Given the multiple announcements made in the Federal budget which will have an impact on real estate investors across the country join us for a special edition of our National event to hear from professionals in tax, financing, rent-to-own, and real estate about what the budget proposal may and will mean and what you can be doing to mitigate their impact. In this session join Travis Redding as they talk about Tax and Accounting implications.
Laurel: Travis Redding from DJB Accounting. He's going to be talking about REI budget interpretation from an accounting perspective. Travis is a senior tax manager with DJB, an expert in finding the best strategies for real estate investors. He's also an expert in resolving tax disputes with the Canada revenue agency.
We always want somebody like that in our corner. Welcome Travis. I know you have a presentation for us, but I'm going to hand it over to you and let you go. I'll be monitoring questions in the chat. I may jump in. But it's all yours. Tell us what's going on from an accounting perspective as best you can.
Travis: Thanks for having me. Congrats on the anniversary, everybody. As described by a senior tax manager at DJB, I'll pre providing an overview of some of the key points in the federal budget this year. For our agenda today, here's an overview of what we'll be discussing. One of the main themes in the budget this year was to introduce new measures, to assist with housing affordability, and first time home buyers trying to enter the market. The federal government has cited housing supply shortages, and speculative investing to be key contributors to Canada's housing affordability crisis, and has proposed new initiatives to mitigate some of those factors.
The focus that I'll be speaking about will be the tax related initiatives. However, I will go over a bit of a high-level overview of some of the key initiatives directed at real estate, as it will provide some context to the context of the rest of it. This slide summarizes several of the key measures proposed in the budget that target affordable housing.
The two that I'd like to highlight and point out here would be one, the government plans to ban foreigners from buying residential real estate in Canada for a period of two years. This obviously poses a few issues as to who would fall into the definition of a non-resident or non-Canadian buyer and how this be implemented.
The second is the government is proposing to spend $4 billion over five years to assist municipalities with creating a hundred thousand new housing units. These initiatives are meant to incentivize housing construction by cutting red tape and building other digitized systems related to municipal planning.
The government has also proposed new Green Buildings initiatives aimed at retrofitting homes and reducing cannabis carbon. I won't spend any time going through these, but the slides will be available and you can take a look at some of these high-level comments when you get some time now to jump into more of the tax related matters.
Providing support to first time home buyers. The government introduced two new personal tax credits to try to help in this area. The first is to double the first time home buyers tax credit from 5,000 to 10,000. Just keeping in mind, these tax credits are 15% of whatever the number is. The tax credit, the impact you'd see on your tax return is the tax savings moving from $750 to $1,500.
This tax credit was already available. Government just doubled it. This is a tax credit that is shared by a group of people buying the home. If two people buy a house together, it's one credit for the house rather than a credit program. The other incentive is extending the first time home buyers incentive to 2025.
What this program does is it allows first-time home buyers to have the option of borrowing from the government to finance their down payment. This does provide the government with equity in your home. I haven't seen this widely used so far, but they are extending it to 2026. Likely the biggest proposal to assist first-time home buyers was the introduction of what's called the first home savings account.
This allows individuals who are over age 18 or over to use pre-tax dollars to earn tax free returns on investment to save for their first home. How this works is an individual would be able to claim a tax deduction for any money. They contribute to the savings. Any returns they earn within that account are tax free. When they withdraw the money to buy a house that all comes out tax free. It's a mix between an RRSP and tax-free savings account that takes the best of both of those and creates this one account for housing.
Some of the attributes of these contributions are limited to 8,000 per year and cap at a lifetime maximum of 40,000. If you're thinking, I'll start contributing when I'm 18, that gives you five years at $8,000 per year to hit the maximum. You'd be about 23 with 40,000 of capital. Depending on what kind of return you can get on there, we set the stage to how much that actually helps a first time home buyer get into the market for current homeowners.
There's been this introduction of this multi-generational home renovation tax. The idea of this is an attempt to alleviate some pressure from the housing supply shortages. The federal government's proposing this tax credit to encourage Canadians to build secondary suites for family members. That would mean adding a room or finishing a basement for either, it could be your parents could be your adult children has been viewed by certain critics as an attempt for the government to try to shift the mindset of single family unit homes in Canada, to more multi-generational homes in order to decrease the demand for new homes and putting pressure on the supply.
This credit would be available starting January 1st, 2023, and would allow taxpayers to claim a credit of about 15% on up to $50,000 of eligible renovations. What is an eligible renovation is yet to be seen once the legislation comes out. However, this credit raises a couple of questions that they're going to have to clarify. How will they audit the fact that you have family members living in these units? If you do have family members living in this unit, is there a time period for how long we have to live there in order for the credit to be applied? A couple of questions that have come out of that and we'll wait to see what goes through the legislation.
Laurel: I'm just gonna jump in here, Travis. That means that for real estate investors though, if we have several properties, then we want to put, say, a secondary suite that doesn't really affect us. Does it as a real estate investor or does it, or is that a gray area? The government hasn't decided yet?
Travis: I wouldn't say, it's great right now cause they haven't released the rules, but the guests are going to be at your primary residence. Likely where it goes, but again, we'll see how that goes when it comes to property flipping. The government has also proposed initiatives to make house flipping more expensive because they identified speculative investment as a key contributor to Canada's rising house prices.
