Budget 2017: Capital gains tax increases off the table for now By John Dickie, CFAA President On March 20, two days before the federal Budget was to be released, Ontario Finance Minister Sousa called for the federal government to increase the capital gains tax on people who buy rental housing for investment. He alleged that the prices of single family homes in Toronto and surrounding areas are being driven up by speculation. Despite that call and the rumours that had been swirling around in business circles, Budget 2017 did not make any changes to the capital gains inclusion rate. However, the concern continued. The day after the Budget, Finance Minister Morneau sought to quell the continued concerns. He told The Globe and Mail, “[Reviewing the capital gains inclusion rate was] not in our budget and those are not key areas of focus.” He went on to say, “I don’t want people speculating on tax…by not talking about those things [capital gains tax rate changes], we’re not talking about them...” Both Finance Ministers and Ontario’s renters should be grateful to the developers who have built condos and the investors who buy condos and rent them. Due to the provincial governments’ limits on the land available for houses and the onerous taxes and impositions on new housing developments of all types, new condos are the main source of new housing supply, especially in Toronto and Vancouver. Federal tax increases, applying across Canada, would have a chilling effect on rental investment, and hardly get at the real problem at all. Besides replying to Minister Sousa’s call, CFAA had earlier made a submission arguing against any increase in the capital gains tax, in general and on rental housing in particular. Other tax planning issues Budget 2017 promised a paper in the coming months on several tax planning strategies, including: • Sprinkling income on family members (in lower tax brackets) through private corporations • Holding a passive investment portfolio inside a private corporation to gain better tax treatment • Converting a private corporation’s regular income into capital gains That review will require monitoring so that rental housing providers are not sideswiped. CFAA opposes all tax increases on rental housing, and advocates tax reductions on rental housing to draw in more investment to make rental housing more available and more affordable. ∎
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A busy year for housing:
what does it mean for you?
his year has already been a busy one for our industry. Marijuana legalization is underway, and Canada’s National Housing Strategy is due to be released in the fall. In major Canadian centres, the housing market has been hot. There have been calls to cool Canada’s hot housing markets, calls for more rental housing supply, and calls for tighter regulation of rental housing, such as the licencing of landlords in Toronto, and the elimination of the post-1991 exemption from rent control in Ontario.
What does it all mean for you? CFAA Rental Housing Conference 2017 is a chance to hear the experts, and share your views on the issues and practices that affect us all.
CFAA invites Canada’s landlords to sessions for handson landlords, investors, executives, regional managers, property managers, and those in specializations like human resources, marketing, leasing, asset management and building science. CFAA will be presenting three keynote speakers addressing leadership, intergenerational housing issues and the Canadian economic forecast, so that delegates can apply a new perspective to their work in the rental housing industry. Cont’d on page 38
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HENRY BURRIS In his keynote speech, Grey Cup-winning Redblacks quarterback Henry Burris, will speak on the value of perseverance and community engagement.
PAUL KERSHAW In his keynote speech on how reformed housing policies would work for all generations, Dr. Paul Kershaw, the founder of Generation Squeeze, will educate you on how the demographics of the housing market are evolving.
BENJAMIN TAL In his keynote speech dissecting the major world economies, Benjamin Tal will address the economy and rental demand in Canada in the new environment 6 months into the Trump Presidency.
RHC 2017 offers streams of topics covering: • investment issues • building science and emerging technologies • apartment marketing and leasing solutions • HR solutions • the state of, and future of, rental housing in Canada • operations and technology • building and management apps. RHC 2017 will offer more than 30 sessions, with more than 60 expert and entertaining speakers, as well as lots of opportunities to ask questions, and to network. Special events include the Building Innovation Bus Tour during the afternoon of Tuesday, June 6; the Welcome Reception in the evening of June 6; and the networking reception and CFAA Awards Dinner, on Wednesday, June 7. If you are looking to advance your skills, knowledge and contacts in Canada’s rental housing industry, you should attend CFAA Rental Housing Conference 2017 in Toronto from June 6 to June 8. For more information or to register, visit the conference website, www.CFAA-RHC.ca.
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Ontario’s expanded rent control comes with development incentives Increasingly over the last few years, months and weeks, government action on rental housing has become intertwined among the federal, provincial and municipal governments, and tied in with house price issues. For example, on March 20, Ontario Finance Minister Sousa asked Federal Finance Minister Morneau to raise capital gains tax on houses and small rental properties held for short periods to cool the Toronto market. Thankfully, Minister Morneau did not raise the capital gains tax. On April 18, Minister Morneau asked Minister Sousa to refrain from measures that would increase demand for housing, and Minister Sousa did refrain. Instead, on April 21, Minister Sousa, Premier Wynne and Housing Minister Ballard announced “Ontario’s Fair Housing Plan” with 16 measures designed to calm the Toronto home ownership market, and also to clamp down on the rental market. To address the rental market in Toronto, Ontario made numerous changes that will have side effects, both good and bad, on the rest of Ontario. Future federal responses to address the housing situation in Toronto or Vancouver could easily have side effects across Canada. The main measures aimed at Ontario rental buildings are these: • Rent control has been extended to all buildings, including those built after 1991 • The property tax rate on all new multi-residential buildings is to be similar to the rate on single family homes across Ontario (instead of often twice as high) • The province is providing rebates of a portion of the development cost charges (DCCs) on new rental construction, in “areas where that is needed” (with funding of $125 million over 5 years.)
