Capital Gains Tax Increase: What It Means for Real Estate and Land Development in Canada

Real estate professionals, developers, and investors are concerned over the proposed changes to Canada’s capital gains tax.  These tax adjustments were originally scheduled to go into effect on June 25, 2024, but are now unknown due to the recent prorogation of Parliament until March 24, 2025. The Canada Revenue Agency (CRA) has stated that it will implement the higher capital gains inclusion rate as though it were already in place, even though Royal Assent has not been granted.

I want to explain what this means for developers, investors, and homeowners as an experienced real estate agent, land development consultant, and investment specialist. More importantly, though, I want to discuss how this will affect Canadian real estate in the future.

Comprehending the Suggested Increase in Capital Gains Tax

The 2024 federal budget introduced a significant change to the way capital gains are taxed:

• The capital gains inclusion rate for corporations and trusts was supposed to rise from 50% to 66.67%.
• Individuals: The percentage of capital gains over $250,000 per year would be subject to the same increase (from 50% to 66.67%).

While this change has yet to become law, the CRA is already planning to implement it, creating uncertainty for those who sold property after June 25, 2024. The question now is whether these amendments will be permanently approved or withdrawn once Parliament resumes.

Impact on Real Estate Investors and Developers

1. Increased Tax Burden for Real Estate Investors

For landowners, real estate investors, and developers, this increase in the capital gains inclusion rate means higher taxes when selling investment properties. Since capital gains taxes apply when a property is sold for a profit (unless it is a primary residence), this could discourage long-term investors from selling, leading to reduced property turnover and fewer listings on the market.

2. Potential Slowdown in Land Development

In the world of real estate development, land assembly and redevelopment projects depend on profitable sales. With a higher capital gains tax, developers and investors may hesitate to sell properties, delaying projects and potentially reducing the availability of new housing in major cities. This could further strain housing affordability, especially in high-demand markets like Vancouver, Toronto, and Calgary.

3. Increased Holding Costs for Investors

Instead of selling, many investors may choose to hold onto their properties to defer tax obligations, leading to a slowdown in property transactions. However, holding onto properties also means dealing with ongoing carrying costs, including property taxes, maintenance, and financing costs—especially problematic in a high-interest-rate environment.

4. Uncertainty and Complexity in Tax Planning

The biggest issue right now is uncertainty. Investors and developers must decide whether to file their taxes based on the current laws (50% inclusion rate) or the proposed changes (66.67% inclusion rate). If the tax increase is not approved, those who followed the CRA’s guidance may need to amend their tax filings—creating administrative headaches and potential financial risks.

The Future of Real Estate Under a Higher Capital Gains Tax

1. A Shift Toward Holding vs. Selling

If the capital gains tax increase is permanently implemented, expect a long-term reduction in real estate listings as investors and homeowners opt to hold properties rather than sell. This could lead to tighter inventory levels, potentially driving home prices higher due to decreased supply.

2. More Demand for Tax-Efficient Strategies

Real estate investors will need to explore tax-efficient investment structures such as:

•       Holding companies to manage real estate portfolios
•       1031-like exchanges (if introduced in Canada) to defer capital gains tax
•       Estate planning strategies to pass down real estate holdings while minimizing tax burdens

Working with real estate tax professionals will become even more essential in this changing landscape.

3. Implications for Real Estate Marketing and Development

For real estate marketing and development firms, the focus will shift towards:

•       Educating buyers and sellers on tax implications before listing properties
•       Promoting alternative investment strategies, such as pre-construction condos, land banking, and REITs
•       Encouraging joint ventures and partnerships to spread out capital gains liabilities among multiple investors

Expert Opinion: Is This the Right Move for Canada’s Real Estate Market?

As a real estate agent with expertise in land development and investment properties, I think this rise in the capital gains tax may have unforeseen negative effects:

1. It deters real estate investment, which results in fewer transactions and a more limited supply of available homes.
2. At a time when Canada is experiencing a housing crisis, developers may postpone projects, slowing down the development of much needed homes.
3. Investors find it more difficult to plan ahead when tax policy is unclear because it causes market confusion and inefficiency.

The long-term effects could be fewer transactions, less development, and higher home costs—the very opposite of what Canada needs to address affordability issues—even though the government may want to increase tax revenue.

Final Thoughts

For those involved in real estate investing, land development, or property sales, the uncertainty surrounding the capital gains tax increase is a major concern. Until Parliament resumes and a final decision is made, investors should:

•       Stay informed about legislative updates
•       Work with tax professionals and real estate experts to develop sound investment strategies
•       Carefully consider the timing of property sales to minimize tax liabilities

If you’re a real estate investor, developer, or homeowner looking for guidance on how this tax change could affect your assets, feel free to reach out. Staying ahead of policy changes is critical to making informed, strategic real estate decisions.

For expert advice on real estate investment, land development, and tax-efficient strategies, contact me today!

Regards,

Sukh Brar

Royal Lepage Comercial.

Evernest Marketing Inc.

Dir. 778-896-4003

Off. 604-916-3000

www.sukhbrar.ca

www.evernest.ca