On Monday, Deputy Prime Minister and Minister of Finance Chrystia Freeland introduced the legislation that would bring forth the changes to how capital gains are taxed, a change that has been highly controversial since it was first revealed in April.
The change would come into effect on June 25 and increase the capital gains inclusion rate — the amount of capital gains that are taxable — from 50% to 66.67% on capital gains above $250,000 for individuals. Capital gains from the sale of a principal residence will remain exempt, but the tax hike would apply to the sale of secondary homes and recreational properties.
The Government of Canada has branded the change as one that will "deliver tax fairness for every generation" and the change is projected to raise over $19.4B over five years that will pay for the various housing initiatives introduced in Budget 2024.
Businesses and corporations are particularly upset about the tax hike because it applies to all capital gains they realize, not just a portion of it, which amount to a much more significant increase.
Much has been discussed about how the change will affect medical professionals, independent businesses, and other realms, but what about the real estate and development industry? To find out, STOREYS spoke to some leaders in the industry.
Increased Difficulty In Assembling Land
"It's always been difficult to buy land in Vancouver for development," says President & CEO of Reliance Properties Jon Stovell. "You're very often buying from long-term owners. If you think of streets like Cambie, or 4th Avenue, or Broadway, which are primarily commercial, they are properties owned, a lot of the times, by small families or mom and pops who have owned them for decades. And whenever you go to buy them to assemble a site for a big housing development, which is what the government wants, we're up against the fact that those people are going to pay a massive amount of capital gains when they sell that investment, so when you increase the [inclusion rate] by 33%, there's even less motivation for them to sell. An increased capital gains tax has always had the effect of making it harder to assemble land for development."
While land assemblies can often consist of single-family homes, which would be exempt from the tax if they are primary residences, assemblies along major arterial roads — typically where the biggest developments are located — are frequently made up of commercial or mixed-use properties, Stovell points out.
"If you look at Broadway right now, which is a main growth area, every property we have there that we're gonna be developing, we have bought from a commercial property owner," Stovell added. "If we wanted to buy more, we'd now be facing that resistance from those people to sell."
In Vancouver's Broadway corridor, Reliance Properties is currently developing over 500 residential units across two towers at 130 W Broadway, which was formerly occupied by MEC's flagship store.
"That was a commercial purchase," says Stovell. "If that was being sold today, that seller would literally be paying millions and millions and millions of dollars in additional tax as a consequence of this change. So, two things would happen: they either won't sell, or they insist [in] getting more to make up for the extra tax they're paying, driving up the input cost of the land [for developers] and the cost of housing."
Suppressing Investment
A lot of developers and investors will have plans to sell buildings they develop after a certain amount of time and use the gains to invest in new projects — gains that would be reduced with the capital gains inclusion rate change.
"Now, they are going to be paying a lot more when they exit the investment," Stovell says. "They're not gonna get as much of the increase in value that they had been planning on, so that's gonna suppress investment — even once you overcome the [aforementioned increase in] land cost."
Stovell says that the change impacts the fundamental promise behind investing.
"Anybody who tells you that increasing capital gains taxes doesn't reduce appetite for investment is just lying. The whole promise of capital gains is you've taken wages that you've earned and paid tax on and put them back in risk to participate in a business opportunity. That's why it's always been taxed lower [than income]. If you're a wager earner, you don't walk into your boss' office, give them $100, and hope you get $150 back at the end of the day. You just show up and you get paid. You're not putting anything at risk. The whole premise of stimulating investment is to compensate them for the initial risk being taken, so this is really counterproductive to the growth of the economy."
What this could result in, Stovell warns, is money flowing elsewhere, which he notes can already be seen with Vancouver-based developers working in the US.
"Everybody says 'Well of course developers say it, because it's taking more of their profits,' but people have to understand that we have to take massive risks to develop housing, and if you undermine the motivation private capital has to develop housing, private capital will just go somewhere else."
Reducing Rental Supply
Relatedly, suppressing the appetite for investment can result in reducing the amount of rental units in the housing market, adds President of Macdonald Realty Jonathan Cooper, who was previously the COO of developer Holborn Properties for six years.
"Developers rely on presales to unlock financing to create more housing supply and investors are an important part of the presale market," says Cooper. "Having presales and incentivizing investors to invest in presales is a good thing. It's something the government should encourage, not disincentivize through increasing the capital gains tax."
Cooper adds that although the primary residence exemption remains, private landlords that own investment properties make up a huge portion of all landlords in Canada.
"In Vancouver and in Toronto, 30% to 40%+ of our overall rental stock is privately-held condos," he says. "When a condo building completes with 300 units, approximately a third of those units are going to hit the rental market right away. So, if you take some investors out of the market, you get less presales, you get less projects starting, and you're gonna get less housing supply overall. This is a part of the overall housing economy that we need to support, not one that we need to disincentivize through an increase in the capital gains tax."
Both Stovell and Cooper believe that change will be detrimental to creating more housing, with Cooper adding that he thinks the legislation will get overturned if the Liberals are not re-elected.
After the Notice of Ways and Means Motion introducing the legislation was tabled on Monday, the Government of Canada said that an updated draft of the legislation will be released in July.
