Airdrie homeowners and investors may already feel the effects of proposed changes to the capital gains tax. The Canada Revenue Agency (CRA) has begun administering the new rules, even though they are still subject to parliamentary approval.
It’s important to note that principal residences are generally exempt from capital gains tax in Canada under the Principal Residence Exemption (PRE), provided specific criteria are met. The proposed changes to the capital gains tax on investment properties and other real estate transactions do not impact this exemption.
Local real estate professional Tyler Baptist advises clients to prepare for potential market shifts as these changes unfold.
Baptist said the proposed increase in capital gains tax could significantly affect investors and property owners, particularly those looking to move up in the housing market by consolidating their real estate portfolios and using equity from their secondary properties.
The tax increase would reduce the funds available for them to purchase their next property. The changes are also significant for investors who use real estate as a savings vehicle for retirement. Investors nearing their time to liquidate and move into retirement may face similar challenges as they calculate the tax implications of their gains.
The proposed changes could increase the capital gains tax from 50 per cent to 66.6 per cent. When the government announced in early 2024 that they planned to make these changes effective June 25, 2024 – there was an increase in new listings as some investors tried to sell before the change took place.
Baptist noted that while discussions about capital gains taxes were once secondary for people, they are now becoming more prominent.
"Capital gains is now something that comes up early when meeting with sellers of investment properties," she said. "People are becoming more aware of the potential costs and are starting to factor them into their decisions."
The uncertainty surrounding the proposed changes has led to some hesitation in the market. Baptist suggested that many investors may hold off on selling their properties until the situation becomes clearer. Some may even wait to see if the changes are retroactively applied or if refunds are issued for those who paid the higher tax rate ahead of the legislation’s official implementation.
"There’s a lot of uncertainty right now, especially with the CRA moving forward with collecting the higher rates, even though the bill hasn’t been fully passed," Baptist said. "I encourage clients to consult with their accountants to fully understand how these changes could affect their unique situations."
In an emailed response, the Canada Revenue Agency (CRA) confirmed it would continue administering the proposed capital gains tax legislation based on the Notice of Ways and Means Motion (NWMM) tabled on September 23, 2024. While Parliament is prorogued, the CRA is proceeding with the new rules.
"The CRA will continue to administer the proposed capital gains legislation effective June 25, 2024, based on the proposals included in the NWMM,” the CRA stated. “This ensures consistency and fairness in the treatment of all taxpayers."
The CRA also confirmed taxpayers could file according to the new rules by January 31, 2025. The rules provide for arrears interest and penalty relief for affected corporations and trusts with filing due dates on or before March 3, 2025.
If the government decides not to proceed with the proposed changes, the CRA will cease administering them and ensure any necessary reassessments are processed.
Investors may be forced to rethink their strategies, particularly if they plan to sell soon for retirement or other financial goals.
Baptist predicted that the uncertainty could lead to a slower spring market. While some investors may hesitate to sell, she expects buyer demand, driven by personal circumstances, to remain steady.
A lack of inventory could also contribute to a competitive market, pushing prices higher. The spring market may still see bidding wars, but the pent-up demand could lead to potential supply shortages, putting pressure on prices.
"For the last decade, low inventory has been a reality we see every year from January to March," she said. "Certainly, since 2021, that has resulted in bidding wars, and this year could be no different."
Baptist emphasized that capital gains tax changes could influence those considering selling investment properties' timing and strategy.
Investors who have owned properties for longer periods may be more affected due to the higher tax rates applied to their gains. This could particularly impact those who have owned properties for decades and would face a significantly higher profit tax rate.
She suggested that investors who had planned to sell their properties for retirement purposes could face a difficult decision. They may be better off holding onto their properties for a more extended period to avoid paying higher taxes, especially if they have a significant amount of equity built up in their real estate holdings.
For those navigating the uncertainty, Baptist advised property owners to consult with professionals to understand their specific tax implications. "It’s important to get clarity on your situation so that you’re not caught off guard when it comes time to sell or buy," she said.
As the situation evolves, Baptist encourages Airdrie homeowners and investors to stay informed and seek professional guidance to navigate the shifting tax landscape.
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