Hiking the capital gains inclusion rate could lead to less housing
American statesman and political philosopher Benjamin Franklin once said, “Nothing is certain except death and taxes.”More than two centuries later, his famous quote still rings true.New housing, in particular, is suffering under the heavy weight of excessive taxation. It only adds to the cost and stymies the ability of developers and builders to construct new homes people can afford.For example, a report commissioned for RESCON in 2023 showed that taxes, fees and levies on new housing now account for a jaw-dropping 31 per cent of the price tag of a new home in Ontario. The add-ons have exploded in recent years, contributing to a housing crisis that is dreadful.The Greater Toronto Area (GTA) has the highest development charges and taxes on new housing in North America. Development charges, which are akin to a hidden tax on new home ownership, have gone up 42 per cent in less than a year and are pretty well killing the market.A few years ago, a study by Altus Group found that government fees, taxes and charges on an average, new single-family home in the GTA were three times higher than in major U.S. markets.Change raises tax rateAs if that wasn’t enough, earlier this year the federal government introduced tax changes that will increase the amount of taxes paid when a secondary property like a cottage is sold.This change is worth exploring, as the higher taxes could lead to less housing and fewer rental units being built.For individuals, the capital gains inclusion rate was increased as of June 25 to 66.67 from 50 per cent on the portion of capital gains that exceed $250,000. The amount under $250,000 will still be taxed at a 50-per-cent rate.That means if your capital gain from a secondary property is over the threshold, you will pay higher taxes on the amount.If a property is owned by multiple individuals, each individual will have access to their $250,000 threshold.The changes were proposed in Budget 2024 and on June 10, the government tabled a Notice of Ways and Means Motion in Parliament that began the legislative process to implement the rate.Calculations show that the changes mean that an individual who has a capital gain of $500,000 from the sale of a secondary property, would pay the 50-per-cent inclusion rate, or $125,000, on the first $250,000, and the 66.67-per-cent inclusion rate of $166,675 on the second $250,000. The taxable capital gains would increase an individual’s total income by $291,675. Under the old system, an individual would have paid a 50-per-cent inclusion rate on the entire $500,000 capital gain, which would have amounted to $250,000 in income – $41,675 less.For the record, a capital gain is the increase in value on any asset or security since the time it was purchased, and when the asset or security is sold.Secondary residences are affectedMany Canadians will feel the full brunt of this tax change when they sell a secondary residence, cottage or rental property. That is why, in my opinion, the decision to hike the capital gains inclusion rate was a bad idea, especially when housing supply and affordability and investment are declining. Let me explain.Oftentimes, Canadians purchase second homes for recreation or to earn extra income and sell off these assets to supplement their retirement incomes. The changes will hit them in the pocketbook. It will have significant implications for their nest eggs and the economy in general. They may also be less likely to build or purchase second homes as an investment and rent them out.There are countless small, private landlords across the country who purchase properties as rental units. The higher inclusion rate poses an additional hurdle. As they are now subject to a higher inclusion rate for capital gains above $250,000, the tax change will have a negative effect.Incidentally, the feds also have a Residential Property Flipping Rule. If a property is sold less than 12 consecutive months after it was purchased, any profits earned with be 100 per cent taxable as business income, even if the property is considered an individual’s principal residence.Presently, it is estimated that up to 30 per cent of rental units are provided by these private landlords. The new rules will disincentivize this practice at a time when cities are experiencing a significant shortage of rental units, which has contributed to higher rent prices. The average rent for a one-bedroom apartment in Toronto is now more than $2,500 per month, with two-bedroom units often exceeding $3,200. People are leaving our cities and many are heading west or south of the border because they can’t afford to live where they work.At a time when we are trying to bring more supply to market, it makes little sense to hike the capital gains inclusion rate and put up a hurdle that could curb construction of housing and rental units.Taxes, fees and levies are already high enough on new housing. Raising the capital gains inclusion rate will only make the situation worse.The path we are on is just not sustainable.Richard Lyall is president of the Residential Construction Council of Ontario (RESCON). He has represented the building industry in Ontario since 1991. Contact him at media@rescon.com.
Investing in Pre-Construction vs. Multi-Family Investments: Which Strategy is Right for You?
