3 tax changes in the fiscal update: There were not many tax changes in this week’s fall economic statement. However, there are a few things that may affect you if you own real estate or are thinking about how to pass on your privately owned business.
3 tax changes in the fiscal update
Rentals for a short time
Starting January 1, 2024, the federal government will not allow income tax deductions for short-term rentals, such as mortgage interest. People are being discouraged from investing in certain types of residential real estate, which some say has caused housing costs to rise. But this new rule will only apply in cities and towns that already don’t allow short-term renting.
The government also said that short-term rental operators will not be able to get income tax breaks if they don’t follow the rules for licensing, permits, or registration of their rental properties at the provincial or local level.
If real estate owners can’t claim short-term rental costs, they will be more likely to put their homes back on the market for long-term rentals, according to the government.
It gives the example of Jacinthe, a Quebec businessman who owns three condos in downtown Montreal but doesn’t live in any of them. She instead rents them out all year on a website for short-term rentals like Airbnb or Vrbo. The condos are in a part of the city where short-term rentals of main residences aren’t allowed very often, but she still lists the condos as short-term rentals.
The average rent for Jacinthe’s three condos is $250 per night. She gets about $120,000 a year renting them out to tourists in Montreal on vacation. She spends about $120,000 a year on things like mortgage interest, cable and internet, property insurance, condo fees, property taxes, and capital cost limit (tax depreciation). Because of this, she doesn’t pay any tax on the money she makes from short-term rentals right now. She also hopes that the three homes will go up in value over time, which would be good for her.
From 2024 on, Jacinthe will not be able to deduct the $120,000 in costs because the city of Montreal and the Quebec government have not properly registered or licensed her homes.
So, if Jacinthe was already in the highest federal tax bracket (33%), she would have to pay an extra $40,000 a year in federal taxes. The government hopes this “could be a strong incentive to stop using these properties as short-term rentals and return them to the long-term housing market.”
Shakira’ Tax Triumph: Resolving the Case with No Courtroom Drama
Underused housing tax (UHT)
In 2021, the government said that starting January 1, 2022, there would be a national, 1% tax on the value of Canadian private real estate owned by non-residents that was either empty or “underused.” The unused housing tax (UHT) is the name of this tax.
If you are a “owner” of a residential property in Canada as of December 31 of a given year and are not a “excluded owner,” you are required to file a UHT report for that property for that year. A corporation, partnership, or trust must submit an annual UHT return whether or not a tax is due on the residential property. Corporations, partnerships, and trusts are mostly or completely owned by Canadians.
Due to ownership in a Canadian private company through a partnership or trust, homeowners had to file reports that were basically “NIL”. There was a perception that the UHT should not have applied since the land was basically 100% Canadian-owned.
In this week’s economic statement, the government said it would no longer require most Canadian corporations, partnerships, and trusts to file this time-consuming form. This would mean that these entities would no longer be considered owners for UHT reasons.
The first due date for filing UHT returns (for the 2022 calendar year) was supposed to be April 30, 2023. After much pressure from real estate owners, their accountants and lawyers, the Canada Revenue Agency waived penalties and interest for 2022 UHT returns. This effectively pushed the deadline back by six months.
At the last minute on October 31, the CRA also said that this transitional filing relief would be extended by another six months. This means that owners will have until April 30, 2024, to file their 2022 UHT reports. The deadline to file UHT returns for 2023 is April 30, 2024, according to this week’s financial report.
The government also said that the fines for not filing the UHT return by the due date will be lowered. As things stand, the least someone can be fined for not filing a UHT report on time is $5,000 per failure. The government wanted to lower this minimum fine for people to $1,000.
Employee stock ownership plans
Employee ownership trusts (EOT) hold shares of a company for the benefit of employees. It is easier for workers to buy a business with electronic shares (EOTs). An EOT gives business owners another way to plan for the next generation of their employees. In both the US and the UK, there are laws that back employee ownership arrangements.
Changes to the Income Tax Act were announced in the 2023 federal budget. These changes will allow EOTs in Canada starting next year. That’s why this week’s economic statement suggested that, under certain conditions, the first $10 million in capital gains from selling a business to an EOT should not be taxed. This would make EOTs more appealing. For the tax years 2024, 2025, and 2026, this benefit would be in place.
