Hill Times: Scrap tax exemption ‘loophole’ causing ‘erosion’ of rental affordability: housing advocates

Posted April 6, 2022

MPs, real estate investors, and affordable housing advocates are waiting to see if Budget 2022 provides any clarity on the Liberals’ promise to review an obscure tax exemption from 1995 that has fuelled the rapid rise of real estate investment trusts as large-scale landlords in Canada’s rental housing sector.

The existing corporate tax exemption makes real estate investment trusts (REITs) especially attractive to investors, said Steve Pomeroy, a housing policy consultant and professor of industry at McMaster University. He said the big-picture result has been the “erosion” of affordable rental units over the years as large corporate landlords have used this “much larger pool of capital” to buy older apartment buildings, renovate vacant units, and raise rents.

Pomeroy told The Hill Times he didn’t think the government would announce a change to the existing tax exemption in Budget 2022, but said the Liberals might announce “that they’re going to undertake an examination,” as “an initial step into actually doing something.”

The Liberals’ 2021 election platform said REITs were “amassing increasingly large portfolios of Canadian rental housing,” and promised to review their tax treatment and to “put in place policies to curb excessive profits in this area, while protecting small independent landlords.”

The March 22 confidence and supply agreement between the Liberals and the NDP said the parties would work together on “tackling the financialization of the housing market by the end of 2023.”

NDP MP Jenny Kwan (Vancouver East, B.C.) said whether these measures make it into the budget “remains to be seen, but the NDP is absolutely calling for the government to take action.” She described the corporate tax exemption as “a tax loophole” that benefits investors at the expense of renters.

Mark Kenney, the president and CEO of Canadian Apartment Properties REIT (CAPREIT), told The Hill Times he was still “seeking clarity” from the government on its plans. He said publiclytraded REITs like his are singled out for extra scrutiny because their financial statements are out in the open, and warned that his firm might shift to a different corporate structure if the government takes the “punitive” step of requiring it to pay corporate taxes on its income.

A joint report from the advocacy groups ACORN Canada and Canadians for Tax Fairness calculated that seven major REITs would have paid $1.2-billion in taxes between 2010 and 2020 if not for the corporate tax exemption, with CAPREIT’s estimated savings at $425-million in that time period.

Housing Minister Ahmed Hussen’s (York South-Weston, Ont.) mandate letter mentions that he is responsible for “supporting the review of, and possible reforms to, the tax treatment” of REITs. Hussen’s press secretary did not respond by press time to a request from The Hill Times about whether the government planned to introduce any changes in this year’s budget.

When asked about the Conservative Party’s position on reviewing tax treatment for REITs, MP Matt Jeneroux, the Conservative critic for housing, said an insufficient supply of housing was the root of the problems in rental housing. Jeneroux (Edmonton Riverbend, Alta.) said his party would “continue to advocate for common-sense solutions to keep the dream of home ownership alive.”

“We will continue to be the voice of families and young people across Canada who are struggling to afford rent, and are giving up on home ownership,” he added in the written statement.

Kwan told The Hill Times the NDP has been “raising the alarm bells” with government that people across the country are “having a real tough time accessing safe, secure, affordable housing.”

“REITs are a form of financialization of housing,” said Kwan, defining this as “a phenomenon where housing is treated as a commodity or a vehicle for wealth and investment, rather than a social necessity.”

REITs born out of changes to the Income Tax Act in 1995

REITs are investment vehicles that allow any investor—be they a massive pension fund or the average person—to buy shares, called units, in commercial real estate. Some REITs specialize in housing while others specialize in shopping malls, office buildings, and other kinds of real estate. The REITs’ executives buy and maintain properties and collect rent from tenants—either directly or by hiring a property management company—and distribute the resulting profits through to their investors.

REITs are exempt from paying corporate taxes as long as they flow all or almost all of their net income through to their investors. This favourable tax treatment was written into the tax code in 1995 under then Liberal finance minister Paul Martin in order to encourage investment in real estate, according to Jane Londerville, a retired University of Guelph professor of real estate who studied the launch of Canada’s first publicly traded REITs in the late 1990s.

