Like many other industries, those in real estate and construction are affected by the 2019 Federal Budget update. A general synopsis of the budget can be found here.
Many business owners and investors are aware of the seemingly never-ending series of budget deficits. This is particularly ironic given that government and other organizations encourage Canadians to decrease their debt and buy homes that they can afford should interest rates increase.
Now that some time has passed to analyze the budget in-depth, our team would like to weigh in on specific 2019 Federal Budget elements that are relevant to real estate and construction.
Home Buyer’s Plan (HBP) limit increase and marriage breakdown resets
With a stated desire to make home ownership more available to first time buyers, the government announced that the $25,000 withdrawal limit will increase to $35,000. The HBP allows qualifying buyers to draw down up to $35,000 (or $70,000 between spouses) from their RRSPs, and in turn repay these funds over 15 years. There is also the option to slowly take the amount into income over this period.
For those who have had a breakdown in their marriage or common-law relationships, the HBP may be more accessible for acquiring a new property or buying out a former spouse. In this instance, various conditions apply.
Having access to a larger deposit, assuming buyers are able to save sufficient funds to benefit from the program, can allow for increased sales and higher prices for homes. With more people waiting longer to buy houses, and parents potentially looking to help their older children out of the family home into their own, the program has the potential to be more widely used. While not the stated intent of the program, increased sales volume and prices may be in store for the real estate industry, outside of other factors.
First-time home buyer incentive
While details are still forthcoming, the government expects to have a shared equity program for new home buyers in place for September 2019. Increased home ownership is expected if buyers can reduce their monthly ownership costs by having 5% or 10% of the initial home price initially paid by the Canada Mortgage and Housing Corporation (CHMC). The lower rate will apply to the purchase of existing homes whereas the 10% will apply to new homes. Family income levels will need to be under $120,000 per year and the amount of the mortgage plus incentives must be no higher than four times the annual household income.
Capping the home values at four times may actually decrease the value of a home many first-time buyers could have qualified to purchase. Ratehub.ca pointed out that on average, new home buyers could see a 15% decrease in the value of a home they are qualified to purchase. As an example, they outline how a family earning $100,000 per year could qualify for a home costing approximately $480,000, If they were to use the program, they would be capped at approximately $405,000 to keep the government incentive/mortgage at $400,000 (below four times their income).
Ultimately, the funds must be repaid at the time of sale. Further details of the program will become available at a later date. The real estate industry could see this as an opportunity to increase sales volume and prices for qualifying properties. Decreases to the prices on borderline homes may also be necessary to qualify for the program. Seeing the impact on spring and summer sales will be interesting as there are a number of Canadians waiting for the fall months to see the details of the program. It’s uncertain if and how the program will continue if the desired results aren’t met. Will the program be cancelled shortly, as happened in British Columbia where a similar program was attempted without the desired results? How would you feel if you were sharing ownership of a property with the government and potentially restricting what can be done with the property for financing purposes later on (for example, using the home equity as leverage for investment purposes).
Multi-unit residential property change
The government is looking to put taxpayers who own multi-unit properties in a similar position to those who own single-family homes when there is a change in use of a unit in the property. A change in use occurs where a property/unit changes from personal to rental/business use, or vice versa. Provided certain conditions are met, where a home has this change, the taxes that would otherwise be owing on the deemed disposition and reacquisition can be deferred. However, the rules require the entire property to be changed, as opposed to a unit of a duplex or a fourplex for example, to qualify for the deferral. Following this year’s Federal Budget update, a unit may have a change in use deferral after March 19, 2019, versus an entire property. This is a positive change.
Beneficial ownership disclosure
Reminders in the 2019 Federal Budget exist for prior efforts to learn more of the true ownership of federal companies and beneficiaries of trusts. Rules relating to federally incorporated companies (with various provinces indicating a willingness to have similar legislation created) are already in place and will be amended. For family trusts, these rules will come into force in 2021. For the most, this will not be an enormous issue; simply just a little more paperwork to watch for. These changes may make it easier for the government and law agencies to identify, track, and seize assets in a timely fashion.
The budget documentation notes efforts to combat mortgage fraud and money laundering within the real estate and construction industry. With regards to money laundering, British Columbia was specifically noted as a target. Through Statistics Canada, the government will begin a two-year project of gathering additional information to help attack tax compliance and anti-money laundering. Unquestionably, the government is looking to access more and more data and from this to develop further measures for addressing tax concerns, and additionally mortgage fraud, money laundering and the like.
Accelerated tax deductions for specified electric, hydrogen, and hybrid vehicles
Consideration for a qualifying energy-efficient vehicle is now virtually a requirement. New vehicles purchased before 2024 may qualify for a 100% write-off in the first year of ownership. And up to $55,000 plus sales taxes are eligible as compared to the more predominant $32,000 plus sales taxes for many vehicles. However, more qualifying construction-oriented vehicles may not have this limit. Additional details will be available in the near future, but it’s worthwhile to consider acquiring a vehicle shortly before your fiscal year-end.
