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Proposed interest limitation rules could devastate rental housing By John Dickie, CFAA President

In the two most recent issues of National Outlook, CFAA warned readers of the risk of an increase in the capital gains inclusion rate, based in part on the potential influence of the NDP. Now rental housing providers face a new, even more serious risk, from a different source. The Liberal Party election platform proposed to expand the application of the limit on the interest that corporations can claim on borrowings to finance their operations. According to well-known economist Jack Mintz, Finance Department officials have been eyeing this possible change for 20 years.

Minister of Finance – Bill Morneau

A similar restriction has been applied to limit the amount of the interest which branches of foreign companies pay to non-residents of Canada. In that context, the rule makes some sense, because profit on Canadian operations could be “converted” into interest in the hands of non-residents who do not pay Canadian income tax. However, expanding the rule to apply to interest payments to Canadians would serve no purpose since those interest payments are taxable in the hands of the recipients. Some descriptions of the rule under consideration suggest it could have a disastrous effect on rental housing and other real estate operations. The Liberals proposed to prevent corporations from deducting more interest than 30 per cent of the corporation’s “earnings before the deduction of interest, taxes, depreciation and amortization” (EBITDA), which is similar to a rental owner’s net operating income (NOI) less applicable administrative expenses. Not to be outdone, the NDP has proposed that the interest deductibility limit be set at 20 per cent! Because rental operations use a great deal of capital, most rental operations pay out more interest than 30 per cent of the building’s NOI; and in their initial stages, many new operations pay out much more then 30 per cent. See Table 1 on page 37.

Timing and lobbying avenues A change to the interest deductibility rules could be announced in Budget 2020, which is likely to be brought in February, March or April 2020. Even if a change is announced then, the details of the change could still be subject to revision during the process by which the Budget measures are implemented. Revisions could include exempting real estate or rental housing, or applying a much higher limit to real estate or rental housing than to other businesses.

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NATIONAL OUTLOOK Table 1 shows two typical situations for a building which has been held for five or ten years: first, a typical income, expense and tax situation for a principal business corporation (a PBC), and second, a typical income, expense and tax situation for a real estate investment corporation, with five or fewer full-time employees. All the figures are based on one unit in a multi-unit building. Both situations assume a 50% borrowing ratio (loan-to-value), and a 4% interest rate.

Table 1: Typical income, expense and tax situations Section

Building item (per rental unit)

Basic building facts

Property value Gross rental income NOI (approx = EBITDA) Interest payments per year Capital cost allowance claimed Net income before tax Total corporate tax (fed & prov - approx) Net income after tax Interest payment allowed (30% of NOI) Notional net income for tax calculation Total corporate taxes (fed & prov - approx) Actual net income (from above) Actual net income after tax Increase in tax (in dollars) Increase in tax (as percentage)

Current tax situation

Apparent proposal


Principal Business Corp (PBC) $180,000 $12,000 $7,200 $3,600 $2,000 $1,600 $585 $1,015 $2,160 $3,040 $1,110 $1,600 $490 $525 90%

Real Estate Investment Corp $180,000 $12,000 $7,200 $3,600 $2,000 $1,600 $803 $797 $2,160 $3,040 $1,526 $1,600 $74 $723 90%

Such a new interest limitation regime would dramatically increase the income taxes on real estate, and dramatically reduce actual after-tax income. While most PBCs would stay in profit (at a much reduced level), many real estate investment corporations would generate an after-tax loss every year under perfectly normal borrowing arrangements. Governments generally say they want the rental housing sector to expand in order to obtain a larger supply of rental housing, and thus make rental housing more affordable. Much taxpayer money and government effort (by all three orders of government) is being invested in promoting new rental construction. It would run directly contrary to that important housing policy objective to apply an interest deductibility limitation to rental housing.

Conclusion Expanding the interest deductibility limitation to corporations with loans from Canadian sources (or foreign loans at market rates) would not achieve a good policy result. It is unnecessary, and would have serious negative unintended consequences, particularly on real estate, including rental housing. CFAA urges the government not to go forward with any expansion of the interest deductibility limitation. At the least, we urge the government not to apply an expanded test to the real estate sector, and in particular, not to apply an expanded test to the rental housing sector. To see CFAA’s pre-budget submission on this issue, go to www.cfaa-fcapi.org. Updates will also be posted there, and distributed in CFAA’s e-Newsletter. E-mail admin@cfaa-fcapi.org to add your name to the e-Newsletter distribution list.

