The federal budget 2024 is here, and the rant I give at the beginning of this video says it all. While there are some good things in the federal budget 2024 for real estate investors, the budget overall gets a D rating from me, and on some points an F. And fair warning that more changes are potentially coming in areas related to capital gains. In the video, and video transcript, below I cover key points in the budget for real estate investors, and a couple of really odd inclusions. I’ll be diving into more details in the coming weeks once we’ve had time to digest the related legislation. This is intended as high-level overview for real estate investors on federal budget 2024.
Video Transcript: Federal Budget 2024 for real estate investors
We’ve had the opportunity now to see the federal budget 2024. I won’t pretend yet to have gone through the complete budget in terms of the detailed tax legislation. So over the next couple of weeks, as I do that, some of my opinions may be tweaked slightly and other points often are brought up after the budgets because they’re buried in that legislation. But certainly we can talk in general.
I’m George Dube,
saving the world, from tax, one bow tie at a time™.
My budget rant
Unquestionably, I’m a fiscal hawk. I like balanced budgets. I believe in wealth creation. I believe in productivity improvement. I do not believe enforced wealth redistribution as such. You can probably tell I was not an overall fan of the budget. I acknowledge there were some good elements, particularly on the real estate side, but a lot of negative. Everyone, it seems from as long as I remember, reviewing budgets will be able to criticize any particular budget ’cause it didn’t spend money on their particular pet project, whatever that may be. Well, for those people that are looking for their pet projects, I can assure you it evaporated with the interest.
Now, the government is putting together a program, they’re wealth redistribution program, which is moving beyond borrowing heavily to taxing and of course maintaining their ability to spend. They’re effectively and by saying there, really it’s our generation, my generation, our parents’ generation that are abdicating our responsibility and leaving the problems to our kids and grandkids.
Changes to capital gains inclusion rates
Parts that can’t escape attention is the changes to the capital gains inclusion rates. Those are jumping from 50% to two thirds with a couple of little idiosyncrasies. First, the government is choosing to punish corporations and trusts and saying that all of their capital gains will now be taxed at two thirds as compared to the former 50%. Although in fairness, in years before, those percentages were at two thirds and three quarters, but had been 50% for quite a while. Now, for individuals, the 50% will remain for the first $250,000 of capital gains and then jump to the same two thirds.
The government assured us that this is a very, very, very small percentage of people that will be impacted. I believe they ended something to the effect of 0.13% or something of that nature. Let me tell you who it actually impacts:
you and your parents.
Well, you’re thinking, I’m not part of the 0.13% richest of Canadians in the world in Canada, I guess. Well, in order to have a $250,000 capital gain, it doesn’t take much. If you have a cottage, for example, a mutual fund stock portfolio, an investment property, many people, when the second of the spouses has passed away, will easily have that size of a capital gain.
In effect, the government has taken away an additional percentage of the inheritances otherwise going to the next generation church, cancer society, et cetera. In corporations, because of their punishing technique, they’re discouraging saving, they’re discouraging investment in real estate projects, in housing, in the economy, Canadian businesses, et cetera, et cetera, and this somehow magically is supposed to help with productivity.
But whatever planning is going to be done, I’m not confident that we will be changing a lot of our strategies in the sense of not using corporations and trusts. But certainly the math has changed slightly and the math is significant. I saw one of the bar graphs say, well, showing how such a small difference will be made with these changes. Well, let’s stop talking about bigger or small. Let’s talk numbers on a million-dollar gain. Again, depending on the province territory we’re referring to. That difference in a corporate setting is about $83,000. It’s called 8% a little over. That’s a big number. And for individuals, yes, that first 250,000 is smaller. That was 8%. Again, to me, a big number and my figure, by the way, on the corporate side is the initial taxes compared to the after the refundable taxes, which is a separate story. Again, talk with your advisor. These numbers are significant. Is it the end of the world? No, I don’t think it is.
