Budget 2012 provides the opportunity to remove a major obstacle preventing income property reinvestment by allowing owners to defer previously written-off depreciation [Capital Cost Allowance (CCA)] when they sell in order to reinvest. Income property investors face taxation on CCA when they sell, and are often left with insufficient funds after tax to acquire a property of similar value.   Consequently, many hold on to properties instead of reinvesting in the community.

The CCA system allows income property owners to write off a portion of the original cost of a building and its component parts, as well as most improvements to the property, each tax year. In most cases, up to four per cent of the undepreciated balance can be claimed against net rental income each year.

Most rental properties are treated separately for CCA purposes. This means the sale of a single building triggers a recapture of the previously claimed depreciation (CCA), which results in insufficient cash resources after tax to facilitate reinvestment. However, if income properties held by a particular owner were pooled together for depreciation purposes, the recapture of CCA could be deferred, and proceeds that would otherwise be taxed could be used for reinvestment.

Under this system, any sale would reduce the pool balance and resulting amount available to depreciate, and any purchase would increase it. In addition, any deferral would be recaptured when the pool balance goes below zero, encouraging income property owners to reinvest and grow their portfolios.

Levelling the Playing Field:
Over half of the individuals who would benefit from this policy change have net incomes below $50,000.

Indeed, this is a Main Street proposal that helps level the playing field between large and small real estate investors. The Income Tax Act already provides real estate developers with a mechanism to defer CCA recapture when reinvesting.

Because income tax rules for developers are far more favourable, they are not subject to the rental loss restriction with which smaller investors must comply. This allows developers to write down the amount of the CCA recapture against the CCA balance of the replacement property immediately, effectively creating a pooling effect to defer tax.

Accelerating the Economy:
This proposal would help industries across the economy by creating jobs and generating growth. Altus Group found a typical multi-unit income property transaction in three of Canada’s largest cities creates $287,850 in spinoff spending, including renovations, repairs, professional fees, and revenue for all levels of government. It is also estimated more than one job is created for every two transactions.

Revitalizing Communities:
Renovations typically occur after a sale when new owners reposition their property to attract new tenants and reduce operating costs. This proposal would encourage owners holding on to older worn buildings strictly to avoid CCA recapture to sell. Renovations would also make buildings more energy efficient.

A Fiscally Prudent Approach:
The cost of this proposal is offset considerably by the collection of other revenue, including Capital Gains Tax from property sales and GST/HST and income tax from spin-off activity. In addition, since the deferred CCA reduces the balance available for depreciation in the replacement property, more revenue is collected than under the current CCA system in future tax years. In addition, all deferred CCA is ultimately collected when an investor’s pool balance goes below zero by choosing not to reinvest.

CREA has received preliminary costing research from Dr. Thomas Wilson of the University of Toronto, which demonstrates the direct cost of the policy change will be nearly completely offset in the first year from additional federal revenues, and will be revenue positive by year two. This addresses the significant fiscal challenge inherent in our previous reinvestment proposal, and is particularly important given the government’s recent announcement that it will take at least an additional year to balance the federal budget.