Prospective sellers divided on keeping homes listed prior to June 25 deadline
A contentious change to federal tax policy came into effect this week through a scheduled increase in the capital gains inclusion rate – and reaction to the measure, which could have big implications for Canada’s real estate sector, has unsurprisingly remained polarized.
First unveiled by federal finance minister Chrystia Freeland as part of the government’s 2024 budget, the adjustment sees that inclusion rate for capital gains jump from one-half to two-thirds – essentially meaning capital gains above a $250,000 cutoff will be taxed at a rate of 66.6% rather than 50%.
While legislation is yet to be tabled passing the measure into law, that’s expected to occur later this year, with June 25 its anticipated date of legal effect.
How has the change impacted the real estate sector?
That announcement spurred speculation that a mass sell-off of cottages, second homes and investment properties could take place prior to the commencement of the new structure on Tuesday.
Goodman Commercial Inc. principal Mark Goodman told the Vancouver Sun in the build-up to the hike that his company had seen deals “turbo-charged” in recent weeks as sellers rushed to flog their homes before the new rules came into play.
However, that spike has failed to materialize across the country, with Canadian Real Estate Association (CREA) spokesperson Pierre Leduc telling CBC that the organization “[hadn’t] noticed anything notable on the sales side” between the change being announced and Tuesday.
While there was an increase in listings of multi-family properties immediately after the budget was revealed in April, Leduc said CREA expected many of those to be taken off the market entirely prior to Tuesday’s change.
“Our latest research reveals that many renters wish to transition to home ownership. Understandably, the greatest barrier to entry is the ability to drum up the initial capital for a down payment,” said Royal LePage CEO Phil Soper.https://t.co/vgbosuyOH5
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 21, 2024
Still, that’s not to say that prospective sellers abandoned all hope prior to June 25. Speaking with Canadian Mortgage Professional prior to the change coming into effect, RE/MAX Canada’s regional vice president Samantha Villiard (pictured top) said while some property owners had pulled out of the market before that date, others held strong in the hope that they could sell before the hike took hold.
The recreational market, meanwhile, saw “a bit of a mix” in the leadup to June 25, Villiard added, with some owners in a hurry to sell their property and others determined to hold on. “Canadians still see a strong value in having recreational properties and the value of having cottages and cabins in this country,” she said.
“So a lot of them [were] planning that they don’t want to sell. They want to hold on, regardless of the tax hike – that’s just their plan. And others [were] saying that they had plans to sell, and they’d better do it before the 25th.”
Villiard said the approach of the government had been “short-sighted” in giving potential sellers a narrow window between April and June to avail of the lower capital gains tax before the beginning of the new rate.
Commentary divided on measure’s likely impact
The Canadian Federation of Independent Business (CFIB) torched the tax changes last week, warning that half of small business owners across the country would be negatively impacted by the new approach.
Dan Kelly, the Federation’s president, pointed to 307,000 Canadian corporations with net capital gains in 2022, with companies frequently recording capital gains as an occasional or -one-time event rather than on a yearly basis.
“The impact of the hike in the inclusion rate needs to be measured over the long term, not just in any one given year,” he said.
Still, the measures have also been viewed as a positive step in the direction of a more balanced tax system – not least by Canadians for Tax Fairness, an advocacy group that welcomed the development.
In a statement in April, the organization underlined the “yawning tax gap” between wage earners and wealthy investors, noting that 100% of wages are included in workers’ taxable income compared with a much smaller percentage of income for Canadians whose earnings are tied mainly to investments.
The federal government attempted to assuage fears about the potential impact of the tax hike by introducing a new program, the Canadian Entrepreneurs’ Incentive (CEI), in tandem – offering a capital gains inclusion rate of 33.3% on a lifetime maximum of $2 million from qualifying small business sales.
A 10-year phase-in period for that policy means it won’t be available in full until 2034, with real estate, finance, and professional corporations excluded from the special rules.