10 weeks – response to capital gains changes
We also have an interesting time period effectively 10 weeks before these measures are implemented. So perhaps, there’s a time to sell assets. Now, if you were otherwise going to be selling them shortly, I’m not usually a big fan of prematurely paying taxes, but perhaps it makes sense in your case, very difficult to sell to real estate in such a short period of time.
More changes coming?
Perhaps more alarming than the changes to the capital gains rates announced is a little reference towards the bottom that indicated more substantial changes are coming. I’m not as excited as I would like to be.
Entrepreneur program
The government introduced a new concept with respect to entrepreneurs being able to sell the shares of their companies if they were one of the original founders for up to $2 million and decrease their capital gains, otherwise payable, this is going to be accumulated in $200,000 increments beginning next year. Unfortunately, and why I’m not nearly as excited is the various provisions they have or exclusions amongst these exclusions. Professional companies used by most healthcare professionals, lawyers, accountants. Real estate is specifically prevented or prohibited and a variety of other industries. I think a shame given we’re trying to allegedly help in terms of one healthcare overall in the country, and two, the housing problem and we’re giving advantages, but yet we’re taking them away. It’s contradictory legislation in my mind. It’s there though, perhaps for side projects. One more example of the government specifically prohibiting or putting it to those that use professional companies and the real estate industry.
Home buyer’s plan
The home buyers plan is another positive to the budget. This is where qualifying individuals can acquire qualifying properties by borrowing from their RSP up to $35,000. Now, this $35,000 has been increased to $60,000. We still have to pay that back within a 15-year time period. However, instead of starting the repayments after two years, it’ll be a five-year period temporarily. Again, positives, I don’t see, admittedly a lot of people using the plan, and I expect there’ll be fewer people with some alternative choices that are now available, but it’s not a negative, so we’ll give the government a point on this one.
Slashing red tape
Slashing red tape. This is gonna sound silly and it is, I probably would’ve laughed, but I’d already gone through a good chunk of the budget and was fairly frustrated by this point, But to improve the paperwork problems that charities can have. One of the solutions Revenue Canada has proposed is that instead of collecting the donors middle initial and putting that on the receipt, the charitable organizations no longer have to put our middle initials on the receipt. Pretty sad when that’s part of the budget. Another plus, for the budget, for purpose built residential real estate rentals, the depreciation or capital cost allowance rate will increase from 4% to 10% for a period of time. We’ll get some of the details in.
Now, there are, as you would expect, a number of restrictions. One of the first that will catch people will be the size of the properties that we’re talking about, so these are not gonna be single family homes, duplexes, triplexes, for example. But while we can debate how useful this will be and that often at the beginning of projects, there’s not a lot of extra cash flow, particularly with the higher interest rates today. Undoubtedly, this is a positive, not a negative from the government, so we say thank you.
Additional deductions: equipment, patents
Continuing with some positives, the government will allow full deductions of certain purchases for the next period of time, and again, we’ll put some details in here with regards to patent acquisitions and various computer equipment software elements relating to the systems themselves. Perhaps not a big deal, but a positive.
Interest deductions for some real estate
Nonetheless, while this may not affect a lot of the smaller investors, there were changes that came into play last October that could restrict interest deductions for real estate owners renting out their properties. Some of these restrictions as a result of this budget will be removed. I believe a lot of the restrictions are still gonna catch people unaware because of the concept of them and the fact that they’re new. Again, while I would like to see more radical changes to the legislation, this is a start.
Combatting mortgage fraud
The Canada Revenue Agency also indicated that they’re gonna be working with the industries in terms of providing a methodology to help curtail some mortgage fraud. That occurs where financial institutions look towards notices of assessment for income verification, for example.
Tax on vacant land?
Revenue Canada also announced that they will begin consultations with respect to charging some form of tax on vacant land that is held for residential or zoned residential and has looked for to help solve the housing crisis. I can’t imagine any of that being good, but be on the prowl for future tax planning and strategic decisions with respect to any land that you may have as a developer.
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Resources
For additional resources related to the federal budget 2024 for real estate investors, you can see:
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
