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Rent Control in – A Boom or Bust for Landlords and Tenants?

Todd Christenson, BComm, Specialist, Tax Alan Wainer, CPA, CA, CPA (Illinois), Partner, Audit & Advisory

Audit | Tax | Advisory Chartered Professional Accountants Member Crowe Horwath International www.crowesoberman.com As the 2018 calendar year gets underway, it’s a good opportunity for a refresher on the significant legislative changes introduced in 2017, which impact tenants and landlords in Ontario.

The expansion of rent control legislation in Ontario, announced in Ontario’s Fair Housing Plan, and passed in May 2017 under The Rental Fairness Act (collectively known as the “Rent Control Changes”), implements measures aimed at providing tenants with more price security, and stabilizing the province’s long-term rental market.

Regardless of which side of a increases in rent were not limited KEY CHANGES POST-RENT lease you fall on, you will likely by the guidelines published by the CONTROL CHANGES: be affected by the Rent Control . Changes implemented in Ontario. Rent control guidelines are 3. Landlords of rental units that expanded to apply to most private Here is a summary of the rental were subject to rent control, could rental units in Ontario, including landscape before and after the apply to the Landlord and Tenant those built or first rented to Rent Control Changes, as well as Board for rental increases above tenants on or after November 1, the implications of the changes for the guidelines. Rental increases 1991. Under the Rent Control both tenants and landlords. that exceeded the guidelines were Changes, landlords cannot generally granted to landlords increase rent by more than the RENTAL LANDSCAPE PRE- to account for extraordinary amount set by the Government of RENT CONTROL CHANGES: increases in municipal taxes, Ontario’s rent increase guidelines. utilities, capital expenditures or 1. Rental units (including private operating costs. 1. These guidelines do not apply apartments, condo units and to nursing homes or commercial part or all of a house) built or 4. Landlords were able to evict rental properties, but they do first rented to tenants on or after tenants, without monetary apply to retirement residences. November 1, 1991 were exempt consequence to the landlord, from rent control. under active leases if the landlord 2. The Government of Ontario desired to utilize the rental unit publishes the rent increase 2. Tenants of rental units that were for their own, an immediate family guideline by August 31st of each not subject to rent control, could member’s, or a specified person’s, year, which outlines the maximum face unpredictable and arbitrary personal use. percentage rent increase rent increases every year, as the applicable for the following year.

2 • The maximum annual rent 6. The Rent Control Changes the amount of the increase, and increase is 1.5% for 2017, and are effective for notices of rent the date on which the increase is 1.8% for 2018. increase, lease renewals, or effective. newly signed leases on or after • The maximum annual rent April 20, 2017. • The Landlord and Tenant increase is capped at 2.5% for Board has indicated that only any given year. The maximum IMPLICATIONS FOR approved formats for these annual rent increase of 2.5% LANDLORDS: notices may be used and, as does not include exemptions, such, it is advisable to use which can be provided by the 1. Landlords can continue to set the form N1 – Notice of Rent Landlord and Tenant Board, rent prices for new tenants or Increase provided by the to increase rent beyond the units at their sole discretion. Landlord and Tenant Board. annual cap and are addressed throughout the article. 2. Because annual rent increases 6. Landlords and tenants may may not be sufficient to cover agree that the landlord will 3. If a landlord evicts a tenant rising operating costs, the Rent provide certain services or because they wish to use a Control Changes may result in make improvements to a unit. If rental unit for personal use, the a reduction in net rental income such an agreement is made in landlord is required to provide for landlords who own currently writing, the landlord and tenant compensation to the evicted rented units. may also agree (in writing), to a tenant, equal to one month’s rent increase of up to 3% above rent, or offer another rental unit 3. There may be a reduction in the published guidelines. If the acceptable to the tenant. the construction of new rental preceding agreements are made, buildings, as landlords could the landlord is not required to 4. Landlords can no longer apply have less incentive to do so, provide 90 day written notice of to the Landlord and Tenant given that their future revenue, the rent increase. Boards to increase rent above the and hence return on investment, • An increase in rent that is stated guidelines, due to increases would be limited by the Rent due to the above agreements, in utility costs. This measure is Control Changes. is limited to a list of prescribed intended to encourage landlords services or facilities, such to make their units more energy 4. Landlords can only increase as - providing cable or satellite efficient. a tenant’s rent after the tenant television, an air conditioner, has occupied a unit for a period locker or storage space. 5. Ontario’s Ministry of Housing of not less than 12 months, or 12 is developing a “standard lease months have passed since the last 7. With respect to rental units agreement”, which aims to help rent increase. where care or meal services tenants and landlords know, and are provided to tenants (ex: a have documented, their rights and 5. Written notice of an intended retirement residence), and the responsibilities, while also seeking rent increase must be provided to care or meal services are billed to reduce disputes between a tenant at least 90 days before to tenants independently of rent, tenants and landlords. any such increase becomes these charges are not subject to effective. The notice must indicate the Rent Control Changes.

