Real Estate News

Federal Budget 2018: Tax loopholes tightened

Turns out the Federal Government likes the results of its tax evasion crackdown as Budget 2018 reminds investors and foreign buyers to adhere to tax rules. Plus, borrowers could be hit with higher mortgage rates because of closed loopholes

On February 27, 2018, Justin Trudeau’s Liberals introduced its third federal budget. The overwhelming message by Federal Finance Minister Bill Morneau was one of economic stability and growth through inclusion.

In broad strokes, the 2018 federal spending plan banks on the national economy continuing to grow, while maintaining low levels of unemployment (“close to its lowest in over four decades,” claims budget documents). While Morneau concedes that the nation’s strong economic growth was helped by consumer spending and strong regional housing markets, the federal finance minister is confident that “housing market pressures will continue to ease in the months and years ahead.” The document continues by saying:

“Housing market conditions have become more balanced in Toronto and Vancouver, and their surrounding regions.”

“Going forward, housing demand across the country should continue to be supported by solid job and income gains, but tempered by rising interest rates and recent changes to mortgage underwriting Guideline B-20 for federally regulated lenders (including a mortgage rate stress test for uninsured mortgages).”

As a result, federal analysts predict that real GP growth will only slightly improve in 2018, but given that real GDP growth was 3% in 2017 — significantly higher than the 2.1% as originally predicted in Budget 2017 — this outlook is still very positive.

Now, for real estate owners and those professionally involved in property development, sale and management in Canada, the Budget 2018 offered very little, but there were still some tidbits.

Noose tightens on real estate investors

Making good on past promises, Budget 2018 continued to beef up reporting of real estate ownership and close loopholes regarding tax evasion.

3 more years before bare trusts must disclose all

Federal Budget 2018. New rules for corporations and bare trusts

Canadian and foreign real estate buyers who opt to use trusts, such as bare trusts, will now have more rigorous reporting requirements.

As Budget 2018 states: “Better information on who owns which legal entities and arrangements in Canada — known as “beneficial ownership information” — will help authorities to effectively counter aggressive tax avoidance, tax evasion, money laundering and other criminal activities perpetrated through the misuse of corporate vehicles.”

Simply put: Investors and asset owners will no longer be able to set up trusts and corporations in an effort to hide ownership or avoid taxes owed.

To achieve this, there will be new tax forms and new disclosure rules regarding “certain trusts.” Going forward the owners of these trusts will be required to disclose information on an annual basis, but only starting in the 2021 tax year (and going forward). That gives property owners, investors and their legal counsel a little less than three years to clean up the books and get onside with the Canada Revenue Agency rules.

These new reporting requirements come after federal, provincial and territorial Finance Ministers agreed to amend regulations regarding the use of corporations, shares and trusts. The proposed changes would require corporations to “hold accurate and up-to-date information on beneficial owners, and to eliminate the use of bearer shares.”

International collaboration means foreign buyers beware


Over the years, its become apparent that the global market was at a disadvantage when up against investors who hid assets across international jurisdictions. It’s a situation akin to police forces not collaborating and enabling global criminals to operate, almost without impunity. Of course, we all know how effective the collaboration between domestic and international police forces has been on criminal networks. (International drug ring was busted after a small county in New York caught on; Interpol facial recognition helped catch a murderer; and, a British man is charged in the US in connection to an international cyber gang). Now, this collaborative approach can be found in the implementation of the OECD/G20 Common Reporting Standard, that allows jurisdictions to automatically exchange information on financial accounts held by non-residents.

The current Federal Government appears to really get the advantages of participating in this international initiative, as reflected in their Budget 2018 statements on tax evasion.

“In recent years, the Canada Revenue Agency (CRA) has implemented transformational changes to its compliance programs. By targeting noncompliance in the highest-risk areas, including wealthy individuals with offshore accounts, the CRA is able to more effectively limit tax evasion and avoidance.”

The document goes on to say:

“These efforts are showing concrete results for Canadians. Over the last two fiscal years, the Government reviewed all large money transfers between Canada and eight countries of concern—a total of 187,000 transactions worth a total of over $177 billion that merited closer scrutiny. Working closely with partners in Canada and around the world, there are now over 1,000 offshore audits and more than 40 criminal investigations with links to offshore transactions.

The Government is also aggressively going after those who promote tax avoidance schemes, and so far has imposed $44 million in penalties on these third parties. Thanks to these and all other audit efforts, the Government has identified $25 billion in fiscal impact from the past two fiscal years.”

Bolstered by the results, Budget 2018 pledges another $90.6 million, over the next five years, to address additional cases both domestically and internationally. But wait, there’s more.

Over the next five years, the Federal Government will provide $38.7 million to the CRA, primarily to expand its offshore compliance activities.

Plus, Budget 2018 pledged $41.9 million over the next five years to Canada’s federal courts, including the Tax Court of Canada, as well as $9.3 million per year to the Courts Administration Service. The funding is to ensure that courts receive “adequate support” to deal with the growing and increasingly complex tax evasion caseload.