When considering real estate investments, it’s crucial to compare different property types to determine which strategy aligns best with your goals and risk tolerance. Two popular niches in the Canadian market are pre-construction and multi-family property investments, as they each offer unique advantages. It’s important to be aware of all of the considerations involved with these two investments and assess your personal situation and goals, in order to make an informed decision on which strategy is right for you.Pre-Construction InvestmentsPre-construction investments involve purchasing properties before they are built or completed, offering several benefits.Early investors can acquire properties at lower prices compared to completed units. This can lead to substantial returns as property values increase over time, especially in developing areas. Investors may also have the opportunity to choose finishes, layouts, and other aspects of the property. Customization can add value and appeal, tailoring the property to market demands and preferences.However, pre-construction investments also come with risks. Construction issues, permitting challenges, or market condition changes can delay projects, which can impact the anticipated return on investment. Additionally, the property’s value can fluctuate during the construction period. Investors need to carefully assess current market trends and potential risks before committing to a pre-construction investment.Multi-Family InvestmentsMulti-family investments, or properties with multiple rental units, such as duplexes, triplexes, or apartment complexes provide their own, distinct advantages, too.With multiple tenants, investors benefit from more stable revenue streams. If you have a vacancy in one unit, it doesn’t have such a major impact on your overall income, as you still have several other tenants. This reduces your financial risk. Investors can expand and diversify their portfolios by acquiring additional units as they are able, enhancing overall cash flow and investment potential.However, multi-family properties require effective property management. Handling tenant relations, maintenance, and operational tasks can be demanding. Investors should be prepared for these responsibilities or consider partnering with professional property management firms. The initial cost for multi-family properties tend to be higher due to the larger scale and associated costs. Investors need to carefully and honestly assess their financial capacity and investment goals to determine if this strategy aligns with their objectives.Comparison of StrategiesWhen deciding between pre-construction and multi-family investments, consider a variety of factors.Investment Goals and Risk ToleranceFor those seeking lower entry costs and potential appreciation, pre-construction investments may be suitable. These are ideal for investors who can wait for project completion and are comfortable with market fluctuations. On the other hand, multi-family investments are better for those looking for immediate rental income and stable cash flow. They provide a steady income stream and reduce the impact of vacancies, making them suitable for investors with a lower risk tolerance.Market ConditionsPre-construction investments are best in markets with strong growth potential and high demand for new developments. Multi-family investments work well in stable or growing rental markets with steady demand for rental properties.Final DecisionsTo make the best investment decision, evaluate your goals, risk tolerance, market conditions, and investment horizon. Understand the advantages and challenges of each strategy, and how they fit with your situation, to ensure you align your investments with your objectives. As always, conduct thorough market research and analyze comprehensive data and reports to gauge future demand and appreciation potential.In conclusion, choosing between pre-construction and multi-family investments requires careful consideration of your financial capacity, investment goals, and market conditions. By staying informed and evaluating all factors, you can make investment decisions that align with your long-term objectives and risk tolerance.
Furnished Rentals vs. Unfurnished Rentals: A Guide for Real Estate Investors
Real estate investors often wonder whether it is better to offer furnished or unfurnished rentals. Each option has distinct advantages and challenges, affecting tenant demographics, income potential, and maintenance responsibilities. Furnished RentalsFurnished rentals come equipped with essential furniture and appliances needed for daily living, such as beds, sofas, dining tables, chairs, kitchen appliances, and sometimes additional amenities like linens, cookware, and electronics. This setup makes them a convenient, turnkey option for renters.The key advantage of furnished rentals is the ability to command higher rental income. Tenants are willing to pay a premium for the convenience of moving into a fully furnished space without the hassle of buying or transporting furniture. This makes furnished rentals particularly attractive to expatriates, business travellers, and individuals relocating for work, who often seek short-term or flexible leases. These tenants are usually reliable and financially stable, providing a steady rental income stream.However, investors should be prepared for the higher initial investment required to purchase high-quality furnishings and appliances. This upfront cost is essential to attract the target demographic willing to pay for convenience. Additionally, furnished rentals necessitate regular maintenance and replacements due to wear and tear, which can be more labour-intensive and costly over time. Managing varying lease terms can be another difficulty, as short-term leases require more frequent marketing and administrative efforts to keep the property occupied. Seasonal vacancy slumps, particularly during the winter months, can further challenge maintaining consistent rental income.Unfurnished RentalsUnfurnished rentals are properties leased without any furniture or appliances, except for essential fixtures like kitchen cabinets, sinks, and sometimes basic appliances like stoves or refrigerators. These rentals are usually aimed at long-term tenants who have their own furniture.One of the main benefits of offering unfurnished rentals is the lower initial cost. Investors do not need to invest in furniture or extensive appliances, significantly reducing the upfront expenditure. Additionally, unfurnished rentals tend to attract long-term tenants, which can lead to reduced turnover rates and more stable rental income. These tenants are likely to stay longer since they have invested in furnishing the space themselves. The maintenance costs tend to be somewhat lower for unfurnished rentals, as there are fewer items that require upkeep and replacement, although maintenance and repairs for the property itself and any fixtures will be consistent. However, unfurnished rentals generally yield lower rental rates compared to furnished ones, potentially reducing the overall revenue for investors. They are not as likely to attract the dependable tenants that furnished rentals do, increasing the chances of tenant issues and legal challenges. Dealing with problematic tenants can lead to prolonged disputes and costly eviction processes. Considerations Investors considering furnished properties must account for the logistics of ensuring the space is appropriately and fully furnished. This includes sourcing and purchasing high-quality furniture, setting up the property, and maintaining it in excellent condition. Ensuring a property remains attractive and marketable requires ongoing attention and investment in furniture and appliances.Partnering with a specialized property management company can help investors manage the complexities associated with furnished rentals. These companies handle the entire furnishing process, from sourcing and purchasing to setting up and maintaining the property. This allows investors to offer a furnished property without the added hassle, ensuring it remains in excellent condition and appealing to potential tenants.When deciding between furnished and unfurnished rentals, investors must weigh the benefits and challenges of each option. Unfurnished rentals offer lower costs and stable, long-term tenants but may attract lower rents and pose higher risks of tenant issues. By carefully analyzing the market and considering the specific needs of their target tenants, investors can make informed decisions that align with their investment goals. Furnished rentals can provide higher income and flexibility but require a higher initial investment and more maintenance. However, partnering with a property management company that is experienced in executive furnished rentals can make the process easier.
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