Policy & Positions Manual

Provincial Issues - Energy and Mines - Housing

Rental Apartment Owners in British Columbia (2011)

Rental Apartment Buildings and other types of rental accommodation, manufactured home parks for example, in British Columbia are for the most part owned by small business owners. Their commitment and investment to the rental housing market is substantial. Through formalized memberships in the Building Owners and Managers Association of BC (BCAOMA) and the Rental Owners and Managers Society of BC (ROMS BC) well over 2,000 business owners are located throughout most if not all municipalities in British Columbia.

These business owners are regulated by the British Columbia Provincial Residential Tenancy Act. Section 23, Items 1-5 of this Act identifies conditions in which rent increases may be determined. Greater rent increases equate to a greater return on investment for the business owner, and in many cases prevents the business owner from suffering a loss on their investment.

For a variety of historical reasons the new construction of private rental housing units in British Columbia has virtually ceased. The existing return on investment compounds that serious problem and penalizes these business owners to an unfair degree.

Challenges of Aging Stock
The current rental housing stock in British Columbia can be characterized as follows:

  • BC rental stock average age is 58 years old

  • Aging rental stock requires increasing capital investment

  • Current rent control system (based on engineering studies) acts as a disincentive to adequate investment in the maintenance in existing rental stock to ensure its viability

  • Current rent control and HST policies act as a disincentive to new investment in the new rental housing units resulting in a downward pressure on  supply


As a consequence of the aging rental housing stock, the rental housing stock will necessarily decline in quality without policy changes.  Current rent control and HST policies affecting rental housing provide disincentives to undertake capital expenditure.

The BCAOMA believes that one of the best market stimuli available to the Province of British Columbia to maintain existing rental housing, encourage the development of new, purpose-built rental housing and to achieve the sustainability of the rental housing industry would be the mitigation of the impact of the planned HST on the rental housing owners.  Neutralizing the impact of the HST on the rental housing industry will support the tenuous viability of a sustainable rental housing market in British Columbia, and will assist in the continued provision of safe, secure and well-maintained rental housing stock.

As a result of the existing Rent Increase Calculation Formula that prescribes allowable rent increases in British Columbia, property owners do not have the ability to pass higher operating costs onto tenants. Consequently, property owners will be in the untenable position of facing higher costs, with no revenue capacity to recoup the costs directly related to the operation and maintenance of rental housing units.

Essentially the BC HST will have the unintended consequence of acting as a further disincentive to property owners for the development of new rental housing units and the undertaking of capital expenditures for rental housing up-grading and maintenance.  In short, the combined impact of rent controls and the BC HST has been to significantly increase costs without providing sufficient means for property owners to recoup their costs.

Even without the application of the added costs of HST, property owners and landlords are already challenged by increasing costs and controlled revenue increase potential, facing owners with a current or prospective negative cash flow.

While accommodation for the cost impact of the BC HST has been made by the BC Government for other life necessities such as groceries, no accommodation has been made for the necessity of shelter.  If the BC Government chooses not to provide HST accommodation to the Rental Housing Industry, then it must consider elimination of rent controls so that the BC HST can be passed through to consumers, and the industry has an opportunity to operate in a financially sustainable environment.

In summary, the BCAOMA believes that the BC Government cannot maintain the burden of a ‘new’ tax in the form of the BC HST, while at the same time not enabling the rental housing industry to pass through the cost of the new tax on to consumers, or otherwise earn more revenue, to make up for the cost-to-revenue shortfall.

We appreciate that the government is being requested by many industries and sectors for some form of relief from the additional taxation represented by HST.  No industry or sector is in the same position as the residential rental industry:

  • Food and shelter are necessities of life.

  • The provision of food is “zero-rated”, exempt from paying and collecting sales taxes.

  • Our industry has only one source of revenue – rents.

  • We are restricted by provincial legislation in the amount by which rents can be increased.

  • Rents must continue to be exempt from formally GST/PST, and now HST.  We are not asking to pass on this tax to tenants.

  • The introduction of HST will cause a significant increase in the net costs of providing rental accommodations, as there are no input tax credits available.