crowesoberman.com 3 IMPLICATIONS FOR TENANTS: 4. Tenants who continue to rent increasing their rental revenues the same property will benefit as these new tenants would 1. Tenants renting a unit that was from the protection the Rent not be subject to the Rent not subject to rent control prior Control Changes provide. Tenants Control Changes; to the Rent Control Changes, entering the rental market as new/ and who received a notice of rent prospective tenants, or tenants • Landlords choosing not to increase prior to April 20, 2017, who move to a different rental unit, invest in making improvements may have their rent increased by would not benefit from the Rent or repairs to their units, due to any arbitrary amount. Any tenant Control Changes. In high demand their limitation on recuperating who received a notice of rent rental markets (ex: Toronto, where these costs via increased rents; increase after April 20, 2017, is vacancy rates are below 3%), protected by the rent increase bidding wars for rental units may • Landlords choosing not to limits (1.5% increase for 2017, and continue, and the Rent Control offer units that they, or their 1.8% increase for 2018). Changes offer no protection from immediate family members these bidding wars; may require for personal use 2. Tenants should carefully review in the future to the market, any notices of rent increase 5. Tenants may have a smaller due to having to compensate to ensure the proposed rent supply of rental units to choose tenants for evicting them for increases do not exceed the from, or be subject to higher these reasons. allowable percentages. If rent initial rents, as landlords try to increases exceed the allowable protect their revenue streams and The Rent Control Changes also percentages, the amounts investments. offer some planning opportunities paid in excess of the allowable for developers and landlords. percentages must be refunded by Although the Rent Control Landlords offering a multitude of the landlord. Changes offer protection to services to tenants (retirement existing tenants, these changes residences offering lodging, • Tenants should request may have adverse, and far- meals, transportation, recreational that their landlord refund any reaching, effects on the rental services) may choose to unbundle excess amount paid. market in Ontario. Some of the some of the services from the rent adverse effects may include, but charge. To the extent that the fees • If the landlord does not are not limited to: for these additional services are refund the excess amount not included in the tenant’s rent, paid, a tenant can file a T1 – • A decrease in the supply any increases to such fees will Tenant Application for Rebate of rental units in the market, not be subject to the Rent Control of Money the Landlord as landlords choose not to Changes. Having said this, the Owes to the Landlord and construct new buildings, unbundling of services would likely Tenant Board. given the limitations put on have sales tax implications to both generating rental revenue; the landlord and the tenant, and 3. Tenants will now have rent may end up increasing tenants’ control protections when • Landlords not renewing out of pocket expenses even renting a unit in a newer leases with existing tenants, further. building (i.e. buildings built after so that units can be rented November 1, 1991). to new tenants, thereby

4 If you wish to receive additional information to assist in navigating these new regulations, and the related implications, for tenants and landlords, please don’t hesitate to contact your Crowe Soberman advisor.

OLD RULES NEW RULES Rent control was applicable to rental units in Rent control is applicable to all rental units in Ontario built or first rented to tenants prior to Ontario, regardless of when the units were built November 1, 1991. or first rented to tenants. Landlords, whose units were subject to rent Landlords can no longer apply for rent in- control, could apply for rent increases above creases above the stated guidelines, related to the stated guidelines due to the cost of mu- utility costs. nicipal taxes, utilities, capital expenditures or operating costs. Landlords, whose units were not subject to Landlords are now generally subject to a cap rent control, could increase rents by arbitrary on rent increases for any year (the maximum amounts year to year. rent increase is set at 1.5% for 2017, and 1.8% for 2018). Exemptions, for rent increases up to 3% over the cap, may be obtained when the landlord provides additional services/improvements to a rental unit. Landlords were able to evict tenants from Landlords who evict tenants from units, so that units, so that the landlord could use the unit the landlord may use the unit for personal use, for personal use, without compensation to the must provide the tenant either i) compensation evicted tenant equal to 1 month’s rent or, ii) offer an alter- nate unit to the tenant, which is acceptable to the tenant. Landlords and tenants had no standard wording Ontario’s Ministry of Housing is developing a or clauses to be included in lease agreements. “standard lease agreement”, with the goal of informing tenants and landlords or their rights and responsibilities. Landlords, whose units were not subject Landlords are limited in their ability to recuperate to rent control, were able to recuperate the the cost of improvements to their rental units, cost of improvements to their rental units via via the cap on rent increases from year to year. increased rents.

crowesoberman.com 5 Connect with the Authors Todd Christenson, BComm, Specialist, Tax Direct: 416.644.3396 Email: [email protected]

Alan Wainer, CPA, CA, CPA (Illinois), Partner, Audit & Advisory Direct: 416.963.7121 Email: [email protected]

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