Canada’s first residential REITs were launched in the mid-1990s following the change to the tax code. Pomeroy said they now own approximately 10 per cent of the purpose-built rental stock across the country, or roughly 200,000 rental units. Many of their properties are apartment buildings built between the 1950s and the 1980s.

CAPREIT, which bills itself as the largest publicly-traded residential landlord in Canada, owns approximately 67,000 apartment units, townhouses, and mobile home sites across Canada and the Netherlands, including, according to Kenney, 40,000 rental apartments across Canada. It has approximately $17-billion worth of assets under management globally and had approximately $457.9-million in cash and cash equivalents on hand at the end of 2021, according to a recent press release.

“There’s this belief that REITs don’t pay tax, which is completely untrue,” Kenney told The Hill Times, pointing out that even though REITs themselves don’t pay corporate tax, the people who invest in REITs pay income tax on the profits that are distributed to them, as well as capital gains tax if they sell their shares of the REITs. Kenney maintained that the federal government receives more in tax revenue by collecting taxes from investors than it would if it were to also collect corporate taxes directly from the REITs.

Kenney said Canadian pension funds are the dominant investors in CAPREIT.

“It’s easy to pick on the REITs because our financials are public,” said Kenney, pointing out that other private real estate companies don’t receive as much scrutiny.

Pomeroy said that was a fair comment from Kenney, since individual real estate investors and mid-size capital firms follow the same playbook, especially in provinces that allow landlords to raise rents as much as they want once a unit is vacant. “There’s this active phenomenon within the commercial real estate sector to market properties not on the value that they would be in today’s rents, but on the basis of the value that they would be if the current tenants leave or you get rid of them, and you can rent them at higher rents.”

“The phenomenon we’re trying to address here is that we’ve got lots of relatively affordable existing housing,” said Pomeroy, that is rapidly “being eroded” from the rental market because it is often more profitable for large landlords to buy up existing apartment buildings and raise the rents than it is to build new purpose-built rental buildings.

Looking at previous census figures, Pomeroy said he has documented that Canada lost roughly 322,000 affordable housing units between 2011 and 2016, a loss of roughly four affordable rental units for each new unit built through federal and provincial affordable housing programs.

DT Cochrane, an economist with the advocacy group Canadians for Tax Fairness said there was no evidence that the preferential tax treatment is beneficial to the people who rent these homes.

“It effectively offers a tax break to a specific type of company and that company’s investors that then drives the assetization of housing. Turning housing into an asset first, and a home second, when obviously what’s most important is that we get people in homes,” said Cochrane.

Canadians for Tax Fairness worked with ACORN Canada, a non-partisan organization for lowand moderate-income people, on ACORN’s “Rein in the REITs” campaign. The campaign, launched in May 2021, called on the federal government to “re-evaluate this tax loophole” and make it contingent on REITs keeping rents affordable in their buildings.

ACORN Canada members picketed outside 30 MPs’ offices in May 2021, including seven in the Ottawa area, to draw attention to their campaign. Sarah Lunney, a member of the New Brunswick chapter, appeared before the House Finance Committee on March 28 to call for the government to amend the Income Tax Act to end the tax exemption for REITs. She also called for federal financial support to help non-profits, co-ops, and community land trusts acquire rental buildings when they go up for sale.

Cochrane acknowledged that groups that focus more on affordable housing have adopted compromise positions that involve tying government support for landlords to certain housing affordability conditions, but said his organization, Canadians for Tax Fairness, would prefer the tax exemption be removed altogether.

“We generally oppose the proliferation of tax credits to encourage certain types of behaviour. We think it introduces new opportunities for the proliferation of loopholes,” he said. “We generally don’t encourage the use of tax credits for things the government should just fund itself.”
 

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Article by Kevin Philipupillai for the Hill Times

 

 

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