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Higher tax on capital gains unlikely to deter property investment

There's speculation that the federal budget coming Tuesday will include a tax measure that would hit people buying and then selling investment properties in hot housing markets.

That's not how higher taxes on capital gains would be billed, but people buying investment properties in addition to their principal residences would be affected. In reality, they'll probably just shrug off the extra tax cost.

"I don't think, to be honest, that it would deter anybody," said David Fleming, a real estate agent and author of

Such is the level of enthusiasm about investing in residential real estate today, at least in Toronto. Mr. Fleming said there's been a wave of optimism in recent months – the feeling that Toronto housing is correction proof – and this has increased the level of interest in people buying investment properties.

"It's crazy because, as the market has continued to go up, you would expect people to get a little more cautious," Mr. Fleming said. "But I've seen more bears come over to the bull side. They're people who have been waiting for the drop and are now saying, okay, I get it, it's not happening."

Rumours of a higher inclusion rate on capital gains of all types, not strictly investment properties, have been circulating in the weeks leading up to the March 22 budget.

"I think it's a real possibility," CIBC World Markets economist Benjamin Tal said in an e-mail. Currently, you pay tax on 50 per cent of the gain when you sell an asset such as a stock, mutual fund or investment property for more than you paid. To raise tax revenue, the federal government could increase the inclusion rate to 66.6 per cent or 75 per cent (both levels applied at different times in the past).

There is no capital gains tax on the sale of a principal residence, and political annihilation awaits the government that tries to change this. In fact, taxing any portion of house gains would be bad policy at a time when governments are worrying about whether people are saving adequately for retirement. Many people will need their home equity to pay their way into long-term care in old age.

A higher capital gains inclusion rate on investment properties and other assets could be billed as another way for the Liberal government to help the middle class while putting a somewhat higher tax burden on wealthier people for whom capital gains are a more significant factor. Already, income tax rates have been cut for middle earners and raised for people making more than $200,000 per year.

For securities such as stocks and funds, the amount of any increase in the inclusion rate will be key. A modest increase could put the tax on capital gains at roughly the same level as on dividends, which have a big advantage in taxable accounts over interest payments from bonds and savings accounts. A larger increase in capital gains taxes might sway investors to choose dividend stocks as opposed to those with the most growth potential.

As for homes and condos bought as an investment, Mr. Tal said a higher inclusion rate on capital gains would not be a game-changer because speculative buying and selling of investment properties hasn't been a huge factor in the market. As evidence, he cited a May, 2015, Canada Mortgage and Housing Corp. survey of condominium owners in Toronto and Vancouver. The survey of 42,191 households found that 83.8 per cent owned one condo unit and lived in it, while 16.2 per cent own their primary residence and at least one other unit. A little more than half of those who had investment condos expect to hold their most recently bought property for more than five years, which suggests they're investing for rental income and not capital gains.

Mr. Fleming said the bulk of his business is still primary residences, but he's working with several clients, Canadian and American, who are looking for condos and multiunit houses. His explanation is that investors are simply reacting to unpredictable stock markets and returns of close to zero from safe investments.

Toronto real estate agent Laurin Jeffrey said he has clients looking to invest in houses with two or three units that can be rented. He's also skeptical a higher tax on capital gains will have an impact on housing. Tougher rules for minimum down payments on houses worth more than $500,000 took effect in February, yet that was a huge month for sales. "At this point," Mr. Jeffrey said, "I don't see there being much that will cool the market."

Hot times in Toronto real estate

Real estate agents report increasing interest in buying investment properties, and no wonder. Prices and sales are soaring in the Toronto area. There's speculation that the federal budget to be released March 22 could introduce a higher tax rate on capital gains, which in theory would make investment properties a little less attractive.

416 Sales905 SalesTotal Sales416 Avg price905 Avg priceTotal Avg price
Semi - Detached239486725$848,835$534,476$638,106
Condo Apartment1,4396072,046$435,579$327,086$403,392
Year-over-year % change
Semi - Detached21.9%21.8%21.8%20.7%12.7%16.1%
Condo Apartment25.6%26.7%25.9%17.8%1.6%13.4%

Source: Toronto Real Estate Board.

416: Toronto proper; 905: surrounding suburbs.  Sales and average sale prices are based on firm transactions entered into the TREB MLS® system between the first and last day of February, 2016; Past monthly and year-to-date figures are revised on a monthly basis.

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