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"CRE Matters" Columnists

Synthia Kloot Senior Vice President, Operations, Colliers International
Oliver Tighe Executive Managing Director, Commercial Appraisal Group, Colliers
Tanya Nicholson Director, Marketing, Landlord and Investment Sales, Colliers International
Madeleine Nicholls Managing Director, GTA, Colliers
David Bowden Vice Chairman, Head of Strategy and Consulting, Colliers Canada
Scott Bowden Head of Valuation & Advisory Services, Colliers Canada
Sarah Bramley and Amy Vuong Colliers International
Brendan Neeson Executive Director of Property Tax Services, Alberta, Colliers International
Lex Perry Vice President, Marketing, Communications and Research, Colliers Canada
Colliers National Multifamily Team, East, Colliers Colliers National Multifamily Team, East
Karl Innannen Managing Director, Broker, Colliers, Kitchener
Shiri Rosenberg Director of Asset Strategy, Innovation and Community Spaces, Colliers
Colin Alves & Jean-Marc Dube Colliers Toronto & Montreal
Janina Franceschutti Executive V-P, National Investment Services, Colliers Canada
Eric Horvath, CCIM Senior Vice President & Partner, Colliers
Adam Grisack Director, Valuation & Advisory Services, Colliers Canada
Eliezer Timolien Senior Research Analyst, Colliers
Robyn Baxter Senior Vice President & Co-Managing Director, Workplace Advisory, Colliers Canada
Arnold Fox Senior Vice President, Real Estate Broker, Montreal, Colliers
Alam Pirani Executive Managing Director, Colliers Hotels
Sarah Bramley Associate Vice President, Workplace Strategy & Innovation, Colliers
Bill Hennessey Managing Director, Moncton Brokerage, Colliers
Greg Taylor Managing Director, Halifax Brokerage, Colliers
Dayma Itamunoala Associate Vice President, Sales Representative, Toronto Brokerage, Colliers
Grant Evans Senior Vice President, Victoria Brokerage, Colliers
Lilian Kan Director, Development Management, Colliers Strategy & Consulting, Vancouver
Bonita Craig & Robyn Baxter Colliers Canada
Daniel Holmes President, Brokerage Services | Canada, Colliers
Sehaj Gill Associate Director, Property Tax Services, Colliers
Jane Domenico Senior Vice-President & National Lead, Retail Services
Robin McLuskie Managing Director, Canadian Hotel Brokerage, Colliers
Douglas Pulver Executive Managing Director, Colliers Vancouver
Pat Phillips Senior Vice President, Colliers Vancouver Brokerage
Rob Newman Senior Director of Property Tax Services, Colliers
Adam Jacobs Senior National Director, Research, Colliers Canada
Darrell Hurst Darrell Hurst, Senior Managing Director, Brokerage, Colliers
Jean-Marc Dubé and Arnold Fox Colliers Montreal
Robert Brazzell Managing Director, Ontario Property Tax Services, Colliers Canada
Damian Bernacik Director, Legal Services, Property Tax Services
Susan Thompson Associate Director of Research, Colliers Vancouver
Peter Garrigan, SIOR Executive Managing Director, Greater Toronto Area | Colliers Brokerage
Rob Purdy Executive Director, Colliers Canada’s Valuation and Advisory Services
Ryan McIver Senior Vice-President and Broker, Colliers Toronto
Tonya Lagrasta Head of ESG, Colliers Real Estate Management Services Canada
Rick Charlton Senior Vice President, Colliers REMS
James Glen Senior Vice-President, Colliers Valuation and Advisory Services
Roxanne Gora Director, Valuations and Advisory Services, Colliers Montreal

Recent

Taxation, wealth transfer issues loom large for family apt. building businesses

Learning from the experiences and close calls of others can be valuable. Recently, we engaged wit...

Learning from the experiences and close calls of others can be valuable.

Recently, we engaged with a client in Ontario who was considering selling the family farm. The family had been approached by a buyer who offered $1 million for the land, outside of Paris. The seller hesitated, thinking the farm could be worth up to $4 million.

