where infrastructure is already in place. It does not rely on megaprojects or large public subsidies. It relies on small builders taking manageable risks. A surprise for developers The enhanced rental HST rebate is still relatively new. Many of the projects affected by this interpretation are only now being completed, with developers filing their HST returns in 2026. Some of these developers reasonably believed their projects were eligible for the rebate. They planned their budgets accordingly. Only after construction is complete and they’ve leased out their units will they discover that retaining part of the existing structure has changed the tax treatment. At that point, there is no practical way to adjust the project. The building is finished. The financing is closed. The unexpected tax cost is locked in. A more sensible approach The fix does not require expanding the rebate or loosening enforcement. It simply requires aligning the eligibility criteria with the policy objective. If the goal of the rebate is to encourage net new rental housing, then eligibility should be based on outcomes. Where a residential property is replaced with additional self-contained rental units, the project should qualify regardless of whether parts of the original structure are reused. This would remove the incentive to demolish usable structures, reduce unnecessary waste, and support the kind of small-scale rental construction that governments regularly say they want to see more of. Getting the incentives right Housing shortages are rarely caused by a single bad policy. They emerge from the accumulation of small barriers and misaligned incentives. This is one of those barriers. Fixing it would not solve Canada’s housing crisis, but it would remove an unnecessary obstacle that is currently discouraging good projects and surprising responsible builders after the fact. If governments are serious about increasing rental supply, the tax system should reward the creation of housing, not penalize the way it is constructed.