On March 19, 2019, Minister of Finance, the Honourable William (Bill) Morneau tabled the government’s final budget prior to the Federal election, which will take place later this year. While Budget 2019 did little to introduce new tax measures or make significant changes to existing measures, there were a few noteworthy items that will affect the real estate industry. However, details for most measures, which are only in the proposal stages, were sparse, with more information to be released later in the summer.
2019 Federal Budget highlights:
- Home Buyers’ Plan
- Change in use rules for multi-unit residential properties
- Future CRA audit initiatives
The Home Buyers’ Plan (HBP) is a program that allows first-time home buyers and individuals eligible for the disability tax credit to borrow from their Registered Retirements Savings Plan (RRSP) to purchase or build a qualifying home, without having to pay tax on the withdrawal. The withdrawal must be repaid over a period not exceeding 15 years and the repayment starts the second year after the year the withdrawal is made. If the withdrawal is not repaid or annual repayment is lower than the required annual amount, the calculated repayment amount or the shortfall is included in the individual’s income on an annual basis.
Budget 2019 proposes to increase the withdrawal limit for 2019 and subsequent taxation years from $25,000 to $35,000. This would be available for withdrawals made after March 19, 2019. In addition, the Budget 2019 also proposes to extend eligibility in the Home Buyer’s Plan to individuals who experienced a breakdown in their marriage or common-law partnership , even if they do not meet the first-time home buyer requirement.
The Income Tax Act deems a taxpayer to have disposed of, and reacquired, a property when the taxpayer converts the property from an income-producing use to a personal use or vice versa. In addition, the taxpayer is also deemed to have disposed of property when the use of a part of a property is changed. For example, in the case of a multi-residential unit, such as a duplex, a taxpayer is deemed to dispose of property if she starts renting out one of the units or moves into one of the units as her personal residence. Under the current rules, a taxpayer may elect that the deemed disposition not apply where the use of an entire property is changed; however, a taxpayer cannot elect out on a change in use of part of a property.
Budget 2019 proposes to allow a taxpayer to elect that the deemed disposition that normally arises on a change in use of part of a property not apply. The purpose of the proposed measure is to improve the consistency of the tax treatment of owners of multi-unit residential properties in comparison to owners of single-unit residential properties. This measure will apply to changes in use of a property that occurs on or after March 19, 2019.
Budget 2019 focuses on combatting tax evasion and aggressive tax avoidance. As it relates to the real estate industry, Budget 2019 proposes to invest $50.4 million over five years for Canada Revenue Agency to create four newly dedicated residential and commercial real estate audit teams in high-risk regions, notably in British Columbia and Ontario. The audit teams will work to ensure that tax provisions regarding real estate are complied with, with a particular focus on ensuring that:
- Taxpayers are reporting all sales of their principal residences on their tax returns;
- Any capital gains from sales of real estate properties which are not principal residences are identified;
- Gains resulting from real estate flipping are reported as income;
- Commissions earned are reported as taxable income; and
- For GST/HST purposes, an appropriate amount of tax is remitted to CRA by builders of new residential properties.
In addition, privately owned real estate builders and developers may face additional audit-related costs due toincreased CRA scrutiny in limited or full scope income tax and GST/HST audits.