Last Updated on August 15, 2024 by CREW Editorial
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 rate
As 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 affected
Many 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.
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.
