Canada Needs Capital Gains Tax Deferrals

The Canadian Real Estate Association (CREA) recommends that the federal government amend the Income Tax Act to promote increased reinvestment in real property. The amendment would effect a deferral of both the capital gains tax and the capital cost allowance recovery 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 capital gains tax.

• Benefits to the Economy
The proposed amendment would provide significant economic benefits by leveraging underutilized wealth in the economy, supporting labour mobility and addressing Canada’s international competitiveness problem.

• Benefits to Middle Class Investors
The current situation effectively eliminates the incentive for many property holders to consider a sale and reinvestment due to the impending tax burden. Investment real estate is widely held as indicated by the fact that 65.9 per cent of those reporting real property gains have net incomes of $50,000 or less, and that they reported 57 percent of all such gains.

• Benefits for Smart Urban Growth
The proposal helps make the federal government an active participant in the regeneration and intensification of urban neighborhoods. This requires properties to be turned over at a rate that is sufficient to promote regeneration.

• Benefits to the Tax System
The proposal would help reduce some of the inherent inequity in the Income Tax Act towards small investors in real property. Over the last 25 years, changes have been introduced that have disadvantaged owners of rental housing, making taxation less equitable and less neutral. Changes include, but are not limited to: the elimination of real estate from the lifetime gains exemption; the denial of deductibility of soft costs for the rental housing industry; and GSTrules that discriminate against rentals.

• The Lock-in Effect
Dr. McKellar’s additional research focused on the lock-in effect that occurs when holders of old assets with relatively low returns hold on to them for tax reasons, rather than reinvesting in new assets with higher returns. The lock-in effect is readily demonstrated by the underutilized and often boarded-up buildings found in deteriorating urban cores across the country. Unlike a capital gains tax cut, a deferral of the tax and capital cost allowance recovery would directly remedy the lock-in effect.

• 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 tax and the recapture is therefore estimated at $415 million. This is a modest and manageable amount that must be considered against offsetting revenues. There would be some immediate offsets from fees generated by reinvestments. This revenue stream would grow in future years and, combined with spin-off benefits, would far surpass foregone tax revenues.

• Increased Revenue from Spin-Off Activity
The government will gain additional tax revenue from renovations, maintenance and conversions generated by reinvestments. A study by Altus Clayton for CREAfound 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 generate even greater renovation activity and other spin-offs than the residential sector. Astudy by DRI Canada found that more than 29 jobs are created for every $1 million invested in renovation.

Members of Parliament have responded positively to the proposal in discussions with CREA and its members.

To read more, download the PDF published by the Canadian Real Estate Association.