Good morning. Thank you for this opportunity.
My name is Al Kemp. I'm the chief executive officer of the Rental Owners and Managers Society of B.C. I'm also a past president and director of the Canadian Federation of Apartment Associations.
There is a critical dual need in British Columbia—indeed throughout Canada today—to increase rental stock and to make rental housing more affordable. Our industry, the industry that provides homes for one in three Canadians, is not looking for preferential treatment, and we're not looking for money. Perhaps that's a refreshing change from what you will hear as you go across the country. What we are looking for is simply the extension of equitable tax policies that are currently available to businesses and consumers in other industries.
To meet this dual need to increase rental stock and to make rental housing more affordable, we propose three changes to tax policies that should be incorporated into the 2010 federal budget: one, make capital gains taxes equitable with other industries; two, zero-rate the operation of rental housing for the GST and HST; and three, zero-rate the construction of rental properties for GST and HST.
While it might appear on the surface that each of these changes would be of great benefit to the owners of rental properties, in fact they would benefit renters through increased rental housing availability and affordability. I'm sure everybody would agree that those are highly significant goals, both economically and socially. Most renters are in the low- to middle-income categories, where a rent increase of only a few dollars can have a significant effect on their budget, their disposable income, and their quality of life.
In 1972 the then-federal government enacted a tax regime that continues to this day to have a negative and discriminatory impact on the residential rental industry. From 1972 to 1998, rental housing construction in Canada fell by 90%, from 50,000 units per year to only 5,000. In the succeeding decade, that level has not changed significantly.
Our industry is essentially penalized for any attempts to increase rental stock through the sale of current properties and reinvestment in new development. Because our industry is defined as a passive business, capital taxation policies that discriminate against reinvestment in rental property, as compared to any other type of property, include, but are not limited to, payment of 100% of capital gains tax on disposal of property, recapture of 100% of capital cost allowances on disposal, the inability to defer recapture of CCAs, and the unavailability to our industry of a preferential tax rate on the first $400,000 of income.
Note that all of the above represent immediate payment of taxes by our industry as opposed to deferment of taxes by virtually every other industry. We're not asking for tax exemption.
With the application of these policies for nearly 40 years, a vicious circle has resulted. The policies have created a shortage of rental stock. This has led to illusory capital gains, which has led to a disincentive to sell and reinvest, which in turn has led to a shortage of rental stock. Only the federal government can break this circle by changing its discriminatory tax policies.
Removing this discrimination will put billions of private dollars to work, certainly a need in these economic times. Owners will sell and reinvest, not only adding critically needed rental housing but also increasing income and sales tax revenues from the many sectors involved in multi-unit construction, ranging from architects to appraisers, equipment renters to realtors.
Turning to sales taxes, GST and HST have had and will continue to have a counterproductive effect on our industry that directly impacts rental rates. Food and shelter are essential necessities of life. In Canada food is not taxed; shelter is, indirectly.
The current 5% GST is estimated to add about $150 to $200 per year to a typical renter's shelter costs. With the advent of HST in British Columbia, that number increases to between $300 and $500 per year.
Groceries are zero-rated for GST and HST. Rental housing should be zero-rated through input tax credits identical to the provisions for suppliers of food. This would result in a minor reduction of tax revenues but have a major impact on housing affordability for renters in the lower- and middle-income brackets.
With respect to construction, it's difficult to quantify the cost to construct an apartment building today, because federal tax policies have rendered such construction economically unattractive for decades. But if we compare the average cost to construct a 900-square-foot condominium unit and a wood frame building, which would be a typical apartment building, HST would add about $12,500 to the average $250,000 to construct such a unit. That would translate into about $750 of additional rent if that unit were to be rented.
Again, recognizing that food and shelter are both necessities of life, HST should not apply to the construction of multi-unit residential housing.
In conclusion, by implementing the above recommendations, the federal government and Parliament will provide the necessary leadership to achieve a profound positive effect on the supply of rental housing and its cost to renters. This is critically needed in these difficult economic times. New rental stock will be created and upward pressure on rents will decrease. These benefits are highly desirable for the government, for stakeholders, and for 10 million Canadian households.
Thank you.