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Proposal that Ottawa amend Income Tax Act to encourage investment in “real property”
Oct 09, 2008

At the federal election all-party forum hosted by WinnipegREALTORS® and the Manitoba Real Estate Association, the sponsors put forward a question on an issue they consider very important in helping Manitobans and Winnipeggers deal effectively with the rental accommodation shortage. 

Renters, especially those in less fortunate circumstances, are having a tough time finding safe and affordable housing in Winnipeg. Rental vacancies are extremely tight and decent affordable rental accommodations are hard to come by. 

Forum moderator Jennifer Dundas asked the four local candidates representing their federal parties: “The shortage of affordable rental housing in Manitoba is nearing crisis proportions. When an owner sells a rental property, he must pay federal capital gains tax on any increase in value. As a result, many owners of rental property are not reinvesting their sale proceeds in rental real estate.

“For sellers of rental real estate who reinvest in rental property, would you and your party support a capital gains tax deferral as a way of increasing the availability of rental housing?”

This is not an easy question to answer in one minute, but it is worth asking as there is a need to stimulate the construction of more and better rental accommodations in Winnipeg for our growing population. 

Here is a  summary of the industry’s position on the capital gains tax deferral which is referred to as “reinvestment in real property” by the Canadian Real 

Estate Association.

The proposal

CREA’s most important federal spending or taxation priority is our recommendation to amend the Income Tax Act to encourage reinvestment in real property. This change would contribute to a significant reduction in greenhouse gas emissions, leverage wealth that would benefit a slowing economy and promote the regeneration of neighbourhoods in communities across the country. The amendment would enable a deferral of both the capital gains tax and the recaptured capital cost allowance for all real property investments when an investment property is sold and the proceeds are invested in another real property within the subsequent year.

Any proceeds that are eligible but not reinvested, or where such reinvestment does not meet the criteria, would be subject to normal taxation.

“REALTORS® believe that our proposal to have the government amend the Income Tax Act so as to allow for a deferral of capital gains and cap cost allowance recapture when reinvesting in real estate will go a long way to stimulating the economy and create an environment to help Canadians,” said Lorne Weiss, a past-president of the WinnipegREALTORS® Association and chairman of the Manitoba Real 

Estate Association’s political action committee.

Current status

In discussions with REALTORS®, Members of Parliament of all parties have responded positively to the proposal that CREA has developed over the last two years. 

This year, Dr. James McKellar, associate dean and professor of Real Property at the Schulich School of Business, York University, and Dr. Thomas Wilson, senior advisor, Institute for Policy Analysis, University of Toronto, are providing additional detailed research on the impact of the recommendation on the carbon footprint and the profile of taxpayers reporting real property gains in 2006.

Benefits to the economy

The proposed amendment would provide significant benefits to a slowing economy by leveraging underutilized wealth, supporting labour mobility and addressing Canada’s international competitiveness problem.

Benefits to the environment

By promoting the early retirement of aging buildings that are highly inefficient, and that represent a significant carbon footprint, the proposal would contribute to Canada’s greenhouse gas reductions. It would encourage the refitting of existing structures with much more energy 

efficient and sustainable buildings.

Benefits to middle-income 

investors

The current situation effectively eliminates the incentive for many property holders to consider a sale and reinvestment due to the impending tax burden. The situation is particularly punitive for small investors.

Individuals with net incomes of $50,000 or lower, (94,455 filers), represented about 66 per cent of those 

reporting real property gains.

Benefits for smart urban growth

The proposal helps to make the federal government an active participant in the regeneration and intensification of urban neighbourhoods. Normal market forces, unencumbered by punitive taxation, will cause properties to change ownership at a greater rate, improving the likelihood of redevelopment of old and inefficient properties for more efficient uses.

Benefits to tax system

The proposal helps to mitigate some of the existing inherent tax inequity imposed on small investors in real property. Over the last 25 years, changes have been introduced that are a disadvantage to the treatment of rental housing, making taxation less equitable and less neutral.

The lock-in effect

Dr. McKellar’s additional research focused on the lock-in effect that occurs when old assets with relatively low returns are held onto for tax reasons rather than reinvest in new assets with higher returns. The lock-in effect is demonstrated by the underutilized and boarded-up buildings in deteriorating urban cores.

Benefits outweigh modest costs 

Dr. Thomas Wilson has prepared an estimate of tax revenue losses that would occur if the CREA proposal were implemented. The total cost in lost tax revenue from individuals, small business and other corporations resulting from deferral of capital gains tax is in the range of $258 million.

The cost of deferring the recapture of capital cost allowance is $157 million. The total cost of deferring both the taxes is estimated at $415 million. This is a modest and manageable amount that must be considered against offsetting revenues. 

Spin-off activity

The government will gain additional tax revenue from renovations, maintenance and conversions 

generated by reinvestments. A study by Altus 

Clayton for CREA found that each residential MLS® transaction generated an average of $32,200 in additional consumer spending between 2004 and 2006. Commercial transactions are generally considered to cause even greater renovation activity as well as other spin-offs, than do the residential sector transactions.

No matter who forms government after October 14, rest assured REALTORS® will continue to push all elected MPs to support amending the Income tax act to stimulate more investment in badly needed rental housing.

(The federal election forum will be rebroadcast 

on Shaw TV, Channel 9, on Sunday, October 12, at 

6 p.m.)