There is a potential solution for Canada’s current lack of residential rental units, writes Peter Watson.
It is an idea that was used in the 1970s when there was also a shortage of rental supply. Offer individual investors tax incentives. Decades ago, the top tax bracket was slightly over 50%, the same as it is today.
Individuals with high personal incomes were motivated to invest because of tax breaks. Save taxes while investing in real estate was very appealing.
Tax savings were available because some of the initial development costs could be written off. Plus, any rental loss could also be deducted. The result was investors saved taxes while purchasing residential rental units.
Developers were motivated to build because of the demand from investors. The program was a success because the federal government tax policy created significant new rental units.
Some might argue lost income tax revenue from those with high incomes was a cost. Yes, it was a cost, but the government created tax revenue because of this policy. There was significant new activity in the construction business.
Workers were employed and they paid taxes plus increased economic activity including material and services generated additional taxable income for the government.
As rents increased, investors paid income taxes on rental profits. Eventually when the real estate investments sold there was the potential that capital gains taxes would be paid.
Renters now had a larger supply of new rental units on the market.
That was a win-win scenario. Investors, developers, and all those employed by the building activity all benefited. As a bonus the federal government did not have to finance the construction of new rental housing.
The creative tax strategy used by the federal government had a positive outcome decades ago to address the national problem of an inadequate supply of rental units. That is an idea that should be considered now.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