Personally creating a proprietorship may be warranted, if needed, to eliminate personal automobile benefits of corporate-owned vehicles. Assuming you will be able to drive the vehicle exclusively for business use for the given period of time, you can avoid a large personal proration to the deduction which would reduce your claim. Moreover, there is a $5,000 purchase incentive for electric or fuel cell vehicles that cost up to $45,000, although this incentive cannot be combined with the 100% deduction.
Real estate audit teams
There will be an additional $50 million dollars invested into four real estate audit teams, expected to focus on British Colombia and Ontario. Presumably, this is a result of prior successes, as well as the statistics indicating the large tax recoveries that have arisen between income and sales taxes.
In particular, they will focus on the following:
- Transactions made on flipping activities to ensure profits are recorded as income (vs. capital gain or non-taxable)
- Ensuring commission income is reported as income
- Failure to report the disposition of principal residences
- Inappropriately claimed principal residence exemptions
- GST/HST on residential properties
Likely this should come as no surprise, but the audit list is virtually identical to the targets provided to me on my initial interview with the leader of the first real estate audit team a few years ago, with the exception of reporting principal residence transactions which at that time wasn’t a requirement. They were experiencing, and continue to experience, success on “low hanging fruit”. Why change what is working?
If the ultimate result of these efforts is removing inappropriate activities, the real estate industry will benefit. The challenge will be in differentiating legitimate planning from inappropriate. As we’ve been warning for a number of years, the real estate industry has been a growing target. Investors and business owners in real estate need to ensure everything is done the right way, know where they stand with compliance quality, and be clear on the level of aggressiveness of their planning.
Supply and demand
Budget 2017 introduced the National Housing Strategy to help Canadians find affordable housing. This was to be a ten-year program where $40 billion dollars was invested to build 100,000 new affordable housing units plus repair 300,000 additional units. To date, seven of the provinces and territories have signed agreements with the federal government related to the program, with various spin-off programs created. Federal Budget 2019 looks to expand on this and “increase fairness in the real estate sector.”
The First-Time Home Buyer Incentive will see the government allocate $1.25 billion to the program. Conceptually, Canadians can buy homes that they can afford according to the budget release. While they are actually borrowing more because the funds must be repaid, cash flow is made easier on purchasers. For example, if you were to stretch out vehicle payments over more years, the vehicle doesn’t become more affordable; there’s simply a different financing plan in place. Albeit the home plan doesn’t appear to come with horrendous interest rates and may in fact decrease the price of the homes being acquired so can still make plenty of sense.
To the government’s credit, they recognize that there is also a “supply” side to the equation in providing affordable housing. While we may disagree on the quality of the programs trying to provide housing, and whether other federal, provincial and municipal activities and policies run counter to the strategy, there is a supply side to the problem/opportunity.
Past vs. present efforts
With the 2017 efforts, the Rental Construction Financing Initiative was developed as a four-year program to provide low-cost loans for new housing to modest and middle-income Canadians. Enhancements were made in 2018 to build 14,000 units. To date, the budget indicates that only 500 units have been approved across the country in relation to the 2018 enhancements.
For 2019, the Rental Construction Financing Initiative will be extended to 2027-2028 with $10 billion of funding aiming to create an additional 42,500 new units nationally. Historically, the real estate industry hasn’t seen many incentives compared to the requirements to receive the funding. Perhaps it’s time for a fresh look into the programs with a more targeted geographic focus.
2019 Federal Budget announced that a Housing Supply Challenge will be established with a $300 million budget. Details of the programs are still being developed for the summer. According to Budget 2019, the aim is to “provide new resources to find new solutions to enhance housing supply and provide a platform to share these models” across Canada.
Smaller announcements include allocations from the CMHC to provide $4 million to a Federal-British Columbia initiative called the Expert Panel on the Future of Housing Supply and Affordability. An additional $5 million is reserved for modelling and data collection.
Investing in Canada plan
In the 2016 budget, $14.4 billion was allocated to infrastructure upgrades while the 2017 budget committed to an additional $81.2 billion for public transit, green infrastructure, social infrastructure and infrastructure that supports trade, transportation, and rural and northern communities.
Overall, the 2019 Federal Budget provides little change from a tax perspective. Spending plans have not been developed in a way that’s comprehensive or considers a balanced budget. Competitive tax rates with the United States, including further commentary on tax reform, have not been addressed at this time. But significant considerations for the real estate and construction industry were made.
If you are interested in any further clarification surrounding Federal Budget 2019 or require support in preparing your business and investing activities for this budget, please get in touch.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Central Canada Industry Leader, Real Estate and Construction