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The corporate quest for profit via real estate holdings is exacerbating Canada’s rental affordability crisis, according to a report from Canadians for Tax Fairness.
The report, released earlier this week, blamed capital gains and residential real estate investment trust tax policies for “financializing” housing — “increasing ownership by financial actors” — with the organization suggesting that Ottawa’s much-criticized change to the capital gains inclusion rate is needed to shift the tide.
“The changes to the capital gains inclusion rate proposed by the federal government are critical to counteract the trend by bringing tax rates on capital gains closer to tax rates on other streams of income. Without it, billions in capital gains flow into corporate and investor bank accounts tax free.”
Canada is contending with many housing issues, not the least of which is a rental affordability crisis. During 2023, Xuereb said rents rose eight per cent while wages rose five per cent. More recently, rent increased 8.9 per cent year over year in August even though headline inflation slowed to two per cent, according to the latest consumer price index report from Statistics Canada.
Canadians for Tax Fairness estimates the finance, insurance and real estate (FIRE) sectors have supercharged their real corporate capital gains by 700 per cent via the sale of financial and real estate assets since 2002.
In particular, the real estate sector collected corporate capital gains worth $22 billion on average in 2021 and 2022, compared with $8 billion annually during the 2010s.
Xuereb said some of that was due to an increase in property values, but he thinks “it also reflects a longer-term trend of rising financial ownership of companies and real estate, which has been incentivized by the partial inclusion of capital gains.”
REITs are the other piece of the rental affordability puzzle for Xuereb.
Financial companies own one-fifth to one-third of housing specifically built to rent, he estimates, with residential REITs holding properties “for the purpose of producing rental income, capital appreciation or both,” a statement he took from one REIT’s financial report.
Income from rents forms part of real estate property values, which are subject to capital gains taxation, Xuereb said. He said this has encouraged residential REITs, which collectively own 200,000 rental units across Canada and are now also purchasing single-family homes, to raise rents above inflation to benefit from capital gains tax rules that subjected only 50 per cent of profits to taxation. Also, increased revenues from higher rents allowed REITs to sell properties at greater values, he said.
Combining this with the capital gains inclusion rate means “investors pay very little tax even when the majority of REITs’ income comes from rents paid by tenants,” he said. “Given the rise of capital gains in the real estate sector over time, it appears that these forms of tax avoidance are becoming more common as the financialization of housing progresses.”
Ottawa’s latest budget proposed to increase the capital gains inclusion rate for corporations and trusts to two-thirds from one-half (it applies the same rate for individuals on yearly gains exceeding $250,000). The changes were put into effect as of June 25, but the legislation has not been passed yet.
Xuereb’s report makes several suggestions to address the financialization of rental housing, including:
Story by: Financial Post
