Government retreats from controversial tax proposal to ensure housing investment continues
The Canadian government has withdrawn its proposal to impose a new tax regime on certain real estate investment trusts (REITs) in Canada, following strong opposition from the industry, Bloomberg reported.
The finance department confirmed this withdrawal in a statement last week, stating that "no changes to the tax treatment of REITs are being considered at this time."
The announcement alleviates a major concern for Canadian apartment REITs, which have been facing uncertainty over potential tax changes for more than two years.
The potential tax threat emerged in March 2022 when Prime Minister Justin Trudeau's Liberal Party, lacking a majority, struck a deal with the New Democratic Party to secure their support. One promise was to tackle the "financialization of the housing market" by targeting corporate apartment owners.
The 2021 Liberal election platform had promised to review tax rules and "curb excessive profits" of large residential property owners.
REITs, which generally avoid corporate taxes by passing earnings to shareholders, would have faced a significant shift if taxed as corporations. This could have potentially deterred investors, particularly during a period when REIT valuations are already under pressure from rising interest rates.
However, the real estate industry resisted, arguing that the threat raised its costs and hindered new housing development.
“While more needs to be done to ensure that Canadians are not subject to renovictions and that rental units are affordable for Canadians, the government understands that REITs provide a critical channel for new investment in rental units,” the finance department statement told CoStar.
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While the government recognized the need to address issues like renovations and rental affordability, it ultimately decided against pursuing tax changes for REITs at this time.
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