Canada

The Canadian Government Just Put Real Estate Investors In Its Crosshairs

Canada quietly put real estate investors on notice, right before the holidays — probably hoping it slips under the radar. A newly re-elected Liberal Party of Canada (LPC) distributed mandate letters. These letters contain orders for the Minister to execute and are usually pretty dry. A big exception is the Minister of Housing’s mandate letter, which puts real estate investors in its crosshairs. The Minister has been ordered to cut profits, deter speculation, and limit leverage. Here are the key takeaways.

Canadian Real Estate Investors To Be Hit With Taxes. Lots of Them

Canadian real estate has been lucrative for investors, and the Government wants a cut. The mandate includes various investor taxes, and reforms to reduce “excessive” profits. Here are the most noteworthy ones:

  • Excessive rent surplus. The Income Tax Act will be amended to require landlords to disclose rent — pre and post renovation. If a minimal renovation was executed and the rent surges, you might be hit with a tax to reduce profit. If executed, landlords might reconsider those renovictions.
  • Anti-flipping tax on residential property. Planning on flipping a property for less than 12 months? You might have to pay an anti-flipping tax. Flippers might be a small segment, but they reduce liquidity and replace it with a higher priced unit. This marginal buyer has a disproportionately large impact on home prices, similar to money laundering
  • Reviewing tax incentives for Real Estate Investment Trusts (REITs). REITs are a type of investment trust to hold real estate and generate income through rent. They aren’t taxed on the income or gains made, making them tax efficient entities. REIT holders pay taxes on the disbursements from the REIT, but those can be deferred or reduced by registered accounts. This has made them extremely attractive over the past few years.

Canada Will Attempt To Limit The Advantage of Real Estate Over Productive Investments

Investors will see hurdles erected to limit the attractiveness of real estate. There are currently many incentives to invest in real estate over other areas. This includes leverage and tax advantages, attracting a disproportionate size of capital. Residential investment recently overtook productive investment for the first time since the 1960s.

Having such a disproportionately large residential investment sector can create problems. Even without a correction, diverting capital from productive investment means fewer jobs. This has been one of the factors leading to Canada having the lowest GDP growth in the OECD. By putting up a few hurdles, the country is probably hoping to get money back into productive growth. Here are some of the key measures:

  • Review investor down payment requirements. Investors might soon need more for a down payment, limiting leverage. This is a move that other countries have recently adopted, including New Zealand.
  • A temporary ban on foreign buyers. The ban would apply only to non-recreational residential property. Canada doesn’t track beneficial ownership, or confirm the info when it does. If it doesn’t know who the beneficial owner is, it has no idea who owns the home. This is mostly window dressing.
  • Curbing “excessive” profit for investment properties. The ambiguously worded directive doesn’t elaborate. It only says they’ll do so while also protecting small, independent landlords, though. Most likely this means they’ll be looking into institutional landlords. No plan usually means they do very little.

Real estate investors have always been a double-edged sword, regardless of the country. The positive is they provide capital (and incentive) for builders, increasing supply. It’s not a coincidence that the most building happens during periods of high price growth.

At the same time, they aren’t a charity. Their incentive for providing this capital is making solid returns. The better the returns, the more capital gets sunk into the market. In the words of the bank regulator, this can become a self-fulfilling prophecy. Investors often pay more because they expect higher returns, detaching from any fundamentals. 

How serious this government is about the measures remains to be seen, but there is one big sign they might be. Canada is injecting significant cash (i.e. loans, subsidies, etc.) to developers. This is a sign the state is preparing to pick up the incentive if other investors divert capital.

17 Comments

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  • Darren 6 months ago

    Here’s the thing and everyone knows it… a huge chunk of the residential real estate investments are owned by real estate agents. They take advantage of the 2.5% + HST (after business taxes) they get back from their purchases to go towards the Land Transfer taxes and closing fees. Essentially real estate agents are able to purchase additional properties as investment without paying any fees. It’s in an agents best interests for housing prices to keep going up as it pads their profits even more and makes them more commission in their day job. Am I the only one he sees a huge conflict of interest here?

    • V 6 months ago

      Very well put and you are absolutely right. These realtors buy properties and just re list them for 100k more.

  • Mortgage Guy 6 months ago

    Don’t like this option? Let’s cut taxes and provide the same advantages to other forms of investment that apply to big business.

