After last week’s flurry of announcements from the Federal government around housing, the official delivery of the budget 2024 was, with no surprise, also containing measures that are seeking to offset these new expenses.

In light of recent changes to Canada’s capital gains tax, it’s crucial to understand the potential impacts on the market and your investment decision-making process. The decision to increase the inclusion rate for capital gains tax from 50% to 67% for businesses and trusts is expected to generate significant revenue, but it comes with far-reaching implications for investment and productivity.

This tax hike is anticipated to affect around 307,000 companies across Canada, including those in the commercial real estate sector. High net-worth individuals and corporations will face increased tax liabilities on profits derived from asset sales, which could lead to a cautious approach towards investment, compounding to the already slowing pace of international investment volume in Canada and the exodus of Canadian capital toward other markets. Investment dynamics could then continue to shift notably.

Regarding the commercial real estate market, a higher tax burden risks discouraging investment in property development and renovation, areas critical for the growth of the market, which, ironically, is the same thing the federal government spent the other half of the budget trying to address. The increase in capital costs could potentially slow down new constructions and renovations of existing properties, which are essential for revitalizing urban areas and meeting the growing demands of the market.

Furthermore, the tax change could also impact liquidity in the real estate market with property owners becoming more reluctant to sell if they face a higher tax burden on the gains, thus possibly leading to reduced transaction volumes. This could also discourage potential new buyers to enter the market and prompt them to redirect their capitals elsewhere. This could have a cooling effect on market activity, affecting everything from office spaces to retail locations and industrial properties.

The Quebec market could see some unique consequences. The province’s distinct economic and demographic trends might buffer some negative impacts, but only for a while. Quebec’s commercial real estate market has shown resilience and adaptability in the past, and the current changes could prompt investors to seek more innovative and tax-efficient strategies for their real estate portfolios.

It’s also worth noting the broader economic context in which these changes occur. Canada’s economy has faced challenges with productivity and investment, and the government’s move to increase capital gains tax is seen by some as a step back in terms of encouraging entrepreneurial ventures and investment. However, for the commercial real estate sector, the ultimate impact will depend on how these macroeconomic changes influence consumer behavior and business growth.

As we consider these changes, I encourage you to share your views and strategies on how you are planning to adapt to the evolving tax landscape. How do you plan to navigate these new challenges? Let’s continue this discussion and explore effective strategies to stay ahead in a changing environment.