The Canadian government, led by Prime Minister Justin Trudeau, has decided to retract a proposed tax overhaul targeting certain real estate investment trusts (REITs) following strong opposition from the industry.
On May 8, the finance department issued a concise three-sentence statement on its website, affirming that “no changes to the tax treatment of REITs are being considered at this time.” This announcement effectively eliminates a looming threat that has loitered over Canadian apartment REITs, particularly for over two years.
The backdrop to this decision traces back to March 2022 when Trudeau, whose Liberal Party lacks a majority in the House of Commons, struck a collaborative agreement with the opposition New Democratic Party (NDP). As part of this pact, Trudeau committed to a series of initiatives in exchange for NDP support in passing legislation. One of these pledges aimed to address what was perceived as the “financialization of the housing market,” with a particular focus on corporate ownership of apartments.
During the 2021 election campaign, the Liberals had promised a review of tax regulations and vowed to rein in what they viewed as excessive profits among large residential property owners. Within the existing REIT framework, profits typically pass through to shareholders and are taxed at their individual level. Any alteration to this system, such as subjecting REITs to corporate income tax, would likely diminish their appeal to investors, especially given the current climate of depressed valuations due to rising interest rates.
However, the real estate sector vehemently opposed the proposed reforms, contending that the uncertainty generated by the government’s intentions was inflating their cost of capital and impeding efforts to expand the housing supply.
“While more must be done to safeguard Canadians from renovictions and ensure that rental units remain affordable, the government recognizes the vital role played by REITs in facilitating fresh investments in rental accommodations,” noted the finance department’s statement, which was initially disclosed by CoStar.
The term “renovictions” refers to the practice of evicting tenants to renovate apartments, subsequently enabling landlords to impose higher rents.