Every year around this time, the Federal Government comes out with a new year budget.
We all pay attention to see if the new year budget is taking care of us or taking money away from us.
As a taxpayer, we also want to know how the government spends our money.
If the government does not have enough money to spend, who do they go to?
Us.
The 2024-2025 Federal budget just came out this week.
For the nine consecutive years we are running into a deficit, which is not a surprise.
Someone said it is the worst federal budget in 40 years while some said it is not as bad as they thought.
If you want to know how the government spends on defense, business, education or AI, this episode is not for you.
I am going to focus only on one thing, the one change that affects the housing market and investment, that is the capital gain tax.
After all, Housing, affordability and generational fairness are the key in this budget.
Not only will I talk about what the change is, who is being impacted, when the change begins.
I will give you my 3 predictions with this change.
First, let’s talk about the change.
For the first time since 2001, the government is changing the inclusion rate for capital gain.
Wait, what is the inclusion rate for capital gains?
It is the percentage of an amount that must be included in taxable income.
For example if the inclusion rate is 75%, 75% of the capital gains must be reported as your income.
Back in 2001, the government lowered the inclusion rate from 75% to 50%.
So instead of 75% of the capital gain earned, only 50% is reported as our income.
The remaining half is non taxable.
Everyone was happy about it.
Budget 2024 proposes to increase the inclusion rate.
For individuals, the inclusion rate below the $250,000 threshold will stay 50%.
Above the $250,000 threshold, it increases 66 per cent.
For corporation and trust, there is no threshold. Inclusion rate is fixed at 66%.
Not 50% anymore.
The new rules will apply to capital gains realized on or after June 25, 2024.
Basically more tax for individuals and even more tax for corporations and trusts.
The government believes that this capital tax change will get them an extra $19 Billion dollars in the next 5 years to fund their 19 Billion dollars housing plan.
Now that you know about the change, here are my predictions!
My Prediction #1 - Supply Problem
With the new capital gain tax, individuals will think twice before selling their investment properties with capital gains more than $250K.
What type of properties are the ones that are likely to make more than $250K?
Townhouses, Detached or Condos that were bought in 2017 or before.
What is one thing in common for these properties?
The cash flow is much better.
Say a two bedroom unit bought at $600K back in 2017 can get a rent of $3200 per month today.
With rental yield at 6%, $400K mortgage at 5.3% mortgage rate, pretty much break even.
If you have an investment like this, generating eggs for you every month, will you sell it or keep it as a long term investment?
Remember if you choose to sell, a fair amount of the profit will be taxed.
For corporations it is even worse, 33% of the gain goes to the tax.
This new tax is going to make people not willing to sell units that they bought earlier.
Around 50% of investment housing units were bought before 2017, that means effectively 50% of available units are suddenly not for sale.
Less incentive to sell means 50% of units will be frozen by investors, and won't be released to end-users.
The supply has just been further reduced by this new tax rule.
My Prediction #2 - Demand Problem
With today’s higher interest rate, most investors slow down a bit.
The new capital gain tax has just further discouraged them.
When a developer launches a new condo project, they need to sell 70% to get construction finance.
If there are not enough investors, it won’t get built.
Should we rely on first time home buyers to invest in a new project?
Of course not.
They are the one who we need to help and to protect.
It will be a disaster if a developer locks down and then returns their 20% deposit after 5 years when the project is canceled.
Not enough buyers, project canceled is a demand problem.
But today’s demand problem will become a supply problem in a few years.
On one hand, the government has an ambitious plan to build over 3 Million homes by 2031.
On the other hand, they have just created a supply problem.
Without investors and developers in the private sector, the government is better able to build more public housing.
My prediction #3 - Inflation Problem
For the past 2 years, the Bank of Canada has been fighting inflation.
Canadians are impacted big time by the high interest rate.
We finally saw the end of the tunnel in the last few months, inflation came down below 3% and we are all eagering waiting for the rate cuts.
The new capital gain tax just added uncertainty and reduced attraction to invest.
Investors are uncertain if they should invest in Canada’s companies, funds, bonds, stocks or real estates.
Here is the thing.
50% of our daily consumption is imported goods.
If investors choose to invest in another country, our currency drops and imported goods just get more expensive.
When inflation goes up again, everything goes higher, including food and shelter, that is rent.
So I see the supply problem in resale, demand problem in pre-construction turns to supply problem in the future and, eventually Inflation problem.
For the first time, I hope I am wrong.
This episode should give you some inspiration.
What do you think about this new capital gain tax? Good or Bad?
Do you think the inclusion rate will go back to 50% soon?
Are you planning to sell your unit before the new capital gain tax kicks in?
If so, are you confident you can close the transaction before Jun 25, 2024?
Comment below to voice your opinion
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