Ontario's 1.3 million renter households will be protected from rent increases due to the HST, the Star has learned.

In advance of the harmonized sales tax taking effect in July, sources say the Liberal government will close a loophole in rent regulations that would have allowed landlords to apply for above-guideline rent increases based on the new 13 per cent tax on utilities.

Instead, the new HST costs for utilities will be reflected in rent only as they affect the Consumer Price Index, which the province uses to calculate the annual rent increase guideline.

The announcement is expected as early as Monday.

Landlords warned last March that the HST would increase residential rents by 2.5 to 3 per cent and cost the average tenant $270 to $320 more per year. Tenants with higher rents could see annual increases of up to $1,000, said Vince Brescia of the Federation of Rental Housing providers of Ontario.

The landlord lobby group has been calling on the government to exempt the HST for rental housing providers since the plan to blend the GST with the PST was announced in last year's budget.

In addition to utility costs, the HST will apply to several previously tax-exempt costs such as maintenance, property management and renovation contracts. Rent remains exempt from sales tax.

Anti-poverty advocates, who have also been urging the province to shield tenants from rent increases due to the HST, welcomed the move. "If a change wasn't made to ensure the HST couldn't be passed on to tenants, it would have been a significant and unsustainable burden on low-income families and individuals," said Adam Spence of the Ontario Association of Food Banks.

"It would have taken a lot of food off people's plates," he added.

For people who rely on food banks, rent is the single largest expense, accounting for about 65 per cent of their income, said Spence.

In Greater Toronto, 46 per cent of tenants spent more than 30 per cent of their income on rent – the highest of any urban area in the country, according to the 2006 Census.

The government says landlords will see HST costs for utilities reflected in the annual rent increase guidelines as well as in rents they set for new tenants.

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In addition to the new rental protection, almost 3 million low-income Ontario families will receive a new permanent sales tax credit of up to $260 for each adult and child per year. A new property-tax credit will provide another $270 million in tax relief to low- and middle-income homeowners and tenants.

The maximum rent increase allowed for 2010 is 2.1 per cent. The 2011 rent guideline will be released in June and will be based on changes in the Consumer Price Index for goods and services from June 2009 to May 2010, compared to the same time period in the previous year.