Foreign buyers can no longer shelter income

As part of their campaign to track down tax avoidance schemes, Budget 2018 also introduced additional action to “fight aggressive international tax avoidance.” This will include rules to prevent taxpayers from avoiding Canadian income tax by shifting property income into foreign resident corporations. It also includes rules aimed at ensuring that non-residents pay their fair share of tax on income derived from Canadian sources”

Specifically, the Federal Government proposes to:

  1. Eliminate the ability to avoid the rules through “tracking arrangements,” which allow taxpayers to “track” to their specific benefit the return on assets that they contribute to a foreign resident corporation)
  2. Prevent unintended, tax-free distributions by Canadian corporations to non-resident shareholders through the use of certain transactions involving partnerships and trusts.

These measures are part of the 2017 multi-country initiative to allows countries to modify their existing tax treaties to recapture tax, based on measures developed under the OECD/G20 Base Erosion and Profit Sharing (BEPS) project.

More rental units through financial incentives

Flickr / great_sea

While the majority of Budget 2018 dealt with issues that did not pertain to housing, renters across Canada were offered some respite.

According to the federal government, approximately 30% of Canadians rely on rental housing. The expectation is that this number will grow as the population expands and grows. Yet, high demand in the rental sector has done little to increase the supply of rental units. As the budget document states:

“Vacancy rates remain low in large urban centres such as Toronto and Vancouver — at 1% and 0.9%, respectively.”

So the Feds stepped in.

As Morneau’s budget states: “To encourage a stable supply of affordable rental housing across the country, the Government proposes to increase the amount of loans provided by the Rental Construction Financing Initiative from $2.5 billion to $3.75 billion over the next three years.”

In April 2017, the Canada Mortage and Housing Corporation launched the Rental Construction Financing Initiative (RCFI) as a way to relieve the pressure in high-demand rental markets. The RCFI offers low-interest loans, as well as subsidies, to builders and developers who focus on the building or development of purpose-built rental housing.

With this latest budgetary increase, the RCFI will attempt to help those most impacted by high vacancy rates combined with high housing prices — “projects that address the needs of modest- and middle-income households struggling in expensive housing markets.”

By increasing the RCFI budget, the Federal Government anticipates that more than 14,000 new rental units will become accessible across Canada.

The RCFI is part of the Federal Government’s National Housing Strategy, where more than $40 billion will be invested over 10 years in order to create more than 100,000 new homes, update 385,000 community housing units and create another 50,000, support 300,000 households with the Canada Housing Benefit and repair 300,000 existing housing units. The plan’s boldest assertion is that over 10 years it will help reduce chronic homelessness by 50%.

Borrowers should prepare for an increase in mortgage rates


The final piece of Budget 2018 will impact just about anyone who must apply for a new mortgage, refinance or renew with a new lender.

The current government is “committed to closing tax loopholes that benefit small groups of taxpayers.” As such, Budget 2018 will continue to make legislative adjustments to help make sure that as new avoidance schemes emerge, the Government is able to continue to safeguard the tax system and build an economy that works for everyone.

As such, the Government proposes to:

  1. Improve existing anti-avoidance rules meant to prevent a small group of taxpayers, typically Canadian banks and other financial institutions, from gaining a tax advantage by creating artificial losses that can be used against other income through the use of sophisticated financial instruments and structured share repurchase transactions.
  2. The Government also proposes to clarify the application of certain rules for limited partnerships in order to prevent taxpayers from obtaining unintended tax advantages through the use of complex partnership structures.

On the surface, these new measures don’t appear to be directed at current homeowners or first-time homebuyers — and they’re not meant to be — but the closing of these loopholes will mean more regulatory paperwork for mortgage lenders and higher costs. As we’ve seen in the past, this translates into higher mortgage rates for Canadians.

At the end of 2015 — when headlines still focused on how low mortgage rates were — banks and lenders were increasing their rates. Not by a lot, but just enough. The reason for these incremental increases wasn’t rising interest rates or falling bond prices, but because of new regulation and compliance rules.

It was November and December 2015, and the most competitive lenders — typically those that work with independent mortgage brokers and specialize in mortgage lending — raised their rates by 0.15% to 0.25%, while some of the major banks increased their variable rates by as much as 0.25%.

Why? Because these lenders were hit with market risk premiums, higher deposit rates, more restrictive securitization rules and higher capital requirements. Translation: New rules and regulations, which translated into increased behind-the-scenes costs for these lenders. Most lenders than passed on these costs to customers.

In Budget 2018, the Federal Government is proposing to restrict how banks (and, theoretically, mortgage lenders) can create income losses. To adhere to these new regulations, banks will be required to adhere to new rules — and this will add to costs. Not only that, but the inability to reduce income will increase the tax burden for these corporations — this is the intent of the Feds — and this will require banks and lenders to re-align their balance sheets, in order to meet shareholder expectations. Translation: It’ll cost more for banks and mortgage lenders to do business and this cost will be passed down to customers. Of course, mortgages won’t be the only products hit with rate increases, but at a time when rates are poised to rise, it’s a solemn warning to really watch your borrowing costs, now, and in the future.

Romana King
Romana King

Romana is an award-winning personal finance writer with an expertise in real estate. She is obsessed with the property marketplace and is the current Director of Content at Zolo.