The 2024 Federal Budget has proposed a number of changes that have caused an uproar with voters and the LinkedIn community. I thought it would be important to run through the changes and how they impact Real Estate Investors and Developers.
At a macro-level, real estate gets built and funded based on free-flowing capital. Our clients seek opportunities to place their capital and also realize returns on this capital to move on to the next opportunity. The returns generated are then used to invest in the economy by way of building businesses, innovation, and creating high paying jobs for a productive workforce.
Canada has to compete at the global level for capital and similar to anyone running a business we need to be easy to do business with. The stance taken by the Trudeau government in this budget is the opposite of pro-investment in an era where we have anemic economic growth and next to zero job creation by a private sector grappling with high interest rates and tightened consumer spending.
The below list is by no means every single change but the highlights being proposed and their general implications to our clients. If you’d like to explore how these tax changes impact your portfolio or your real estate firm feel free to reach out for a complimentary consultation at Info@FinalyzeCFO.com or www.FinalyzeCFO.com. As the Trusted CFO Advisor to Real Estate Developers and Investment Firms we are here to help you every step of the way in this challenging environment. Our team of talented real estate tax accountants can help you navigate through these changes.
Let’s dive right in to my personal top 5 changes with their impact on Real Estate Investors and Developers:
- Increase in Capital Gains Inclusion Rate
I am sure you have seen a ton of articles on this but at a high-level this change of the inclusion rate from 1/2 to 2/3 will likely cause increased property sales and investment disposition activity by June 24, 2024. For my realtor and investment advisor friends out there buckle your seatbelts!
From a longer-term perspective this is a terrible change for anyone that is making investments, building their business, or planning their retirement. In short, in most cases you will have loss an extra 17% of your after-tax cash available to either make your next investment or retire on.
Instead of incentivizing more investment and productivity this change does the opposite and makes tax compliance a lot more complicated!
2. Lifetime Capital Gains Exemption (LCGE) and Canadian Entrepreneur Incentive
Generally, this change provides additional opportunities to shelter more of the capital gains on disposal of qualifying small business shares under certain conditions. Unfortunately the incremental change doesn’t necessarily offset the negative impact of the increased capital gains inclusion rate.
3. Home Buyers Plan Withdrawal Increase
Do first time home buyers have extra cash in their RRSP to buy a property? Well if you are that rare bunch that do then you can take out $60K per person instead of the $35K you can today with a 3 year deferral on repayment.
Similar to other incentives for home buyers the main challenge is we need more homes for them to purchase and more higher paying jobs to give them the cash flow to qualify for these purchases.
4. Higher CCA on Purpose Built Rentals
Typically buildings have 4% tax deprecation and a half-year rule for the first year of putting them into use. You will now be able to write-off 10% tax depreciation (CCA) for buildings that are constructed starting April 16, 2024 with move-ins by January 1, 2036. An additional incentive here is no half-year rule if you put the building in-use before 2028.
Unfortunately these benefits aren’t realized until after you have built the building and are in the leasing up stage which usually has lower income in the first year. The real challenge developers are having is to get a handle on the full costs of buildings, making a market profit, and ensuring the capital stack is viable. In most cases, this is a down the road benefit and doesn’t help us get more buildings built.
5. Higher CCA on Patents and Technology
In an effort to incentivize businesses to invest in patents and technology the Feds have increased tax depreciation rates from 25%/30%/55% to 100% if purchased April 16, 2024 and put in-use by Jan 1, 2027.
This may help industries who expend a lot in technology and patents so I will leave it to experts in those fields to give their opinion. From a real estate perspective most of the software has moved to SAAS and so the software is being paid for and written-off as an expense during the contract resulting in little to no impact. For those in the proptech space this could be a great benefit!
You can find more information on the 2024 Canadian Federal Budget here.
At Finalyze Real Estate CFO Services we are the Trusted CFO Advisor to Real Estate Developers and Investment Firms. Our team would be pleased to discuss how these changes impact your portfolio and your real estate investment strategy. Feel free to reach out at Info@FinalyzeCFO.com or www.FinalyzeCFO.com to learn more about our unique Plan, Raise, and Manage approach to your real estate firm.