Using Capital Cost Allowance (CCA), income property owners can write off a fixed percentage of the original cost of a building and its component parts each tax year, typically up to four per cent of the un-depreciated balance can be claimed against net rental income each year.
However, under the current system each property is treated separately for CCA purposes. When an owner sells a property, she’s required to pay taxes on the CCA previously claimed. This often leaves an owner with insufficient funds to acquire another property of similar value. Consequently, many owners hold on to properties rather than sell and reinvest.
By limiting reinvestment in new properties, the current system also limits reinvestment in communities. For example, Altus Group found a typical multi-unit income property transaction in Toronto, Vancouver or Calgary generates $287,850 in spin-off spending. This includes renovations, repairs, professional fees, and revenue for all levels of government.
CREA’s Proposal to Increase Community Reinvestment
CREA wants to encourage reinvestment in our communities. To this end, we’re recommending that property owners be able to defer the recapture of CCA. Specifically, for CCA purposes all of an owner’s properties would be pooled: buying a property increases the total amount that can be depreciated; selling reduces the amount.
The end result is that fewer owners would hold on to properties to avoid CCA recapture; they’d instead have a strong incentive to sell and then reinvest in other properties.
The Benefits of Our Proposal
1. Community Revitalization
Investment in property triggers renovations, retrofits and redevelopment because owners want to improve their property to attract new tenants and reduce operating costs. The economy, environment and community all benefit.
2. Leveled Playing Field
Over half of those who would benefit from our proposal have incomes below $50,000. Real estate developers get tax advantages unavailable to small real estate investors. This proposal helps level the playing field between large and small real estate investors.
3. Economic Acceleration
Industries still recovering from the global economic recession would be able to create jobs and generate economic growth. As mentioned previously, Altus Group found a typical multi-unit income property transaction in Toronto, Vancouver or Calgary generates $287,850 in spin-off spending. Its research also estimates every two transactions create more than one job.
4. Fiscally Prudent
The cost of the proposal would be offset by higher revenue from other sources. By encouraging property sales and reinvestments, the proposal would generate more revenue from Capital Gains Tax, GST/HST and income tax from spin-off activity.
For more information on this issue, please consult the Stimulate Community Reinvestment issue brief