After running some research, including assessing the Official Plan for the area, we sat down at our client’s kitchen table and revealed the true value of the property: somewhere between $18 and $25 million.

It was an emotional experience for our client, who was overwhelmed by the life-changing windfall for their family, while also recognizing the near-miss of hastily accepting an unfair, lowball offer.

As shock eventually subsided, the conversation shifted to the issue of capital gains tax that would apply to this property sale.

In this case, the client was set to earn a remarkable amount of money, taxes aside, but this experience provides a couple of lessons for other similar situations and also represents a harbinger of tax matters yet to come.

As our country continues to face massive deficits amid the ongoing pandemic and large-scale spending to blunt economic recession, personal suffering and social upheaval, we should expect our government to review changes to the tax regime with the potential for changes to the capital gains tax.

Meanwhile, we are entering an unprecedented period of wealth transfer in this country.

It’s important for families to be informed, prepared and advised on how to deal with the sale of valuable family assets. Changes are coming and perhaps for no property asset class could this issue be more significant than family-owned rental apartment buildings.

Family businesses hold most rental apartment buildings

Over the past few decades, the Canadian rental apartment market has intensified and has become one of our strongest, if not the strongest, property asset class.

Fuelled by low interest rates, strong demand for housing and meaningful investment returns, rental housing buildings are experiencing insatiable demand. It’s also tough to build new rental buildings in our big cities due to NIMBYism, skyrocketing costs and a slow bureaucratic planning and approval process.

The pandemic has fuelled the market and safe, secure, healthy, well-located housing feels more important than ever.

While consolidation and institutional investment continues to increase, we still estimate roughly 70 per cent of rental apartment buildings in Canada are owned by families or “mom-and-pop” businesses.

These are usually not rich people, but they now face decisions in handing down the family apartment business, or cashing out and facing the consequences of capital gains taxes.

Capital gains tax has a history of ups and downs

Implemented in 1972, changes to the Income Tax Act required that 50 per cent of realized capital gains be included in taxable income. The tax was introduced in part to finance the growing costs of Canada’s social security system, including benefits such as Employment Insurance and Old Age Security, and to create a more equitable system of taxation.

Since then, the inclusion rate of the tax climbed to 66.66 per cent, then up to 75 per cent through the 1980s and 1990s, and then eventually came back down to 50 per cent where it remains today. The tax doesn’t apply to Canadians’ principal residences.

A potential increase to the capital gains inclusion rate is a conversation we see intensifying in coming months and years. Nobody should be surprised if we see an increase in the overall capital gains tax as a way to keep pace with government spending. It’s been higher before and it could go higher again.

Politically speaking, raising the tax could find some popularity given that many Canadians would consider owning more than one property to be a luxury.

That’s fair, but as we enter into a period of wealth transfer, more Canadians will find themselves in a position of having to carefully manage property sales, responsibly ensuring their families can lay a foundation for their futures.

There are actions for owners of apartment buildings, and other family assets, to take — and there is no better time than now.

Key to wealth transfer is succession planning, expert advice

Succession planning. It’s probably the most important first step, but many families find it to be the hardest. Canadians find it difficult to talk about money, estate planning and fading roles in the family business. 

Family apartment building companies, to carry on, obviously require family members to proceed with the business, or at least to manage the managers.

Increasingly, we’re finding that many in the younger generation don’t want to be tied to the business, or the job, and would much rather take the money than the responsibility.

That all needs to be laid out on the table.

Second, as our earlier example suggests, it’s crucial to avoid lowball offers for assets from sharks, whether for a family farm or a family apartment building. It’s essential to engage with a commercial broker or consultant who can reveal the true value of your asset and support you through a potential sales process.

Third, when a deal begins to materialize, it’s important to involve the expertise of a tax accountant to guide the younger generation through what can be a surprising or complicated tax process.

As we peer into the post-pandemic future, at least one thing is starting to come into focus — potential changes or increases to the capital gains regime may be upon us, and soon.

If you’ve decided to sell the family apartment building, there’s no time like the present to make the deal.



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