Over the last several years, the Canadian Real Estate Association has actively lobbied the Federal Government to institute a deferral of capital gains on income producing properties that are sold where the investor reinvests within a short time frame.  Below is a report generated by CREA on this topic and is well worth reading.  I hope you get some great ideas from this and you speak with your MP about this important issue.

REALTOR® POSITION
Allow the capital gains tax and the recaptured capital cost allowance to be deferred when an income property is sold and the proceeds are reinvested in another income property within one year.

THE ISSUE
Many average Canadians are reluctant to sell in order to reinvest in another income property because of the tax consequences. Paying the capital gains tax and recapture of the capital cost allowance leaves investors with less equity and often unable to acquire a property of similar value. Removing the disincentive to reinvestment, by allowing tax deferral, will rapidly trigger a chain reaction of benefits for the economy, communities, and the environment.

BACKGROUND
Over a number of years, CREA’s proposal to defer taxation on income property reinvestment has been fine-tuned and is gaining momentum. CREA commissioned research from leading Canadian academics, as well as from a respected independent economic analysis firm. In a 2007 report, An International Comparison of Capital Gains Tax, Dr. James McKellar of York University’s Schulich School of Business found taxation influences behaviour. His analysis pointed out the “lock-in” effect, which occurs when people hold onto assets with relatively low returns for tax reasons, even if other assets would be more productive.

Research from Dr. Thomas Wilson of the University of Toronto demonstrates tax deferral on income property reinvestment is a Main Street issue. He found 58 percent of those reporting rental property had net incomes of $50,000 or less. The proposal would help level the taxation playing field for investment property owners. Tax deferral is permitted under various circumstances in the Income Tax Act. Subsection 13(4) and 44(1) allow capital gains deferral when a “former business property” is voluntarily disposed and a “replacement property” is acquired; or where a “former property” is involuntarily disposed. Subsection 14(6) provides similar treatment for eligible capital property.

This proposal would help stimulate demand for the struggling commercial real estate sector, which has yet to rebound from the global economic recession. In 2009, vacancy rates increased and rents declined. Uncertainty about the strength of the economic recovery continues to weigh on demand for commercial real estate in 2010. A healthy commercial real estate market spins-off opportunities for trades people in renovations and redevelopment; fees for professionals; income for industries that mine, harvest and manufacture construction materials; as well as tax revenue for all levels of government.

TAX DEFERRAL ON INCOME PROPERTY REINVESTMENT
In fact, research from Altus Group estimates, between 2006 and 2008, the typical multi-unit residential income property transaction in the Greater Toronto Area, Greater Calgary Area and Greater Vancouver Area generated $287,850 in ancillary spending. Furthermore, the Altus study found more than one job was created for every two transactions. This proposal would assist Canadians saving for retirement, as well as retirees dependant on regular income, by making real estate a more viable investment vehicle. It would also facilitate investment portability for real estate investors who move to another city, something that is easily done with a stock or bond portfolio. By encouraging renovations, which typically occur after an income property sale, this proposal would contribute to a greener environment.

Dr. McKellar’s 2008 report Promoting Community Reinvestment Through Tax Deferment notes buildings account for 39 per cent of U.S. carbon emissions and Canadian numbers are similar. He also cites a study, which identified 1000 buildings in the GTA that consume 20 per cent more energy per square metre than a typical single family home. It is estimated retrofitting could cut energy use and carbon output in those buildings by well over 50 per cent.  Tax deferral would also help generate needed housing supply to meet the demands of rental housing and urban intensification. According to the Canadian Federation of Apartment Associations (CFAA), purpose-built rental housing starts across Canada have declined over the last 35 years from an average of 60,000 starts per year to an average of less than 15,000 starts per year, despite population growth. Dr. McKellar notes people are migrating to the urban core. Among other actions, this requires the redevelopment of underutilized sites, as well as reusing, retrofitting and  adapting existing buildings, which are often owned by small landlords. In the past year, the National Trade Contractors Coalition of Canada (NTCCC), the Canadian Construction Association (CCA) and the Appraisal Institute of Canada (AIC), have joined existing coalition members, the CFAA and REALpac – the Real Property Association of Canada, in support of this proposal. The Canadian Chamber of Commerce has passed a policy resolution recommending tax deferral on property reinvestment.

Dr. McKellar believes benefits to society, which are rarely included in cost/benefit analysis, could far exceed the modest cost estimates of this proposal. Based on figures provided by Statistics Canada, analysis by Dr. Wilson and survey data and estimates from CREA, CFAA and REALpac, the first year tax deferral cost is an estimated $450 million.

At PAC Days 2009 and in subsequent fall PAC meetings, MPs from all parties indicated support for the proposal.