The Canadian real estate sector is experiencing a roller-coaster year, with markets catching fire in regions across the country, then cooling down on the heels of interest rate increases and changing mortgage stress tests. The 2022 federal budget attempted to address some of the challenges facing Canadians, although issues around supply chains and rising costs remain.
While many of the announced measures in Budget 2022 are steps in the right direction, specifically in the housing sector, more can be done to reduce roadblocks in the real estate and construction sector. In this article, we break down several of the measures that could impact you and your business.
Business tax measures
Among the business-related tax measures announced in the budget was the change to the small business deduction, which has been expanded to include Canadian-controlled private corporations with higher capital balances. The budget proposed to increase the upper range of the taxable capital range to $50 million, from $15 million.
The proposed change is a positive one for medium-sized businesses as they may be able to now access the reduced corporate tax rate. However, given there is still a limit on this due to investment income, the change may not extend to capital-intensive businesses like real estate, construction, or manufacturing.
A positive update for businesses is there were no changes to the current tax rules on intergenerational business transfers. Amendments introduced through Bill C-208 in 2021 allow parents to succeed their businesses to their children in a tax-effective manner. The budget announced a consultation period relating to this legislation but did indicate the government would keep the legislation in place for legitimate business successions.
Budget 2022 indicated the federal government will conduct a review of housing as an asset class in corporations. Given the increased prices of homes, Canadians may not be able to afford to buy their own homes and will rely on renting from these corporations. The government indicated it is trying to understand the role of corporations in the housing market as there is a perception corporate ownership is driving up rents and house prices. While the results of such a review remain to be seen, the direction of this change could mean corporations that invest in real estate could be penalized in some fashion.
You may see an increase in renovation activity due to the Multigenerational Home Renovation Tax Credit and enhanced Home Accessibility Tax Credit. They are intended to offset some of the costs for renovations made to homes for the elderly and those living with disabilities. However, the uptick might not be seen right away, given it requires a second suite addition, and municipalities will have to change zoning to allow it.
An increase in the First-Time Home Buyers’ Tax Credit and the introduction of the Tax-Free First Home Savings Account (FHSA) can help Canadians in purchasing their first home. The FHSA will have a maximum lifetime contribution limit of $40,000, with an annual limit of $8,000. This measure will allow some Canadians to save over a few years toward buying a house. However, it will remain to be seen if this is adequate to support those looking to purchase their first home and address Canada’s housing affordability challenge.
New rules on flipping homes, foreign ownership
Budget 2022 also introduces a new deeming rule to ensure profits from selling residential real estate, including rental properties, owned for less than 12 months are subject to taxation as business income. This measure is meant to stop Canadians from sheltering tax on the sale of a home flip by using their principal residence exemption or treating it as a capital gain.
There are exemptions for specific life events such as death, separation, employment change and household additions. It is important to keep in mind this does not mean that once a property is owned for 12 months and 1 day that it gets capital treatment – the facts still need to be considered to determine if capital treatment is still appropriate.
The budget moved forward another measure to slow down foreign-owned property by introducing restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years. Exemptions would apply to refugees, international students on the path to permanent residency and individuals on work permits who are residing in Canada.
Budget 2022 also proposed to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST / HST purposes. This has historically been a grey area as to whether this was taxable, so the government is clarifying that it is in fact taxable. The ultimate purchaser ends up paying tax on the full cost of the build and the assignment sale.
Although the government clearly recognizes the current challenges, long-term solutions for the real estate and construction sector will require the federal government to work with provinces, territories, and municipalities to ensure the sector fulfils its potential. This includes developing policies that drive affordability in the construction of new supply, the retrofitting and renovation of existing supply, to ultimately foster greater economic accessibility for those aspiring to purchase a home.
Melissa Aveiro, CPA, CA, is the Southwestern Ontario Regional Tax Leader, and National Real Estate and Construction Tax Leader, at 519.286.1807 or [email protected]