March, 2008
Tax Deferral on re-investment good for the economy
By John Dickie, President, CFAA
One of the key objectives of the Canadian Federation of Apartment Associations (CFAA) is to obtain tax reform to improve the position of the rental housing industry. For the time being, CFAA has made one issue a priority, namely a tax deferral on the sale of a rental property and re-investment in another rental property. It is easy to see how this would help a landlord who wants to sell and re-invest, but the benefits of such a reform would extend much wider than that.
Under the current federal income tax rules, when a rental real estate property is sold, the owner must pay tax on the recaptured CCA (at up to 48%) and on any nominal capital gains (at up to 24%). Due to the tax impact, an even trade of properties of the same value is not possible. The inability to defer the tax burden on the sale and reinvestment in rental real estate creates numerous economic problems and inequities.
1. Promote efficient capital allocation across the economy
The absence of a tax deferral on reinvestment creates a “lock-in” effect; in other words, to avoid tax consequences, investors retain real estate assets when other assets would provide a higher return. That is a drag on the economy, and results in lower economic growth and less productivity across Canada. Allowing tax deferral would eliminate that effect.
2. Promote more compact, environmentally sound urban redevelopment
The lock-in effect also inhibits the redevelopment of land in urban areas. It discourages the redevelopment of significant pieces of land into their most productive uses, contributing to urban decay and to urban sprawl. Allowing tax deferral would facilitate the rehabilitation of brownfield sites and compact, environmentally sound redevelopment in cities.
3. Help small investors and middle-income families
Investment rental property is very widely held, much more widely held than shares in public or private companies. For example in 2005, 66% of those who reported capital gains on rental real estate had less than $50,000 per year in income other than those gains. For those people the gains averaged $40,000 each.
4. Level the rules between rental property and shares in companies
Three quarters of company shares are held in tax deferred vehicles such as pension plans and RRSPs. Real estate is not eligible for RRSPs. Allowing a tax deferral would result in between 50% and 75% of real estate gaining tax deferral, which would still be less than the deferral level which exists in company shares.
