Préparé pour le ministère des Affaires municipales et du Logement, Direction des politiques de logement, Groupe de travail sur l'offre de logements par Ernst & Young (Le 14 mars 2001)
This report analyzes the impact of various types of federal taxation on the construction of multi-family rental housing in Ontario. Comparisons are drawn to several U.S. markets, with a view to isolate the specific effects of tax rules relating to marginal tax rates, capital gains and depreciation rates, rollover provisions, deductibility of soft costs, pooling of assets, and capital taxes.
The following are the key findings of the analysis:
Market conditions in Ontario are very strong, with low vacancy rates, rising rents, and strong economic growth, yet little new construction is taking place in the multi-family residential rental market
Market conditions are very similar in the four American centres as well, yet some markets are experiencing much higher degrees of construction in the multi-family residential rental market
There is a strong relationship between the financial returns available to builders and owners of multi-family rental housing, and the volume of new construction of rental housing
On a pre-tax basis, returns are slightly higher in the U.S. markets than in Ontario
Merchant builder returns are approximately 8% higher in U.S. markets compared to Ontario
After tax returns are far lower in Ontario than in the U.S.
Tax rules relating to the treatment of capital gains and depreciation appear to be the most significant factors driving down returns in Ontario. The impact of capital gains taxation is greatly influenced by regulations relating to the pooling of assets and rollover provisions
After tax returns (considering capital gains and rollover provisions) are approximately 25% higher in the U.S., on average
A change in Canada's tax laws to restore rollover provisions would increase rental investment returns in Ontario by approximately 15%
A U.S. style depreciation system would increase after-tax cash flows by 16% in Ontario compared to the current system
Marginal tax rates are higher in Ontario than in the U.S. cities, but the negative effect of this is less severe than the capital gains and depreciation issues
Although not explicitly examined in this report, GST and PST, which increase construction and development costs, can have a significant impact on the margins available to builders of multi-family housing projects, and a lesser effect on the on-going operations of a building
Realty tax rates appear to be a significant impediment to development of potential new multi-unit rental housing developments in Ontario under the current 8-year cliff provisions
In Ontario, residential rental developments are disadvantaged under the current system as realty tax rates are almost 300 percent higher for rental units than for condominium units, although there are provisions under recent legislation that enable municipalities to tax new rental housing at a lower rate for a period of eight years
Municipal fees such as lot levies and other development charges are a significant factor in some markets, as they add significant costs to new developments
Municipal fees and charges can reduce rental development returns by approximately 6.5% in Toronto, and as much as 11 percent in other GTA municipalities
The availability of financing for new projects is critical for the development of new rental housing projects