They think this is an area they need to try to cool. Two ways they're trying to do that. One is through income tax. There's been an introduction of a new deeming role to ensure profits from flipping residential. Real estate is always subject to full taxation rather than the more favorable capital gains tax. What that means is currently right now, if you have a rental property and you sell it, you have a capital gain. That's taxed at 50%.
They're trying to come up with a rule now that if you buy that property and sell it within the first 12 months of owning it. That sale is actually going to be business income tax at a hundred percent inclusion instead of 50%. It goes a bit further to say that if it's your principal residence and you sell it within 12 months of purchasing it. You don't get to claim the principal residence exemption on it.
What that exemption is, that's the mechanism Canadians use to be able to sell their homes on a tax-free basis. If the government takes that away now, those houses will be taxed at whatever profit you can get off of it when you sell it. But again, if you sell it within the first 12 months of purchasing it.
Now, having said that the government has alluded to an exception to the rule and that's if there's a qualifying life event. That is the reason that you sold the property so fast. They haven't defined a qualifying life event, but it's been speculated that it's likely going to include things such as divorce, death of a spouse or moving to a new house for a new job.
Laurel: I'm going to jump in again. For real estate investors, I think people who treat real estate investing as a business, this is really not much of a change because I know Daniel. It's a business and we know that and it's all about the intention. It's like we intend to buy properties and sell them. It's our business. This doesn't really affect people. Treat it as a business.
Travis: If you're in the business of flipping, if you're in the business of having multiple rental units that might've gotten capital gains. At my house, it might depend on how it's being operated, but if you are buying and just to improve it and then sell it, that would be considered business income.
Laurel: Great. Thank you.
Travis: No, problem. The second way that they're trying to cool this market is through HST on assignment sales. I don't know, I'm assuming everyone is familiar with assignment sales, but if you assign the mortgage to another party right before closing. Prior to May 7th of this year, HST was applicable on assignment sales. However, there was an exception that would deem HST to not be applicable if the assigner was selling the house due to a change in life circumstances.
It sounds similar to the other rule that we just talked about. Subsequent to May 7th. The exceptions eliminated and any assignments sales will be subject to HST. HST is only payable on the assignment fees, not any reimbursements of deposits the assigners already paid. You're only subject to HST once those fees go above $30,000.
The government has also proposed changes to the FAPI regime in Canada in FAPI or Foreign Accrual Property Income, is a set of rules in the income tax act to prevent Canadians from benefiting from certain tax deferral opportunities that would otherwise be available when earning passive income through controlled foreign affiliate corporations.
These rules are actually some of the most complex and the act. They're outside of the scope of our discussion as I could spend half a day talking about it. The key takeaway here is that there's proposed changes to these rules and it could result in a loss of a tax deferral. If you're a Canadian investor who's investing in say US real estate through a US corporation.
Laurel: That's really interesting. I'm going to jump in. Some of us, like we just bought some stuff in or have contract properties under contract in Costa Rica. We might get to look at it. We might look at it in relation to this cause we also have a Costa Rican corporation. That's the kind of thing you're talking about when you have corporations in other countries and they bought properties and all that kind of thing.
Travis: That's right. The reason I mentioned the US. There's some complicated formulas in there, but the way that it ends up working out in the end, if the Canada US tax treaty is you couldn't get yourself into a position where that FAPI income earned in the US is actually tax-free until you bring it back to Canada. Depending on what country you're investing in, you'd have to do an analysis of the treaty.
Canada has with that country to see where you'd fall and what kind of tax rate would come out of it. Now, the small business deduction. This may be relevant to those investors that have real estate inactive business operations. In Ontario, the small business deduction allows certain corporations to be taxed at the small business tax rate of 12.2% on its first $500,000 of what's called active business income. Without this deduction, then these corporations would be subject to the general corporate tax rate of 26.5%..
There's a significant spread in that. To ensure that the $500,000 business limit is restricted to small business corporations, the $500,000 limit has historically been reduced. When the corporate groups tax look capital is between 10 million and 15 million, and then completely phased out when this tax lookup rose above 15 million.
Taxable capital, you can think of it as your long-term investment assets minus any liabilities you have against them, such as. The federal budget now has proposed increasing that $15 million upper limit to 50 million in order to expand access to the small business deduction to certain medium sized businesses. Above 10 million, you're not going to get the whole 500,000, but now the phase out period is much greater so that you can still benefit from something from that deduction.
In closing, I know there's a lot of information. The budget has been criticized for releasing numerous new initiatives with no indication of how they will be implemented. Although the budget proposal is an instance to increase the supply of housing critics, have noted that the forecast of population growth in Canada and immigration targets of over 400,000 people per year over the next three years is set to far outpaced the growth in housing supply. All these factors considered signal demand for housing is still going to be going up and could push prices up further.
Laurel: Wow, thanks. There's just so much to unpack, and we don't know all the details and the devil truly is in the details here. We do have a question for you from Anthony. He said that I read in a blog that HST is now payable on the deposit as well. Not just on the assignment fees on assignment, I guess if you put it I'm not quite sure, but if it is, so I guess the question is, will HST be applicable to deposits that people are putting on, say a pre-construction condo or something?
Travis: Yes. I don't know if the timing of that has changed. I know HST was applicable on new builds anyways, that closing. I don't know if there's been a change now to apply that on the deposits.
Laurel: Thank you.
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