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Canadian Budget 2016 and its Effects on Real Estate

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2016 has been a year of changes in the Canadian real estate market, with foreign tax implementations to cool down heated markets, talks of ending welcome taxes, and mortgage pre-requisites due to crack down by the end of November.

Budget 2016, which was announced with the election of the new liberal government, ushered in new regulations that will affect the provincial and national real estate markets for tenants, homeowners, buyers and investors. Here are some of the highlights:

  • Montreal residential property owners will see an average increase of 1.9 per cent on their property taxes as part of the 2016 budget, though specific rates vary widely by borough and property type. Single family homes will see the highest tax increases while condos and multi-family dwellings will be less effected.
  • Half a million dollars will be spend on foreign buyer data, hoping to collect more information about purchases that will effect housing affordability.
  •  More rental units projected to ensure suitable accommodation for tenants.
  • Budget 2016 campaigns to improve accessibility and standards of social housing, particularly for seniors and First Nations communities.
  • Several tax loopholes to be investigated and closed, preventing tax evasion in real estate investments
  • Tougher mortgage regulations to be expected across the board.

Related: Montreal vs Toronto: A Guide for Real Estate Investors >>

Half a million spent on foreign buyer data

The Canadian government has pledged to invest $500,000 into Statistics Canada, with the goal of developing methods to gather data on purchases of Canadian properties by foreign buyers.

Unlike U.S, Australia and the UK, Canada does not yet track data that may affect housing affordability. While statistics on housing prices and sales are recorded, there is still a large information gap when it comes to measuring the extent of foreign home ownership and any potential price impact on local markets.

The goal of the half a million pledge is twofold: to regulate overheated markets such as Toronto and Vancouver, where housing affordability has become a serious regional problem, and to develop a collaborative policies in which municipal and provincial governments work hand in hand to ensure housing affordability.

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The creation of an Affordable Rental Housing Innovation Fund

Budget 2016 will invest $208.3 million over five years, into an “Affordable Rental Housing Innovation Fund,”administered by the Canada Mortgage and Housing Corporation (CMHC).

This fund will be invested into constructing 4,000 new affordable rental projects over the next 5 years, with the hopes of easing the pressure in markets where vacancy rates are very low and prices are high.

Aside from new constructions, the money will be used to test out more innovative housing models, such as mixed-use buildings and resource efficient buildings.

The new initiative will also provide low interest loans to developers planning to construct new, purpose-built rental projects.

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Related article: Demographic trends in Montreal, 2016 and beyond >>

More affordable housing for seniors 

$208.3 million has been allocated to the design, construction and management of affordable housing projects for seniors. The funding will come from the Investment in Affordable Housing initiative and will not require provinces or territories to cost-match these investments.

The Budget indicates that the spending is intended to help seniors stay in their homes as long as possible. This extends to renovations on pre-existing homes owned by senior citizens, in the cases where medical/assistive extensions such as ramps, mobility aids and security devices are needed.

Related: Trend Watch – Senior Housing >>

Improved standards of social housing 

The Budget also includes initiatives to improve accessibility and standards of social housing, particularly for seniors and First Nations communities.

$573.9 million has been allocated to retrofits and renovations of social housing projects, specifically tackling required repairs while also improving energy efficiency and water use in these buildings.

$30 million is budgeted over the next two years to maintain rent-geared-to-income prices for those relying on social housing.

$111.8 million is budgeted towards homelessness initiatives across Canada, as means of ensuring that Canada’s destitute have easy and safe access to social housing.

Lastly, $731 million will be used to address First Nations peoples’ housing needs on reserves, including ensuring affordable housing for the North and Inuit communities.

Crack downs on tax evasions and tax avoidance in the real estate market

The feds will be investing $444.4 million over half a decade to crack down on tax evasion and avoidance. For example, they will be investigating potential abuse of the capital gains loophole and whether or not properties purchased by investors are being declared as a primary residences or as businesses.

Their expected return for this investment: $2.6 billion in previously lost revenue. $351.6 million have also been pledged towards improving the CRA’s ability to collect tax owed, from which another $7.4 billion in tax debt collected is projected over the next five years.

Take note investors—anyone partaking in complex or multiple transactions from condo assignment sales, to home flips, to purchases involving foreign partners —now is the time to talk to a tax specialist to make sure that all former and future endeavours are thoroughly in the clear.

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No more capital gains exemptions for real estate donations.

Budget 2016 eliminates this tax exemption proposed last year regarding the exemption of capital gains of donative private real estate (to a registered charity).

Tougher mortgage rules and the no more rock-bottom rates

Gone are the days of 1.9%.

The Budget proposed a few changes regarding their dealings with major banks and lending institutions, and these decisions will trickle down to impact homeowners and buyers.

Specifically, it introduces a “Bail-in” regime; which makes bank shareholders and creditors responsible for the bank’s risks instead of taxpayers. What this means is that authorities could convert a bank’s long-term debt into common shares so that the bank could keep operating in the case that it collapsed. Banks will need to personally cover the capital owed in mortgage loan debts, rather than resorting to a government bail-out.

This “Bail-in” regime is “in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as ‘too-big-to-fail’,” states the Budget.

Banks will prepare for the costs and risks that come along with increased regulation and responsibility by raising their consumer rates. For the average home buyer, this means that mortgage rates will increase, and applicants with lower credit scores, smaller full time employment income, or higher debt ratios may no longer secure the best rates or qualify for a mortgage at all.

Read more about the new mortgage regulations here >>  

What remains undelivered in this budget?

The Liberal government had promised to loosen requirements for the Home Buyer’s Plan (HBP), effectively easing the financial burden of homeownership on first time buyers. This change would have helped HBP applicants dealing with unforeseen life events such as work relocation, divorce, or death of a spouse. This change did not come into fruition in the new budget.

Nor did an increase in the capital gains inclusion rate, which was speculated to jump from 50% to 66.67% or even as high as 75%.

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