Daniel: Hello, REITE Club nation. This is Daniel St-Jean, one of the co-founders. Before we get started, I wanted to ask you a quick question. Have you checked out the ROC yet? What's the ROC? It's the REITE Club Online Community, a place where you can go to find your real estate investing and business answers and network with like-minded people.
We have interactive forums, all the podcast episodes and hours of videos with a wide range of real estate investing, training and education, and much more it's free to join. So be sure to come grow with us at thereiteclub.com. Now on with the podcast.
Laurel: Hello REITE club, it's Laurel Simmons here and welcome to this special podcast episode. Recently, we had a special national webinar event related to the numerous Canadian federal budget announcements about real estate. We brought together a number of experts to offer their thoughts on what this can mean to you.
In this episode, I had the opportunity to speak with Travis Redding from DJB chartered professional accountants, about some of the opportunities and challenges arising out of the new budget. I'm sure you're going to find his insights helpful to your real estate investing business. Be sure to listen to the other special episodes that are all coming out over the next few weeks. Now, here is Travis Redding.
Travis Redding from DJB Accounting. He's going to be talking about REI budget interpretation from the accounting perspective. Travis is a senior tax manager with DJB and an expert at finding the best strategies for real estate investors. He's also an expert in resolving tax disputes with a Canada revenue agency. We always want somebody like that.
Welcome Travis. And I know we have a presentation for us, but I'm gonna hand it over to you and let you go. I'll be monitoring questions in the chat. I may jump in occasionally, but it's all yours. Tell us what's going on from an accounting perspective as best you can.
Travis: Thanks for having me and congrats on the anniversary everybody. As described by a senior tax manager at DJB, I'll be providing an overview of some of the key points in the federal budget this year, just a regular legal disclaimer. 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, to 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 will 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 build initiatives aimed at retrofitting homes and reducing cannabis carbon footprint. So 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.
To jump into more 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 1500. 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 per person.
The other incentive is extending the first time home buyers incentive to 2025. And 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 2025, likely the biggest proposal to assist.
First time home buyers introduced what's called the first home savings account. This allows individuals who are over 18, or over to use pre-tax dollars to earn tax free returns on investment to save for their first home. So how this works is an individual would be able to claim a tax deduction for any money.
They contribute into the savings account, 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 created to this one account for housing.
Some of the attributes of these contributions are limited to 8,000 per year and capped at a lifetime maximum of 40,000. If you're thinking, I'll start contributing when I'm 18, that gives you about five years at $8,000 per year to hit the maximum. So you'd be about 23 with 40,000 of capital.
Depending what kind of return you can get on there would 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 credit. 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 put pressure on the supply. This credit would be available starting January 1st, 2023, and would allow taxpayers to claim a credit of up 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 questions that they're gonna have to clarify such as how will they audit the fact that you have family members living in these units? If you do have family members living in these units, is there a time period for how long they have to live there in order for the credit to actually be applied?
Couple 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, and we want to put, say, a secretary 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: Let's say it's great right now. Cause they haven't released the rules, but the guess is it's going to be on your primary residence. Likely where it goes, but again, we'll see how that plays out 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. So there's been an introduction of a new deeming role to ensure profits from flipping residential real estate are 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 out 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 gonna be business income taxed at a hundred percent inclusion instead of 50%.
This 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. 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, so they haven't defined a qualifying life event, but it's been speculated that it's likely gonna include things such as divorce, death of a spouse or moving to a new house for a new job.
Laurel: I'm gonna jump in again. So 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 with Daniel and it's a business, and we know that , it's all about the intention, right? It's like we intend to buy properties and sell them.
It's our business. This doesn't really affect people who treat it as a business , am I reading that correctly?
Travis: If you're in the business of flipping, if you're in the business of having multiple rental units that might have gotten capital gains treatment. It might have. Depending 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: Okay. Thank you.
Travis: No problem. The second way that they're trying to cool this market is HST on assignment sales.
I don't know, I'm assuming everyone's familiar with assignment sales, but it's, 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 assignor was selling the house due to change in life circumstances.
Sounds similar to the other rule that we just talked about subsequent to May 7th. Now the exceptions are eliminated and any assignment sales will be subject to HST. That HST is only payable on the assignment fees, not any reimbursements of deposits the assigners already paid, and 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 and 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 control for an affiliate corporation.
These rules are actually some of the most complex in the act. They're outside of the scope of our discussion as I could spend half a day talking about it. But 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 gonna jump in. Like some of us, like we just bought some stuff in or have contract properties under contract in Costa Rica. So we might 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 from other countries and they bought properties and all that kind of thing.
Travis: That's right. The reason I mentioned the US is because there's some complicated formulas in there, but the way that it ends up working out in the end with the US Canada, US tax treaty is you could get yourself into a position where that's income earned in the US is actually tax free until you bring it back to Canada.
Depending what country you're invested 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 and a half percent.
There's a significant spread in that tax. 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 group's taxable capital is between 10 million and 15 million, and then completely phased out when this taxable capital is above 15 million.
Taxable capital, you can think of it as your long term investment. Minus any liabilities you have against them, such as a mortgage. 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 size businesses.
Above 10 million. You're not gonna get the whole 500,000, but now the phase out period is much greater so that you can still benefit from some, from something from that deduction. So in closing I know there's a lot of information, so the budget has been criticized for releasing numerous new initiatives with no indication of how they will be implemented.
Although the budget proposes initiative. 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 outpace 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 there's not, we don't know all the details and the devil truly is in the details herein. 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, I guess if you put it like I'm not quite sure, but if I guess the question is, will HST be applicable to deposits that people are putting on pre construction condo or something.
Travis: I don't know if the timing of that has changed.
I know HST was applicable on new bills anyways, at closing. I don't know if there's been a change now to apply that on the deposits.
Laurel: Okay. Thank you.
Daniel: Thanks for listening to The REITE club podcast, where the focus is on helping all levels of real estate investors advance to the next level and help you customize your life. Be sure to tune in next week at thereiteclub.com/podcast or wherever you listen to podcasts. And if you get a few seconds, please rate the podcast. Wherever you're listening, it helps the show get noticed by others like you, and we truly appreciate it. And don't forget to subscribe.
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