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Canada has quietly warned real estate investors just before the holidays, probably hoping it goes unnoticed. Newly re-elected Liberal Party of Canada (PLC) distributed mandate letters. These letters contain orders to be executed by the Minister and are generally quite dry. A big exception is the Minister of Housing mandate letter, which puts real estate investors in its sights. The minister was ordered to cut profits, discourage speculation and limit leverage. Here are the main points to remember.

Canadian real estate investors will be affected by taxes. Many of them

Canadian real estate has been lucrative for investors, and the government wants a cut. The mandate includes various taxes for investors and reforms to reduce “excessive” profits. Here are the most notable:

  • Excessive rent surplus. The Income Tax Act will be amended to require landlords to disclose rent before and after renovations. If a minimal renovation has been done and rents go up, you could be hit with a tax to reduce profits. If executed, the owners could reconsider these renovations.
  • Anti-rollover tax on residential property. Thinking of returning a property for less than 12 months? You may need to pay anti-rollover tax. Fins may be a small segment, but they reduce liquidity and replace it with a higher priced unit. This marginal buyer has a disproportionate impact on house prices, similar to money laundering.
  • Review of Tax Incentives for Real Estate Investment Trusts (REITs). REITs are a type of investment trust used to hold real estate and generate income from rent. They are not taxed on income or gains made, making them tax-advantaged entities. REIT holders pay taxes on disbursements from the REIT, but these may be deferred or reduced by registered accounts. This has made them extremely attractive over the past few years.

Canada will try to limit the advantage of real estate over productive investments

Investors will see obstacles stand in the way of limiting the attractiveness of real estate. There are currently many incentives to invest in real estate compared to other areas. This includes leverage and tax benefits, attracting disproportionate capital. Residential investment recently overtook business investment for the first time since the 1960s.

Having such a disproportionate residential investment sector can create problems. Even without correction, diverting capital from productive investment means fewer jobs. This has been one of the factors that led to Canada having the lowest GDP growth in the OECD. By putting up a few hurdles, the country probably hopes to inject money back into productive growth. Here are some of the key metrics:

  • Review investor down payment requirements. Investors may soon need more for a down payment, limiting leverage. It is a decision that other countries have recently adopted, including New Zealand.
  • A temporary ban on foreign buyers. The ban would only apply to non-recreational residential properties. Canada does not track beneficial ownership and does not confirm information when it does. If he doesn’t know who the beneficial owner is, he has no idea who owns the house. These are mainly window treatments.
  • Curb “excessive” profit for investment properties. The ambiguously worded directive does not provide details. It just says that they will do it while also protecting the small independent owners. This most likely means that they will be looking for institutional owners. No plan usually means they are doing very little.

Real estate investors have always been a double-edged sword, regardless of the country. The good thing is that they provide capital (and incentives) to builders, thereby increasing the supply. It is no coincidence that most construction occurs during periods of high price growth.

At the same time, they are not a charity. Their incentive to provide this capital generates strong returns. The better the returns, the more capital invested in the market. In the words of the banking regulator, this can become a self-fulfilling prophecy. Investors often pay more because they expect higher returns, breaking away from all fundamentals.

It remains to be seen how serious this government is about the measures, but there is a great sign that they could be. Canada injects significant liquidity (ie loans, grants, etc.) to developers. This is a sign that the state is preparing to increase the incentive if other investors embezzle capital.

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