March 2, 2018

Federal Budget Reveals Real Estate Tax Cheat Rules, Rental Spend

At first blush, the latest Federal Budget doesn’t say much on the state of housing in Canada – and as the $40-billion, 10-year National Housing Strategy was announced just this past November, perhaps there isn’t much yet to add to the conversation.

Titled Equality + Growth – a Strong Middle Class, this progressive budget – the third since Justin Trudeau’s Liberals took office in 2015 – puts a heavy focus on gender equality, pharma-care, and scientific investment. However, there are a few tidbits that will impact those wishing to rent or purchase real estate across the nation.

Slower Growth Forecasted

Canada’s GDP expanded 3 per cent in 2017, and the federal government attributes much of that growth to strong real estate activity. However, while home buyers and sellers will continue to contribute to the economy, rising interest rates and new mortgage qualification rules will take some of the wind out of the sector’s sails.

“Following rapid growth in prices and sales in recent years, housing market conditions have become more balanced in Toronto and Vancouver, and their surrounding regions,” the budget states, adding that condo price growth remains strong and supply continues to affect prices.

“Going forward, housing demand across the country should continue to be supported by solid job and income gains, but tempered by rising interest rates and recent changes to mortgage underwriting Guideline B-20 for federally regulated lenders (including a mortgage rate stress test for uninsured mortgages).”

A Crackdown on Tax Cheats

That Canadian real estate has been used as a vehicle for international money laundering and tax evasion has been a growing concern, and the feds have announced renewed efforts to close off the loopholes that make such activity possible.

A main measure will be stricter annual reporting requirements for those who purchase real estate through a trust, and better information on who actually owns the legal entities, referred to as “beneficial ownership information”. The budget states this will “help authorities to effectively counter aggressive tax avoidance, tax evasion, money laundering and other criminal activities perpetrated through the misuse
of corporate vehicles.”

The new reporting requirements will come into effect in 2021, and will make corporations provide up-to-date information on their beneficial owners. This follows a similar measure announced last week in the provincial British Columbia budget, which forces those who purchase real estate via numbered corporations to reveal their true identities in a public land registry.

The federal government will be cracking down on “tracking arrangements”, which allow real estate owners to defer the profits they’ve earned on their properties – whether from rental income or capital gains made on a non-principal residence sale – to a foreign resident corporation.

They’ll also be collaborating with international jurisdictions to sniff out tax evasion tactics by non-residents. Via this new Common Reporting Standard, foreign purchasers can no longer hide their assets across borders, and that tax will be paid on all income with Canadian sources.

The government has also announced an investment of $38.7 million for the CRA to improve its offshore compliance methods and will inject millions into the Tax Courts to help it deal with the resulting additional caseloads.

Translation: It’s about to become a lot harder for unscrupulous foreign investors to use Canadian real estate as a front for money laundering, or avoid tax by funneling gains through faceless corporate entities.

New Incentives to Build Rental

The budget also pads an existing measure to create more affordable rental housing, upping the cash fund to incentivize developers to $3.75 billion from $2.5 billion.

Called the Rental Construction Financing Initiative, the loan program was first introduced by the Canada Mortgage and Housing Corporation in April, and offers qualifying developers low-cost loans of up to 100 per cent. To be eligible, the project must be considered affordable housing, and satisfy energy efficiency and accessibility standards. Priority will be given to developments with the greatest social outcomes in efforts to “make costs more predictable during the earliest and most challenging phases of development.”

The budget states 30 per cent of Canadians rely on the rental housing market, and that pressure will only intensify as migration and immigration increase, and the ownership market becomes more expensive.

“Unfortunately, high demand for rental housing has not translated into an increase in supply,” the budget states. “Vacancy rates remain low in large urban centres such as Toronto and Vancouver at 1.0 per cent and 0.9 per cent, respectively.”

The government expects the measure will create 14,000 more affordable units across Canada, and has also proposed supplying the CMHC with an additional $11.6 million over five years to expand the program.