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Housing spending under the National Housing Strategy

The new Minister of Families, Children and Social Development is Ahmed Hussen, who was formerly the Minister of Citizenship and Immigration. Broadly speaking, he is mandated to deal with three main housing policy areas.

Building and renovating housing under the NHS Minister Hussen is to continue to build and renovate housing through the National Housing Strategy (NHS). That includes the repair and expansion of community housing, supportive housing and shelters, and low-cost financing for new rental construction, with some affordability component. For rental developers, the value of housing subsidies and low-cost financing delivered under the NHS is clear. To serve rental providers in all areas, those financial supports for new construction should be focused on areas with housing shortages, and on creating supportive housing to house people hard to house in the private sector. CFAA advocates those two focuses, and they are largely being addressed. Table 2 shows the projects approved up to August 2, 2019 in several of the key geographic areas which CFAA is monitoring.

Table 2: Approved NHS Projects (# of projects; dollars in thousands) Sample Province and area

Private market affordability projects #

Amount of low-interest loan

Community housing

Supportive housing or shelter


Amount of grant


Amount of grant

Nova Scotia







Greater Toronto







Other Ontario high growth areas







Ontario low growth areas





















BC high growth areas (incl. Vancouver & Victoria)







BC low growth areas







Canada Housing Benefit Minister Hussen is also mandated to ensure the effective implementation of the Canada Housing Benefit (CHB). The CHB is to be jointly funded by the provinces and the federal government. While the designs may differ somewhat from province to province, the CHB is to be a form of direct financial assistance to low-income renters, with an element of portability. CFAA encourages the use of the new CHB in the private rental market, with a focus on the people who need the housing help the most because they have the largest affordability gap. Besides that, the CHB will be used to support tenants in community housing while their homes are retrofitted or renovated. The exact program design is up to the federal government and each province; and so, CFAA works on the CHB issues with our member-apartment association in each province.

38 | January 2020

NATIONAL OUTLOOK On December 19, 2019, Minister Hussen and Steve Clark, Minister of Municipal Affairs and Housing for Ontario, announced the Canada-Ontario agreement to implement the new Canada Housing Benefit in Ontario. That agreement is the first of what will likely be 13 separate agreements, one for each province and territory. CFAA is proud of the major role we played in achieving the inclusion of housing benefits in the NHS, and the work we have done with our member associations to encourage the use of the new benefit in the private rental market.

Measures to facilitate homeownership Minister Hussen is also to ensure the effective implementation of the new First-Time Home Buyer Incentive (FTHBI), increasing the qualifying value in high-cost markets (such as Toronto and Vancouver), and making the program adjust to reflect changing market dynamics. Finance Minister Morneau is to consider making the borrower stress test more dynamic. Both measures will assist higher income renters to buy homes. In weak rental markets, that is against the interests of rental housing providers, but in strong markets that program helps the rental housing industry by enabling turnover and by relieving some of the upward pressure on rents, which is leading to calls for more landlord regulation, such as tighter rent control. Canada’s new Housing Supply Challenge CMHC is currently developing Canada’s first Housing Supply Challenge, a $300M competition announced in Budget 2019 to seek and to help implement new ideas to reduce the barriers associated with the creation of additional housing, and especially affordable or mixed income housing. The program is likely to be divided into several categories. Possible categories include intensification while enhancing quality of life, Northern housing, housing data and others. The ability to replicate proposals will likely be an important criterion in the competitions. The first round of the competition is expected to be announced in June 2020, with an initial application deadline in October or November. The current plan is to begin with the challenge: “Reduce local planning and approval timelines for housing development”. To ensure you receive notice of the opening of the competition, sign up for the CFAA e-Newsletter at admin@cfaa-fcapi.org.

Join CFAA in Halifax this June at CFAA - Rental Housing Conference 2020 Registration is now open for CFAARHC 2020, which will take place from June 8 to 10 at the Westin Nova Scotian in downtown Halifax. CFAA-RHC 2020 will feature two days of timely and relevant education sessions, the Building Innovations Tour, CFAA’s 5th annual Rental Housing Awards Dinner, and more! Don’t miss out on our early bird pricing! For more information, or to register, visit www.CFAA-RHC.ca or email events@cfaa-fcapi.org.

