Budget 2024: A boon or bane for the real estate industry?

A major focus of Budget 2024 was making housing affordable. This article focuses on various measures introduced in the Budget 2024 towards homeownership impacting the Real Estate (RE) industry. In particular, it provides an overview of various targeted incentives meant to promote development in the multi-family RE sub-sector and considers whether these will outweigh the cost of an increased capital gains tax on investments in Canadian RE development projects.

Budget 2024: A boon or bane for the real estate industry?

Canada’s Finance Minister Chrystia Freeland tabled the 2024 Federal Budget (Budget 2024) on April 16^th, 2024. A major focus of Budget 2024 was making housing affordable, including changes to stimulate the creation of new purpose-built rental properties and incentives for first-time home buyers. Only time will tell how these targeted incentives weigh against other economic pressures, including a higher capital gains rate, in making housing more affordable for Canadians.

Background

As part of tackling the affordability crisis for housing, the government introduced various measures to discourage speculative investments in RE. The government identifies that short-term rentals and vacant land held as investments could be hurdles to increasing the housing supply for Canadians. To combat this issue, the government previously introduced measures such as the underused housing tax (UHT) and a foreign buyer ban, both meant to curb foreign speculation on Canadian RE.

In the same vein, in Budget 2024, the government introduced several tax measures to improve access to affordable housing for Canadians.

Accelerated capital cost allowance (CCA)

Budget 2024 proposed to increase the existing CCA rate from 4% to 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024 and before Jan. 1, 2031, provided the building is made available for use before Jan. 1, 2036. This increase in depreciation rate by 250% is intended to incentivize builders to build more houses and contribute to housing supply.

EIFEL exemption for purpose-built rentals

The excessive interest and financing expenses limitation (EIFEL) rules limit the deduction of interest and financing expenses (IFE) to a fixed percentage of a taxpayer’s earnings before interest, taxes, depreciation, and amortization. Budget 2024 proposes to exempt, via an election, IFE incurred before Jan. 1, 2036 in respect of arm’s length financing used to build or acquire eligible purpose-built rental housing.

Increasing withdrawal limit under Home Buyers’ plan

The Home Buyers’ plan (HBP) helps eligible home buyers to withdraw up to $35,000 from a registered retirement savings plan (RRSP) to purchase or build their first home, tax-free, provided the withdrawal amounts are re-contributed within a 15-year repayment period. Budget 2024 proposes to increase the withdrawal limit from $35,000 to $60,000 in respect of withdrawals made on or after April 17, 2024. In addition, Budget 2024 proposed to temporarily defer the start of the 15-year repayment period to the fifth year following the year in which the first withdrawal was made (rather than the second year under the current rules) for the first withdrawal made between Jan. 1, 2022, and Dec. 31, 2025.

Increasing amortization period for first-time home buyers

Beginning Aug. 1, 2024, Budget 2024 proposed to increase the mortgage amortization period from 25 years to 30 years for first-time home buyers purchasing newly constructed homes.

If the objective of Budget 2024 is to improve housing affordability, the effect of these tax incentives may be dampened by a higher capital gains inclusion rate. Budget 2024 proposed an increase to the capital gains inclusion rate for corporations and trusts from 50 per cent to 66.67 per cent starting June 25, 2024. Individuals will also be subject to the capital gains inclusion rate increase to the extent they have annual capital gains exceeding $250,000. The budget documents do not provide any exclusion for certain types of capital gains nor do they include any plan to include grandfathering rules for accrued gains prior to June 25, 2024.

The increased capital gains inclusion rate may discourage capital investment in the residential RE sector in the long-term. In 2000, when the government lowered the capital gains inclusion rate to its current rate of 50 per cent, it posited that the reduction would help ensure that businesses had access to the capital they needed in a more competitive economy. As a result, RE, as a capital-intensive sector, could be negatively impacted by a higher capital gains inclusion rate.

While the housing market is a complex and volatile sector, the government might consider exempting  residential development from the higher capital gains rate. Such an exemption may be a better balance between not discouraging investment in the RE sector and ensuring housing affordability.