Real estate and construction: Insights from Federal Budget 2022

The 2022 Federal Budget was highly anticipated as there were many measures expected to not only aid the economy, but also to provide steps for slowing the deficit that was increased during the pandemic.

Housing was a key focus in 2022. This is one of the most complex public challenges in Canada right now, as housing, real estate, and construction involves municipal, provincial and federal governments.

The real estate and construction sector was hopeful for changes to help increase the supply chain and slow increasing costs. Although many of the announced measures are steps in the right direction, specifically on the housing sector, there is still more to do to address the challenges faced by Canadians in the real estate and construction sector.

Business Tax Measures

Among the business-related tax measures announced in the budget was the change to the small business deduction. The deduction is a benefit many Canadian businesses access and has now been expanded to include companies with higher capital balances.

This change is a positive one for medium-sized businesses as they may be able to now access the reduced corporate tax rate. Unfortunately, given there is still a limit on this due to investment income, this change may not extend to capital-intensive businesses like real estate, construction, or manufacturing.

Another positive update for businesses is there were no changes to the current tax rules introduced through Bill C-208, allowing parents to succeed their businesses to their children in a tax effective manner. The budget announced a consultation period relating to this legislation but did indicate the government would keep the legislation in place for legitimate business successions.

Budget 2022 indicated the federal government will conduct a review of housing as an asset class in corporations. Given the increased prices of homes, Canadians may not be able to afford to buy their own homes and will rely on renting from these corporations. The government indicated it is trying to understand the role of corporations in the housing market as there is a perception corporate ownership is driving up rents and house prices. While the results of such a review remain to be seen, the direction of this change could mean corporations that invest in real estate could be penalized in some fashion. We will continue to monitor this and keep our clients informed.

Personal Tax Measures

A number of personal tax measures announced will positively impact the real estate and construction sector.

The multigenerational home renovation tax credit and home accessibility tax credits are intended to offset some of the costs for renovations made to homes for the elderly and those living with disabilities. These measures will help deal with these increased and sometimes unforeseen expenses. However, the uptick in this multigenerational credit might not be seen right away, given it requires a second suite addition, and municipalities will have to change zoning to allow it.

The increase in the First-Time Home Buyers’ Tax Credit and the introduction of the Tax-Free First Home Savings Account (FHSA) will help Canadians in purchasing their first home. The FHSA will have a maximum lifetime contribution limit of $40,000, with an annual limit of $8,000. This measure will allow some Canadians to save over a few years toward buying a house – it will remain to be seen if this is adequate to support those looking to purchase their first home and address Canada’s housing affordability challenge.

Another small benefit announced is for tradespeople and apprentices. Budget 2022 acknowledged skilled trade workers are essential and in short supply. As such, it is critical to get to a job site no matter where that is. To address this, a new personal tax deduction of up to $4,000 a year in eligible travel and relocation expenses has been introduced.

Residential real estate clauses

Budget 2022 also introduces a new deeming rule to ensure profits from selling residential real estate, including rental properties, owned for less than 12 months are subject to taxation as business income. This measure is meant to stop Canadians from sheltering tax on the sale of a home flip by using their principal residence exemption or treating it as a capital gain. There are exemptions for specific life events such as death, separation, employment change and household additions. It is important to keep in mind this does not mean that once a property is owned for 12 months and 1 day that it gets capital treatment – the facts still need to be considered to determine if capital treatment is still appropriate.

The budget moved forward another measure to slow down foreign-owned property by introducing restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years. Exemptions would apply for refugees, international students on the path to permanent residency and individuals on work permits who are residing in Canada.

Budget 2022 proposed to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST / HST purposes. This has historically been a grey area as to whether this was taxable, so the government is clarifying it is in fact taxable. The ultimate purchaser ends up paying tax on the full cost of the build and the assignment sale.

As indicated before, one of the biggest issues facing the real estate and construction industry is increasing costs. Many of the credits above may help individuals with the increased costs they are experiencing personally. However, the measures don’t address some of the causes of the costs being so high in the first place, such as development and regulatory burdens, and supply chain issues.

Although it is evident the government clearly recognizes the current challenges, long-term solutions for the real estate and construction sector will require the federal government to work with provinces, territories, and municipalities to ensure the Canadian real estate and construction sector fulfils its potential. Governments all need to work together to develop policies that drive affordability in the construction of new supply, the retrofitting and renovation of existing supply, to ultimately foster greater economic accessibility for those aspiring to purchase a home.

The real estate industry is an economic engine for the country – the budget clearly recognizes this and is moving in the right direction – but the real question is: will it be enough?