Maroc - STOREYS.COM - A La Une - 17/Jul 18:54

Op-Ed: The Capital Gains Hike Hurts Private Landlords, Rental Market

This article was written and submitted by Jonathan Cooper, President of Macdonald Realty.The Government of Canada's recent change in the capital gains tax inclusion rate took effect on June 25. This change prompted much discussion and consternation in the business community and media about the implications for investment, innovation, and Canada's economic productivity and competitiveness. Part of the government's rationale for this tax hike is the need to fund their housing program (for example, the recently announced Canadian Housing Infrastructure Fund), but it's also important to consider the impact of this hike — along with other government policies — in a different housing context: small, private landlords.Data in the private landlord space is difficult to pin down, but based on studies conducted over the last few years, it’s safe to say that millions of Canadians own at least one rental housing unit as an investment — including condos, townhomes, and single-family homes. Collectively, these private investors are, by far, the biggest owner of rental stock in the country. In markets like Toronto and Vancouver (both of which have low single-digit rental vacancy rates), privately-held units constitute around 30% of the overall rental stock. As residential investment properties are subject to the new inclusion rate for capital gains above $250,000, small landlords are directly impacted by this tax change. To quantify the impact, let's take a typical, two-bedroom investment condo unit in Vancouver, with a pre-sale price of $1M. After GST, the cost base for this unit is $1,050,000. Assuming the investor sells the condo after a 10-year holding period (with an increase in value of 5% per annum), the sale price would be approximately $1,628,895. If the owner has a marginal tax rate of 40%, under the former inclusion rate they would have paid around $115,779 in capital gains tax, whereas under the new inclusion rate, their tax bill jumps — by more than $21,000 — to $136,828.The increase in capital gains tax is not the only headwind facing private rental-unit owners. British Columbia has Province-wide rent control, meaning you can only increase rent at the rate dictated by the Government (3.5% in 2024). Of course, increases in an owner's costs — property tax, maintenance, utilities, skilled labour — are uncapped, and subject to the same inflationary pressures over the last few years as the rest of the economy. If a small landlord in Ontario has a significant increase in property taxes or a substantial maintenance cost — such as a roof repair, which on a typical detached home will cost $10,000 to $20,000, or more — there is a formal mechanism to potentially adjust the rent to support this. In BC, there is no such mechanism, which creates a barrier when it comes to upgrading and improving rental units. Aging rental stock often remains just that — aged, and aging.Coming into effect in 2025 is also the Province's new home flipping tax — starting at 20% of the net income from the sale — for homes sold within two-years after purchase (this is in addition to the Federal Government’s existing 'anti flipping' tax). But what if an investor needs to sell for unexpected reasons – an unanticipated expense in their personal lives, a business loss on another investment, or to meet unforeseen tax obligations? If we want to encourage investment in housing, we also need to provide investors with the flexibility to adjust their capital allocation as circumstances change. This lack of flexibility is further exacerbated by the Province's new requirement (taking effect on July 18) requiring landlords to provide four months notice if they intend to owner-occupy a rental unit, which can create a complication for those looking to sell tenanted properties, as a potential buyer’s circumstances may not allow for a months-long delay in occupying their new home. Owners of small rental units also potentially face punitive taxes if they have an unexpected vacancy of more than six months, including the City of Vancouver Empty Homes Tax (3% of the property’s assessed value), the Provincial Speculation Tax (0.5%), and possibly the Federal Underused Housing Tax (1%, though Canadian citizens are generally exempt). Together, the first two taxes would equate to more than $35,000 on the aforementioned rental until, assuming an assessed value of $1.05M. While it is unlikely that, in the current market, a rental unit would sit vacant for more than six months, markets can change, and these taxes impose an enhanced risk profile on residential rental ownership. Right now, investors can get a risk-free 4%+ return on their money, a rate which is incidentally in the same ballpark range as the typical residential rental cap rate in Vancouver or Toronto. The risk-free return from a GIC poses none of the potential stress and downsides of property ownership: the concentration of capital in one geographical area and asset (what if there is a huge leak in the building?), ongoing maintenance costs, problematic tenants, and potential taxes and vacancy 'downtime' if a tenant moves out. Bearing in mind the key role that private strata units (for example, condos) play in the rental stock, we should support and encourage private investors to buy pre-sale multi-family units so that developers can build more buildings and increase the overall housing supply. In a persistently undersupplied, low rental vacancy housing market, can we really afford to disincentivize this form of real estate investment? Encouraging investment and flexibility for small rental investors will support both the quantity and quality of Canada's rental market. This would be a benefit to all.