Thursday, November 23, 2006

Realtors want tax breaks for small landlords (This could have major implications for Canada's overall inflation rate and property market stability)

Hi All,

Tax implications are a huge influence on an owners decision to sell a property.

Capital Gains Tax on the proceeds of a sale of a non-primary residence can be exorbitant and deters successful real estate investors from selling properties.

A lack of supply in a market with excess demand drives up prices and does so quickly. The bigger and more popular the asset the more effect it will have the economy as a whole. Economics 101 stuff.

Real Estate is the single most expensive asset the average person will ever buy. The market for this asset is a major engine in a Canada's GDP and has a big impact inflation and the Bank of Canada's decision on interest rates.

Up to the June/July of this year, Vancouvers property market was very hot. Listings were in very short supply and sold very quickly and prices were increasing by more than 1% per month. This situation was common across the country.

The Bank of Canada, increased interest rates because of concerns about inflation, specifically, home price inflation in Western Canada.

30-35% of Downtown's stock of condo's is owned by investors. Had these people been able to sell their properties tax free, the quick price increases would not have occurred.

There would have been a slower increase in price that would have lasted longer, because the Bank of Canada would not have intervened as early to cool the market. Prices would have gone up and as high as they eventually went, but would have done so in a more stable and measured manner.

A liquid market is a stable market.

Looking forward to hearing what you think.


Globe and Mail Update

A group of Canadian realtors is calling on Federal Finance Minister Jim Flaherty to extend capital gains tax relief to small landlords, saying the move will level the taxation playing field and encourage property owners to update and maintain rental housing.

The Canadian Real Estate Association, which represents 88,000 full-service realtors, is asking Mr. Flaherty to allow landlords with smaller holdings and fewer than five employees to defer capital gains and capital cost allowance taxes when they sell their investment property, provided they put that money into another investment property within a year.

The Conservative government campaign included a pledge to provide individuals and companies with the ability to defer capital gains taxes by allowing them to reinvest proceeds within a certain time frame. Prime Minister Stephen Harper spoke of introducing rollovers for shares, bonds, mutual funds and family cottages. He did not, however, mention small investment properties.

Mr. Flaherty is slated to unveil his economic plan today and he is expected to signal the need for more personal and business tax cuts to help preserve Canada's living standards.

CREA does not expect the minister will unveil any measures related to small real estate investors Thursday, but is nevertheless forging ahead, trying to secure meetings with Mr. Flaherty's office and other members of parliament. They have been calling for similar measures since 2001.

"The Conservative government said they were going to address capital gains tax," said James Brennan, a spokesman for the CREA. "They left the door open to deal with the issue of capital gains tax as a whole."

In a paper submitted to the House of Commons Standing Committee on Finance last month, CREA said their proposed changes to the tax legislation would alleviate current inequities that place small real estate investors at a "significant disadvantage" when compared with many other investment vehicles.

"The Income Tax Act effectively eliminates the incentive for many property holders to consider a sale due to the impending tax burden," the paper said. "The situation is particularly punitive for the small investor" who manages property but is denied the tax benefits given to larger investors because they have less than five employees.

The CREA also said that small investors are currently holding onto their investment properties to avoid the tax hit that would arise from selling and re-investing. The high taxes preventing reinvestment in income property are stunting Canada's productivity and labour mobility.

"Households can now move their belongings, stocks and bonds, but are unable to move their real property investments without facing substantial tax consequences," the CREA said.

The economic spinoffs of having a real estate transaction take place are notable, Mr. Brennan said, since most renovations take place around the time a property is bought or sold.

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