Big news today in development land. The federal government just announced that it has removed sales tax (GST/HST) from new rental housing effective immediately. This is a significant step in the right direction, and something that we have spoken about many times before on the blog.

Here's how things used to work:

In the case of a newly constructed or substantially renovated multiple-unit residential complex or addition to a multiple-unit residential complex, the builder must generally self-assess GST/HST on the fair market value of the whole of the substantially completed multiple-unit residential complex or addition when possession of the first unit is given under a lease, licence or similar arrangement as a place of residence of an individual.

What this is saying is that if you build new rental housing, and even if you plan to continue owning it forever, you need to determine the fair market value of the property and then pay HST on that amount. In Ontario, the HST rate is 13%. However, the effective rate was a bit lower because of new rental rebates. Let's say it was somewhere around 11%.

Now that this no longer needs to be paid, a lot of rental projects that were flirting at the margin should suddenly make economic sense. Which is why I tweeted earlier today that every housing developer in Canada is right now dusting off their "what if we built rental" development pro forma. It didn't work yesterday, but maybe it does today!

Today is a good day for new rental housing supply in Canada.

Update: This announcement only relates to the federal portion of the HST. The feds are now calling on provinces to follow suit.

One way you could oversimplify the Canadian economy is to say that it revolves around three things: natural resources, real estate, and high immigration. (You can tell me I’m wrong in the comments below.) More recently, we’ve also been touting the growing number of tech workers in our cities. But in some ways this is a bit of a vanity metric. 

I think of it in terms of two different categories of workers. There are tech workers that are the result of foreign companies opening satellite offices to take advantage of the weak Canadian dollar and our more enlightened immigration policies. And there are tech workers that are the result of Canadian-based companies innovating, growing, and needing more talent. Think Shopify.

The former situation is not at all bad, but a lot of the value is going to accrue outside of the country. Whereas in the latter situation, we get to be the principal recipients and we get all of the positive externalities associated with innovation and entrepreneurship. One of these is a powerful compounding effect. Successful startups tend to beget even more new companies. 

So even though I work in and benefit from one of the three things that I mentioned at the beginning of this post, I believe that we need to be much better at encouraging a culture of innovation and entrepreneurship in Canada. We’ve become too complacent.

This is a critically important topic that we don’t seem to be talking about nearly enough. So I plan to do more of that here on the blog.