Policy change will increase rental units

Over the past few years, the lack of good, affordable apartment units in Winnipeg has been well documented by the Professional Property Owners Association, WinnipegREALTORS®, the Canadian Real Estate Association and Canada Mortgage and Housing Corporation. 

CMHC, the housing agency that tracks apartment vacancy rates across the country, indicated the 2008 apartment vacancy rate in Winnipeg will be lower than in 2007, dropping to the one per cent level. As a result, rental units will be hard to find in a number of neighbourhoods in the city. 

 But Winnipeg is not alone. In the October 2007 major centre apartment vacancy rate CMHC report, Kelowna was at 0.0 per cent, Victoria at 0.5 per cent, Greater Sudbury at 0.6 per cent and Saskatoon similarly was at 0.6 per cent. Other Canadian cities in line with Winnipeg’s present 1.5 per cent vacancy rate were Regina, Calgary, Edmonton, Quebec City and Trois-Rivieres.

October 2007 marked the sixth time in the last seven years Winnipeg has had a vacancy rate at or below 1.5 per cent. 

Strong demographic trends and impressive migration numbers are contributing factors to the strong demand for rental units. 

On the other side of the demand/supply ledger, rental units in Winnipeg slipped from 52,895 to 52,430, which continues a 15-year trend — with the exception of 2003 — of declines or no change in the total number of available rental units. It works out to close to 5,000 fewer rental units since 1992. 

During the mid- and late-1990s, a considerable number of rental units were lost due to condo conversions (e.g. 900 in 1995), however, recently the reason has had more to do with existing rental units being demolished or condemned. CMHC indicated 150 of the approximately 200 units removed from the market in 2007 were in the latter category.

The Canadian Real Estate Association (CREA) is aware of the tight rental market across the country and the need for a commitment to affordable rental units. The association, representing 95,000 REALTORS® across the country, has been active in advocating changes to federal tax laws that will reinvigorate the rental market in cities such as Winnipeg and reverse a trend to a shrinking rental inventory.  

The following position by CREA and two other national associations was released in an effort to urge the federal government to quickly create incentives for investors to reinvest in existing and new rental housing stock. By making these proposed changes, the federal government will be seen as an active participant in fostering the regeneration and intensification of urban neighbourhoods.

Ottawa urged to encourage 

reinvestment in urban cores

Three national associations whose members are central to the investment, management, purchase and sale of real property had called upon the federal government to change capital gains tax policy in the 2008 federal budget to encourage reinvestment, but the recent budget failed to make mention of such a policy change. The three associations will continue to lobby the federal government to make a future policy change.

The members of the three associations generate hundreds of billions of dollars of economic activity annually. 

The policy change proposed by the Canadian Real Estate Association (CREA), the Canadian Federation of Apartment Associations (CFAA) and the Real Property Association of Canada (REALpac) would support urban regeneration and expand rental housing in Canada by encouraging new investors, and by providing existing owners the opportunity to re-invest because of capital gains deferrals. 

The three associations have completed new research to support the proposal to allow the deferral of capital gains tax and the recapture of the capital cost allowance when an investment property is sold and the proceeds of the sale are reinvested in another property within a year. 

The research shows that the first-year cost of implementing the proposal would be $415 million, not taking into account offsets from increased economic activity. The group of taxpayers who would benefit most from the change would be those with net incomes of $50,000 or less. The research also shows current tax policy creates a negative “lock-in effect” so investors hold onto old assets to avoid paying tax, rather than selling and reinvesting in new assets. 

CREA CEO Pierre Beauchamp said the new research confirms the investment impact of the tax deferral proposal. 

“The deferral would trigger major economic activity that would far outweigh costs to the treasury in the long-term,” he said. “Small-scale investors typically renovate property and make related purchases when they reinvest.” 

CFAA president John Dickie said the proposal would reduce the cost of rental housing and improve affordability and housing supply. 

“Tax policy has discouraged the private sector from building and maintaining rental housing,” he said. “Renters will benefit from a larger supply of units and lower rents.” 

REALpac CEO Michael Brooks pointed out that the proposal is for a tax deferral rather than a tax reduction. 

“No capital gain is actually realized when one asset is sold and another of equal value is purchased,” he said. “The sale of an asset without reinvestment would continue to be taxable.” 

The new research was completed by two leading academics: Dr. Thomas Wilson, senior advisor at the University of Toronto's Institute for Policy Analysis, and Prof. James McKellar, academic director of the Real Property Program at York University's Schulich School of Business. 

Dr. Wilson used tabulations compiled by Statistics Canada with tax returns reporting capital gains for 2005. He conducted separate studies for capital gains tax and the recapture of capital cost allowance for individuals and corporations. 

The cost of lost tax revenues from individuals, small businesses and other corporations would be about $258 million. The cost of deferring the recapture would be $157 million, for a potential first-year total cost of $415 million. These figures do not include the offsetting benefits from spin-off activities that would grow over time. 

Using the same data, Dr. Wilson found that about 66 per cent of those reporting real property gains in the 2005 taxation year had net incomes of $50,000 or less. They realized capital gains of $3.8 billion or about 57 per cent of the dollar value of all capital gains. 

Prof. McKellar also looked into what is known as the “lock-in effect.” His analysis shows taxes applied to capital gains only at the time of sale can trap capital in inefficient investments when it could be used more productively elsewhere. Those most affected are small-scale investors, including owners of rental housing, who tend to retain real property holdings to avoid tax consequences. 

The lock-in effect can be readily seen in underutilized and often boarded-up buildings in deteriorating urban cores throughout the country.