Association urges removal of tax on reinvestment

SOURCE: http://www.calgaryherald.com/business/Income+property+sales+fuel+millions+economic+spinoffs/2036230/story.html

By Mario Toneguzzi, Calgary Herald Residential income property sales generate millions of dollars in economic activity in various industries as well as creating a number of jobs throughout the country.

 And a new economic study underscores the need to remove tax barriers to property reinvestment, said the Canadian Real Estate Association.

“Spinoff benefits generated by ancillary spending in (Toronto, Calgary and Vancouver) totaled $137 million per year over the 2006 to 2008 period,” said the Altus Group report prepared for the association on the economic impact of commercial multi-unit residential property transactions in the three major Canadians centers.

A total of $287,850 in extra spending was generated by the typical multi-unit residential property transaction in these three areas.

The report also said these transactions, which account for about 15 per cent of all commercial transactions, generate direct and indirect employment in the Canadian economy.

It said these transactions in the three centers generated an estimated 762 direct and indirect jobs across Canada on an average annual basis during the period between 2006 and 2008.

The average multi-unit residential property transaction produces fees for professional services such as lawyers, real estate agents, appraisers and financial institutions in addition to fees and tax revenue to government. They can also precipitate capital expenditures to upgrade the buildings.

The real estate association said many income property owners are reluctant to sell and reinvest because of the capital gains tax and recaptured capital cost allowance. According to the federal government, the capital cost allowance is a non-refundable tax deduction that reduces taxes owed by permitting the cost of business-related assets to be deducted from income over a prescribed number of years.

“I don’t think our government understands (the economic spinoff), otherwise there would be removal of the barriers to investing in real estate,” said Dale Ripplinger, Canadian Real Estate Association president.

“The biggest issue right now is the capital gains tax system, which does not allow an owner of a residential real estate property to sell a specific property and roll over the capital gain into a subsequent purchase,” he said. “So what happens is that as soon as a revenue-producing real estate property is sold, it triggers a capital gain. So consequently a lot of properties don’t come on the market that would otherwise and free capital to invest in larger projects.”

The association has been lobbying the federal government to make tax changes that would allow people to re-invest capital gains into subsequent purchases.

“To unlock the capital that’s currently locked in to revenue-producing properties, but also to help create more rental situations,” said Ripplinger. “We’re seeing in a lot of Canadian markets huge demand for housing and a shortage of decent rental accommodations. Our proposal with the re-investment option for real estate sellers would certainly stimulate more investment in residential rental property.”

According to research by Avison Young in Calgary, the first seven months of this year saw only three sales in the multi-family market locally for a combined dollar volume of $23.6 million and two of the sales were purchases by social housing agencies for subsidized or low-income housing.

For the year in 2008, the commercial real estate firm’s mid-year investment review said there were 13 multi-family property transactions recorded with a combined total selling price of $224 million, while in 2007 there were 57 sales for $493 million.

The ripple effect from a commercial real estate transaction is significant, said Richard Pootmans, business development manager for real estate at Calgary Economic Development.

“It’s sometimes not fully appreciated how the tax revenue, the tax base, appreciates with the contribution that the builders and developers make as well to the asset base of residential units,” he said. “It doesn’t seem to be top of mind, but from an economic development point of view, we’re always very excited to see these developments going forward because they are in fact adding to the strength of our tax base.”

The Altus Group analysis found that for transactions valued at less than $3 million, the average ancillary spending was $124,400 and it was $582,000 for property transactions $3 million and higher.

The estimated annual expenditures generated by the average multiunit residential property transaction in the report’s selected cities were $476,800 in Toronto, $233,472 in Vancouver and $168,011 in Calgary.

Between 2006 and 2008, an average of 476 multi-unit residential properties changed hands annually in Toronto, Calgary and Vancouver. In those three years, those transactions contributed about $412 million in spin-off benefits to those three cities, said the report.

mtoneguzzi@theherald.canwest.com

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