Left unresolved, the imposition of the HST on the rental housing industry will only serve to further increase the existing negative gap that results from the imbalance between allowable rent increases and actual increases in costs associated with operations and maintenance.  Imposition of the HST has made an already negative operating balance more negative.

Rental housing is already a scarce commodity in many regions of British Columbia.  Therefore it does not make good sense – policy or otherwise – to impose further costs on the rental housing industry.

It is critical that the government recognize that the residential rental industry is unique in that it is the only private industry in British Columbia that is restricted by government legislation from passing cost increases to its “customers”  through increased rents, since rents are controlled, unlike, other private/industry products.  Further, a typical rental property owner’s only source of income is rents.  The current Harmonized Sales Tax (HST) – treatment of commercial real estate illustrates the anomalous situation of rental housing. Unlike rental housing investors, investors in non-residential properties (e.g office and retail projects) effectively do not bear the burden of HST.  While HST is payable on the final value of a new non-residential building, the owners receive input credits for all HST paid – credits which can be applied against HST collected on rents from commercial tenants, or refunded if they exceed HST collected.

This difference between the HST treatment of rental housing and non-residential rental properties is not clearly understood by many observers.  It arises from the fact that, when the GST was introduced, a decision was made to exempt residential rents, now also to exempt rents from HST.  Since commercial rents are subject to the HST, any HST paid on inputs by the owners of non-residential properties can be deducted against the HST collected from rents.  In contrast, since residential landlords do not collect HST on rents, they are required to absorb 100% of the HST on inputs because there is no HST collected to which HST paid can be applied as a credit.  Therefore, because no HST is payable on residential rents, rental housing is an exception from the general rule that the HST paid by businesses can be recovered from the purchasers of its products and services.

HST has expanded the tax base previously encompassed by the BC’s PST by essentially adding PST to the broader range of goods and services upon which GST was previously payable.  This change has a considerable – and totally negative - tax impact on the residential rental industry.

The Impact of Harmonized Sales Tax
Understanding that the average age of rental buildings in Vancouver is 58 years, rental housing owners are challenged by very real costs associated with required maintenance of older buildings – costs which are labour and input intensive and subject to the application of HST.

Rental housing owners are also in the very difficult situation of facing real, increasing maintenance costs while at the same time coming up against the very real revenue barrier imposed by the new HST, which limit their ability to pay for maintenance projects, possibly placing owners in the unsustainable position of a negative cash flow.

The implementation of the HST has a significant business impact on owners of residential rental housing in British Columbia. Under the legislation, owners are required to pay HST on all goods and services related to residential housing but are unable to recoup these charges as a result of the rent controls found in s.43 of the Residential Tenancy Act and s.22 of the Residential Tenancy Regulation.  In effect, the owners are forced to bear an increase in operating costs equivalent to an estimated 1.5% - 3.0% of gross income, which cannot be passed on to tenants.  As noted, this will have significant impact on an industry where margins are already limited, and will have a profound effect on the future quality and quantity of residential housing in British Columbia.  Many owners are highly mortgaged, after which they may net only 5% or less of rents.  A 2% gross income increase in costs that cannot be passed on would result in a 40% reduction in net income, a severe disincentive to further investment in rental housing.

Rent Control Prevents Industry from Passing on HST
At the present time, the landlords are restricted to rent increases by the Rent Calculation Increase Formula in British Columbia calculated as the Canadian Price Index (CPI) + 2%.

If BC’s rental housing providers’ incur costs such as maintenance or operating expenses above the allowable rent increase, the landlords have no ability to raise rents to an equivalent increase.

Existing rental housing stock is declining in quality and will continue to do so, without policy changes.  Current policies affecting rental housing provide no incentives to undertake capital expenditure.

Failure to proactively address this situation will of necessity force rental housing providers to reduce “optional” spending, i.e. building servicing and maintenance, leading to building deterioration and tenant unrest, plus upward pressures on deferred (controlled) rents will be exacerbated.


THE CHAMBER RECOMMENDS:

That the Provincial Government;

  1. work with the federal government to designate the residential rental housing industry as zero-rated; and
  2. amend the current rent calculations formula to reflect current actual cost increases that impact the rental housing industry.