REALTOR® Proposals for Canada’s Long Term Prosperity
We Realtors are lobbying these important issues which are critical for the economy. If you are a Parliamentarian or a local MPP reading this post, please take note. We are asking the government to maintain the value of the Home Buyers’ Plan for first-time home buyers through indexation.
We are also calling for the Home Buyers’ Plan to be extended after a significant life change like the death of a spouse, job relocation or a marital breakdown.
Finally, we are asking the government to facilitate income property reinvestment by allowing the deferral of previously written-off depreciation (Capital Cost Allowance (CCA) recapture).
Revisiting Home Buyer's Plan
By allowing Canadians to withdraw up to $25,000 from their RRSP, the HBP reduces home buyers’ obligation to lenders and can reduce or eliminate costly mortgage loan insurance. Since its inception in 1992, this critical program has helped make home ownership a more affordable reality for over two million Canadians without detracting from retirement savings goals.
Unfortunately, inflation steadily erodes the purchasing power of the HBP. In its 20 year history, the HBP has only been adjusted once, from $20,000 to $25,000 in Budget 2009. While this restored much of the Plan’s purchasing power at the time, inflation is once again steadily eroding the buying power of the HBP.
A first-time buyer in 2012 is only receiving $23,850 in value from the HBP in 2009 dollars, not $25,000. For this reason, REALTORS® recommend the HBP withdrawal limit be indexed to inflation in $2,500 increments. It is important to emphasize that adjusting the withdrawal limit to compensate for inflation serves to maintain, not increase, the Plan’s value.
Adjusting in increments is a similar approach used to maintain the value of Tax Free Savings Accounts and would not interfere with deficit reduction targets and other fiscal and monetary objectives. Indeed, using the last time the HBP was adjusted as the starting point (Budget 2009), this approach would cost nothing until 2015, at which time the plan would adjust by $2,500 at a cost of $7.5 million. A further $2,500 increase would occur in 2019 at an additional cost of $7.5 million.
Stimulate Community Reinvestment
Over time, buildings suffer from wear and tear. In recognition of this, depreciation of buildings used for business or investment activities can be deducted from taxable income.
This is known as Capital Cost Allowance (CCA). Each building depreciates up to the original amount paid for the structure and its component parts. A certain percentage, typically 4 per cent, can be written off each year as a deduction against the owner’s income from the property. The amount left over, still available to be deducted over future years at 4 per cent, is known as the undepreciated capital cost (UCC) balance.
At the time of sale of a property, there is a reconciling on the amount of depreciation taken over the period of ownership. If the proceeds on sale of the building are less than the undepreciated capital cost balance, then the difference can be written off as a loss. However, if the proceeds of the sale are more than the undepreciated capital cost balance, the difference up to the original cost of the building is added to the seller’s income, upon which they pay tax. This is known as “recapture”.
Because most of time building owners are required to pay back previously claimed depreciation (CCA recapture) from the proceeds of sale, they often lack sufficient funds to reinvest in a property of similar value. This is a significant disincentive to selling income properties. It is also exceptional as CCA recapture can be deferred for many other types of business assets.
Budget 2013 presents an opportunity to remove this major obstacle to income property reinvestment. Allowing owners, who reinvest in other properties, the ability to defer recapture of CCA when they sell would motivate reinvestment which in turn encourages new entrants into the sector and rejuvenates communities. Image one demonstrates how the current system discourages investors from selling their income property and trading up.
By forcing the investor to repay CCA up front they are not left with enough funds to make a purchase of equal or greater value. Image two demonstrates how rolling over the undepreciated capital cost by subtracting the amount that would be recaptured from the undepreciated capital cost balance of the new building allows owners to reinvest without short changing the tax system.
This proposal levels the playing field for small investors. Indeed, over half of the individuals who would benefit from the proposed policy change have net incomes below $50,000. The Income Tax Act already provides real estate developers with a mechanism to offset CCA recapture when reinvesting by excluding them from the rental loss restriction with which smaller investors must comply.
As a result, developers can already write down the amount of the CCA recapture against the CCA balance of the replacement property immediately. This creates a pooling effect to defer the effect of recaptured depreciation.
By encouraging investors to reinvest, this proposal would help many sectors of the economy by creating jobs and generating growth. Altus Group found a typical multi-unit income property transaction in three of Canada’s largest cities creates $287,850 in spin-off spending, including renovations, repairs, professional fees, and revenue for all levels of government.
It is also estimated more than one job is created for every two transactions. This proposal would have a minimal net cost of $12 million in the first year and earn the government $7 million in year two. The direct cost is offset considerably by the collection of other revenue, including Capital Gains Tax from property sales, and GST/HST and income tax from spin-off activity. In addition, deferred CCA is ultimately collected when income property owners choose not to reinvest.
