Federal Tax Threatens Rental Housing

Federa l Tax Threatens Renta l Housing By John Dickie, President, Canadian Federation of Apartment Associations

CFAA is deeply concerned about the federal government’s proposal to impose an Interest Deductibility Limitation (IDL) of 30 per cent of earnings before interest, taxes, depreciation and amortization (EBITDA) on all business corporations. If the rental housing sector is not given an exemption from the proposed IDL, the income taxes payable by corporations providing rental housing could be doubled in many cases, and substantially increased in other cases.

So urc e o f the r eq uest The government says that the proposal to impose a general IDL is a request of the Organization for Economic Cooperation and Development (the OECD). The OECD is an organization of the world’s 37 First World countries, which seeks to harmonize economic and tax policy, while promoting development in the Third World. The OECD recommendation aims to prevent income tax avoidance through the “transfer” of income from high-tax countries (like Canada) to low-tax countries (such as the Cayman Islands). Some multi-national corporations apparently seek to achieve income transfer through taking out high levels of debt in high-tax countries. However, almost all rental housing corporations are not part of a multi-national group, and none use income transfers through low-tax countries for tax avoidance. Rental housing and all real estate is very capital intensive. Rental owners certainly provide on-going services like cleaning and repairs, and pay utilities and insurance, but the bulk of what we provide is the use of a suite in a building. That has been paid for by equity and borrowing, and most buildings are still encumbered with substantial mortgages on which substantial interest is paid. Moreover, Canada and the US have a rental housing industry with a structure different from that of all the other countries in the OECD. In the rest of the OECD, rental housing is almost entirely provided by “mom and pop owners” with, at most, a handful of rental units. They would all be exempt under the OECD’s de minimis rules (rules for excluding small operators). However, in Canada and the US, many rental housing is provided by principal business corporations or real estate investment corporations, which would be subject to the proposed IDL rules. For many rental housing providers, paying 30 or 40or 50 per cent of EBITDA in interest on rental projects is not tax avoidance; rather, it is the usual course of investing in and operating rental housing (or other real estate). Indeed, CMHC insures much of our mortgage financing as part of a deliberate government policy of encouraging the provision of rental housing.

The US exampl e The US has recognized the unique nature of rental housing and commercial real estate by allowing all corporate real estate investors to opt out of the OECD’s IDL rules in exchange for adopting a slightly longer depreciation schedule than would otherwise apply. That longer depreciation allows more depreciation (and thus more tax deferral) than Canada allows to all rental housing providers.

Imp ac t on r en tal ho using in Can ad a As noted above, if the rental housing sector is not given an exemption from the proposed IDL, our income taxes could be doubled in many cases, and substantially increased in other cases. That would be devastating to those who have invested in rental housing, and it would be devastating to the various programs under which the Government of Canada, and the other orders of government, encourage the production of rental housing to meet the housing crisis in Greater Vancouver, Greater Victoria, Greater Toronto, and many other growing communities across Canada. Applying an IDL to rental housing would result in: • m uch less new rental supply, • m uch less investment in existing rental buildings, • m any fewer building upgrades to reduce greenhouse gas emissions, and • h igher rents for renters. Applying an IDL to rental housing would run contrary to virtually all other government policies related to the rental housing sector. It would especially hurt the four million Canadians who live in core housing need each year, which the government is seeking to help through the National Housing Strategy.

Concl usion CFAA has put these points to the government, meeting with the Finance Minister’s key political staff, the Prime Minister’s office, the Privy Council office, and numerous influential members of parliament. We have also communicated with the key officials in the finance department, in CMHC and in the office of the minister responsible for housing. LandlordBC assisted CFAA by providing timely information about the impact of the proposal on several B.C. corporate landlords. CFAA appreciates that assistance, and has masked the identities in the report we provided to the government, to keep them strictly confidential. At the time this issue of The Key went to press, Budget 2020 had not been tabled. CFAA and LandlordBC sought a full and automatic exemption for rental housing from any Interest Deductibility Limitation. In the perfect world, the IDL would not go forward at all, or a full and automatic exemption for rental housing (and all real estate) would be included in the announcement. Even if an exemption is not announced, an exemption or an ability to opt out (as is available in the US) may still be attainable through the budget implementation process. If need be, CFAA will fight hard for that.

Visit CFAA’s website at www.cfaa-fcapi.org for updates on the budget announcement, CFAA’s work, the status of the issue.