Thankfully the government left untouched vacancy decontrol, under which a landlord can agree on a new rent whenever a unit turns over. That will be available to the owners of post-1991 buildings, as well as older buildings. The extension of rent control is the big negative, both for any owners of post-1991 buildings with rents below market, and for developers deciding whether to build a new rental building now. However, less competition from new developments may be good for the owners of existing buildings, especially those built before 1991. That applies across Ontario, even though the original problem was limited to Toronto and the surrounding area.
The incentive effect of the property tax reform and the DCC rebates will vary greatly. The cities of Toronto and Ottawa and the Region of Waterloo made that the tax reduction 10 years ago, but many other cities did not. That may encourage new developments in those other places. In fact, the positive effect of the tax reduction could exceed the negative effect of the extension of rent control. See Table 1 for the impact in selected cities.
Table 1: Differential impact on a per unit basis City Toronto Mississauga Oakville London Waterloo Ottawa
2016 Development Charges
Possible DCC Rebate (at 33%)
$24,600 $54,200 $35,500 $18,600 $19,800 $16,600
$8,120 $17,900 $11,700 $6,100 $6,500 $5,500
Projected Property Tax Saving (Over 5 Years) $0 $3,750 $5,000 $7,500 $0 $0
Total Possible Saving Over First 5 Years $8,120 $21,650 $16,700 $13,600 $6,500 $5,500
NOTES: 1. Based on a new 2 bedroom apartment with an assessment of $250,000. 2. Applied on its own the decrease in the tax rate would yield twice that tax benefit, but MPAC adjusts the property value upwards, which partially offsets the tax rate decrease. 3. The tax benefit does continue after 5 years. 4. For illustration only. For any decision, an investor should recalculate based on hard numbers. Will the new cost reductions overcome the negative effect of the extension of rent control? We will have to see how developers and investors react.
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Federal Housing Policy still largely up in the air Through Budget 2017 we now know how much money the federal government plans to spend on housing over the next 11 years. However, we still do not know clearly what programs they plan to spend the money on, largely because the government has not decided yet, and because many of the specific decisions will be made in future years through mechanisms which have not yet been decided or created. How much of the money will go to social housing repairs, to new affordable housing construction or to rent subsidies? We simply do not know. Even for the money likely to go to new affordable housing we do not know how much will go to social housing and how much will go to the private sector, perhaps for scattered subsidized units within larger projects. Tables 1 and 2 show the funding envelopes, the decision makers and what the funding may be used for.
Table 1: Continued funding Funding envelope
Possible uses of the funding
Approx. $4.4 billion, by maintaining the baseline funding related to social housing operating agreements
Federal government in consultation with the provinces and territories, and the social housing associations
• Renewal of the operating agreements • Social housing capital repairs • Rent subsidies tied to the units (as now) • Rent subsidies tied to the tenants
While the amounts listed in Tables 1 and 2 may look like a lot of money, the federal funding available for new affordable housing construction would not exceed $6 billion over 11 years, given all the other demands for the money. At current subsidy rates, averaging $150,000 per door, that would produce a maximum 40,000 new affordable rental units, or an average of 3,650 units per year. That would be less than 1/10 of 1 percent of the rental units in Canada each year. Such a limited creation of new affordable units will not have any transformative effect. Each year, two-thirds of low-income households will continue to rent in the private rental market, but receive little or no housing-
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specific assistance. 500,000 low-income households could be helped for the 11 years if that funding were used for portable housing benefits. Under the National Housing Fund, referred to in table 2, the lending could be substantially more than the amount of the fund since the fund will be used to provide guarantees and to subsidize interest rates. Conceivably loans of $20 billion or $30 billion could be generated. However, the value to developers is the interest subsidy, not the amount of the loan.
MARCH/APRIL 2017 Table 2: New funding commitments Funding envelope
Possible uses of the funding
$5 billion for a new National Housing Fund
Federal government, CMHC or delegated decision makers (such as public-private boards in charge of separate funds)
• A “Transformation Fund” to help social housing providers transition to new operating models • Expanded lending for new rental housing (social or affordable private units) • Grants to support innovations • Rent subsidies, tied to units or tenants
$3.2 billion for provinces and territories to support key priorities
Provinces and territories, and in Ontario, municipalities (because of downloading)
• Repair or renovation of existing units, • Construction of new units • Rent subsidies, tied to units or tenants
$2.1 billion to expand the Homelessness Partnering Strategy
Federal government in consultation with the Alliance to End Homelessness and other associations
• Better homelessness services in more communities • More or better shelters • Rent subsidies tied to formerly homeless tenants
$202 million to fund gifts of surplus federal land
• New social housing • New homeless shelters or facilities
$241 million for better housing data and more research
• Better data on the private market, including foreign ownership, domestic speculation, etc.
$300 million for Northern housing
Federal government in consultation with the territories
$225 million for urban and rural Indigenous housing
Federal government in consultation with aboriginal groups
• Construction of new units • Support for partnerships between social housing providers and private sector providers
The total new funding listed in Table 2 amounts to $11.2 billion. That is in addition to the $4.4 billion of continued funding listed in table 1, which was to expire over the next 11 years, but which the government has committed to maintaining. There are to be six more months of consultation on the National Housing Strategy. CFAA will be working hard to get pieces of the total funding allocated for private sector development or retrofits, and for portable housing benefits. The provinces and other housing sector associations will also play a major role in many of those decisions. The federal government is still developing a national Poverty Reduction Strategy. Visit www.CFAA-FCAPI.org/submissions.php to read CFAA’s submission to the HUMA Committee of Parliament on why a PHB program is essential for cost-effective poverty relief.
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