WANT TO STAY UP TO DATE WITH NATIONAL OUTLOOK? Sign-up for CFAA’s National Outlook e-newsletter to receive up-to-date news on what is happening across Canada, as well as industry insights and insider information on CFAA happenings. Email communication@cfaa-fcapi.org to start receiving National Outlook today!

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JANUARY -FEBRUARY 2020 CFAA-RHC 2020: Building Innovations Tour CFAA Rental Housing Conference 2020, taking place from June 8 to 10 in Halifax, will begin with the Building Innovations Tour, in the afternoon of Monday, June 8, 2020. The Building Innovations Tour will tour some exceptional new rental buildings in downtown Halifax.

Maple by Southwest Properties

Flynn Flats by Dexel Developments

Maple by Southwest Properties, winner of the 2018 Rental Development of the Year at the CFAA Rental Housing Awards, will be featured on the CFAA Building Tour this year.

The CFAA Building Tour will also feature the newly-built Flynn Flats, by Dexel Developments, in downtown Halifax.

This newly built piece of the Halifax skyline, located in the downtown core, is home to 300 rental units and 9,000 square feel of retail space. Maple’s glass tower and modern architecture makes it a visual standout in its neighbourhood. Targeting LEED® gold certification, Maple features modern suite designs, original artwork and a sense of community, through resident social events and the proximity to everything the Halifax’s downtown has to offer. Amenities include a swimming pool, hot tub, fitness centre, Great Room, billiard room, and large terrace with Harbour views.

Flynn Flats was named for the Flynn family, who owned a home at the site, before selling to the Lawen family (Dexel Developments is part of the Lawen Group). Flynn Flats consists of 43 one- and two-bedroom flats, some with dens. Included in the flat style mix are 4 townhouse style flats. All flats offer residents high end, open concept living, with maximized unit storage, and relaxing, well appointed commons areas. Large windows and enclosed balconies provide residents with spectacular views of the famous Halifax Harbour. Amenities include a rooftop terrace, resident lounge (including a dining room, kitchen and library), guest suite, fitness centre and indoor secure bike storage.

The Building Innovations Tour will also visit The Alexander by Killam REIT. More information about the Alexander can be found on page 40 of the November 2019 edition of RHB Magazine. You can purchase tickets for the Building Innovations Tour, and for the rest of CFAA-RHC 2020, by visiting www.CFAA-RHC.ca. If you have any questions, please contact us at events@cfaa-fcapi.org. We hope to see you there!

40 | January 2020

NATIONAL OUTLOOK CFAA Awards Program 2020 – Open for Applications CFAA is proud to announce that the 5th annual Rental Housing Awards Program is open for applications. Awards finalists and winners will be announced at the CFAA Awards Dinner on June 9, 2020, at CFAARHC in Halifax. CFAA is continuing its simplified and expanded eligibility rules and the application portal that were both introduced in 2020.

Awards CFAA is offering 10 awards categories in 2020. CFAA Suppliers Council members, direct landlord members and landlord affiliate members (landlord members of one of CFAA’s 11 member associations) are invited to apply for these awards: FOR RENTAL HOUSING PROVIDERS • Property Manager of the Year • Off-Site Employee of the Year • On-Site Employee of the Year • Rental Housing Provider of the Year • Marketing Program Excellence of the Year • Renovation of the Year • Rental Development of the Year

FOR RENTAL HOUSING SUPPLIERS • New Product or Service of the Year • CFAA Suppliers Council Member of the Year

For more information about membership, eligibility to apply for an award, becoming a judge, or sponsoring the Awards Dinner (in whole or in part), visit www.cfaa-fcapi.org.

Specialized in Commercial & Industrial Properties, Rental Apartments, Condominiums, Hotels, Housing Cooperatives & Non-Profits.


• Interior Renovation • General Contracting Call Us: 905-415-1851 Toll Free: 1-877-694-8397 www.domeservicesgroup.com “Proud to be a new member of the Toronto Construction Association”

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RHB Magazine January 2020 - National Outlook  

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RHB Magazine January 2020 - National Outlook  

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