The Triple Threat: How Increased Property Taxes, High Interest Rates, and Higher Capital Gains Inclusion Rates Are Squeezing Canadian Homeowners and Businesses

As Canada’s housing affordability crisis deepens, homeowners, prospective buyers, and businesses are facing a trifecta of challenges: skyrocketing property taxes, persistently high interest rates, and increased capital gains inclusion rates on business properties. These financial pressures are not just numbers on a spreadsheet—they’re shaping the futures of Canadian families and businesses alike. This blog explores the impact of these economic challenges, the broader consequences for estate planning, business investment, and innovative solutions that could alleviate the burden on Canadians. As a tax lawyer with extensive experience, I’ll break down these complex issues and offer insights on how the government and civil society can collaborate to find sustainable solutions.

The Property Tax Predicament

Property taxes across Canada have been steadily rising, with 2024 shaping up to be another year of significant increases. Cities like Toronto and Calgary are experiencing some of the most pronounced hikes. For instance, Toronto’s property tax rate is set to increase by 9.5% in 2024, while Calgary is proposing a 7.8% hike​ (Zoocasa.com). These increases, while necessary for funding municipal services, are putting enormous pressure on homeowners.

Consider a homeowner in Toronto with a property valued at $1 million. In 2023, they would have paid around $5,042 in property taxes. In 2024, this figure is expected to rise to approximately $5,542​ (Zoocasa.com). This increase, although seemingly small, can be particularly burdensome for seniors on fixed incomes or for families who have recently purchased homes at historically high prices.

High Interest Rates: The Silent Strain

If rising property taxes weren’t enough, homeowners and businesses are also grappling with high interest rates. Although there has been a slight decline in rates recently, they remain far above the historically low levels seen just a few years ago​ (Canada’s Podcast). For those with variable-rate mortgages or those entering the market now, the cost of borrowing is significantly higher, which directly impacts monthly mortgage payments and business loans.

Let’s take the example of a $500,000 mortgage. A few years ago, with interest rates at around 2%, the monthly payment on a 25-year mortgage would have been approximately $2,118. With interest rates now closer to 5%, that monthly payment jumps to about $2,908​ (The Hub). This increase of nearly $800 per month is substantial, especially when combined with rising property taxes.

Capital Gains Inclusion Rates: A New Disincentive for Business Investment

Adding to the financial strain, the recent increase in the capital gains inclusion rate is another blow, particularly for businesses. The federal government’s decision to raise the capital gains inclusion rate has significant implications for businesses that invest in property, including those looking to develop new rental properties.

Under the current tax regime, 50% of capital gains are included in taxable income. However, there has been discussion and implementation of increasing this rate to 75% for certain transactions, which would mean a higher tax burden on any profits from the sale of business properties​ (Mount Royal University). This change disincentivizes businesses from investing in real estate, particularly in the development of new rental properties that could help alleviate the housing crisis.

For example, a business that invests in a property with the intention of developing affordable rental units may now reconsider due to the higher tax burden on potential capital gains. This reluctance to invest could exacerbate the already limited supply of rental housing, pushing prices even higher.

The Ripple Effect on Renters

The impact of rising property taxes, high interest rates, and increased capital gains inclusion rates extends beyond homeowners and businesses—it also affects renters. Landlords typically consider property taxes, mortgage principal, interest payments, and potential capital gains when setting rental prices. As these costs rise, landlords pass them on to tenants, leading to higher rent prices. This dynamic is particularly concerning in cities like Vancouver and Toronto, where affordable rental options are already in short supply​ (Zoocasa.com)​ (The Hub).

Estate Planning and Generational Wealth: A Growing Concern

One proposal that has emerged to help seniors manage rising property taxes is placing a lien on their property, which would be collected upon their passing. While this might seem like a short-term solution, it has significant long-term implications. For many families, the equity in their homes represents a substantial portion of their wealth—wealth that they hope to pass on to their children. By placing a lien on the property, the government effectively reduces the amount of inheritance that can be passed on, which can have a lasting impact on generational wealth transfer​ (Mount Royal University).

But the consequences of such a lien go beyond just inheritance. By encumbering the property with a lien, seniors may also lose access to their own wealth during their lifetimes. This can severely limit their financial flexibility, making it more difficult to access funds through options like a Home Equity Line of Credit (HELOC) or a reverse mortgage. These financial tools are often lifelines for seniors who need to supplement their income, cover medical expenses, or make necessary home improvements. With a lien in place, the ability to tap into home equity is significantly reduced, potentially leaving seniors financially vulnerable at a time when they need stability the most.

The Need for Coordinated Government Action

Addressing Canada’s housing affordability crisis requires a coordinated approach from all levels of government. The federal government’s immigration policies, which are intended to boost the economy by welcoming new residents, must be carefully aligned with provincial and municipal housing strategies. Without adequate planning, the influx of new residents will only exacerbate the housing shortage, putting further pressure on home prices and rents​ (The Hub).

One potential solution is for the federal government to provide low or no-interest loans to civil society organizations dedicated to building low-income housing. These loans could be made contingent upon the properties being used exclusively for affordable housing while the loans are outstanding. Additionally, municipalities could be encouraged to offer property tax discounts for these developments, further reducing the financial burden on low-income families and ensuring that the benefits are directly passed on to those most in need​ (Mount Royal University)​ (The Hub).

Innovative Solutions: A Path Forward

Beyond government action, there is a role for civil society and the private sector in addressing this crisis. One promising approach is the conversion of underutilized office spaces into affordable housing units, a trend already being seen in cities like Calgary. These conversions not only provide much-needed housing but also help revitalize downtown areas by bringing in new residents and businesses​ (Mount Royal University).

Moreover, collaboration with civil society can ensure a comprehensive plan is in place for new immigrants. This plan should go beyond just housing and include pathways to improve language skills, upgrade education, increase employability, secure jobs, and access essential services such as healthcare and other resources. By offering a holistic approach that integrates housing with broader settlement services, Canada can help new residents not only find a place to live but also build a sustainable future​ (Mount Royal University).

Another potential solution is the creation of mixed-use developments that combine affordable housing with commercial spaces, community centers, and green areas. These developments can help create vibrant, sustainable communities that offer a range of housing options to suit different income levels.

Conclusion

The combination of rising property taxes, high interest rates, and increased capital gains inclusion rates is creating a perfect storm for Canadian homeowners, renters, and businesses. However, by taking a coordinated approach that involves all levels of government, civil society, and the private sector, it’s possible to alleviate some of this pressure and make housing more affordable for all Canadians. It’s time for innovative solutions that not only address the immediate crisis but also lay the groundwork for a more sustainable future.

References:

1. Zoocasa: How Property Taxes Have Changed in Canadian Cities​ (Zoocasa.com)
2. Canada’s Podcast: Increased Taxes Impacting Housing Affordability in Canada​ (Canada’s Podcast)
3. Mount Royal University: Unpacking the Affordable Housing Crisis​ (Mount Royal University)
4. The Hub: Sean Speer on Housing Affordability​ (The Hub)

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

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