    • Erik 6 months ago

      Awesome! The govt is finally going to crack down on all the money they made incentivizing , foreign investment, money laundering and ballooning house prices!! Hahaha. Not a chance.. this ship is sailing till it sinks.. higher down payments just means the wealthy can afford to buy in…

  • Hugo 6 months ago

    Canada depends on rising home prices to fuel the lack of income people make. There’s going to be so many holes in this legislation, it will be like it didn’t exist.

  • David Chan 6 months ago

    Nice to see these measures created to address the problems they made. Next will they knock over a Jenga tower, and fund its reconstruction?

    • Kate Wright 6 months ago

      Happy about this, but what I don’t understand is why did they need to be re-elected? They’re acting like they’re fixing problems another government was overseeing.

  • GTA Landlord 6 months ago

    Tracking rents sounds like it would require a pseudo-national rent control, which I don’t believe they have the political support to carry. Regardless of whether you think rent control is fair or not, it’ll be argued as overreaching.

    • Scott 6 months ago

      More red tape, more Government, more fees, higher prices and higher rents as investors get fed up and leave it for the big corporations which can afford the lawyers and accountants….

      Same thing with the mom and pop home builders, gone are the days when 1 or 2 lots are bought and homes build, further gone are the war time style houses being build, although they still exist and often sell for $500K+ the inexpensive lots and modest building codes are long gone. Its too bad Canada has run out of land:(

  • Bloemie 6 months ago

    Since Canada has more living space/housing per person than any other developed OECD country per the OECD, its not a shortage of living space/houses, that is driving demand. Either is because we have the wrong format of housing (i.e to many huge homes with single residents) or demand is being driven by narrative and investor returns. Reducing demand is clearly half of the right approach, not to make mortgages more available and increase demand. The other would be density changes, making it easier to subdivide.
    That said, if the bubble pops, I am not sure everyone will thank the government in office for letting it run this far, before addressing the issue. On the other hand, If they dont slow down price growth, inflation will push the government out of office or force them to stop the financial repression rates of 0.25%, popping the bubble anyway with the rest of the economy.
    If BoC does not raise rates soon, inflation will / is already be the biggest issue facing Canadians and this may all be to little too late for a minority government

  • Erik 6 months ago

    Awesome! The govt is finally going to crack down on all the money they made incentivizing , foreign investment, money laundering and ballooning house prices!! Hahaha. Not a chance.. this ship is sailing till it sinks.. higher down payments just means the wealthy can afford to buy in…

  • Scott 6 months ago

    Now if Governments would free up more land for development, OR reduce fees and red tape on development, OR reduce the number of new immigrants to the number of new houses built there would be less demand, lower prices and more young people able to get into their own home.

    When I advertise a rental property and get 45 responses in 8 hours its pretty obvious there is a shortage. 90% of the problems are caused by Government, they just want to grab some of the money too. (I have seen figures that Government fees on a new house in Toronto are well over $200K, due before the house is finished..)

    I was in San Antonio, TX Dec 2019, I saw new single family homes under construction were $165K, new but basic for the US, 4BR, 2 car garage low 200’s. 3 car garages, 3000+ sq ft, low $300K.

    • Jeremy 6 months ago

      LOL. Prices in San Antonio are cheap because the property tax rate is more than three times higher than Vancouver. A million home most places in Texas has property taxes of the median wage in Canada.

      It’s funny when people try to explain the cost of housing in different regions because of builders, without factoring alternatives for investment. Texas’ GDP is the size of Canada’s, so people don’t need to speculate on housing to make up for the lack of living expenses. And if they tried, they wouldn’t get nearly as far paying US$26k in annual taxes on a $1 million condo.

  • Freddy 6 months ago

    I noticed the phrase “protecting small, independent landlords” in their directives. Why do these people need to be protected? Why do these people need incentives to buy 2 or 3 or more houses? We need to protect people who hoard houses?

    • Doug Bateman 6 months ago

      So you want to deal with the shortage of rental units, but you don’t want people to own rental property? How does disincentivising landlords create more rental units?

  • Heather 6 months ago

    So, they are finally getting off their duffs and appearing to do something, eh? How about a mandate letter to the Ministry of Justice to copy US racketeering laws and beef up enforcement? Oh, sorry Justice. You saving the reading of ‘Wilful Blindness’ for Xmas break?

  • Brian 6 months ago

    Somehow I do not believe this.

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