Ask the Expert is a monthly column where Steve Garganis, lead mortgage planner at Mortgage Architects and founder of CanadaMortgageNews.ca dives into what’s going on with mortgage rates and the Canadian housing market. Have a question for Steve on home buying and your mortgage? Reach out to us at media@rates.ca.
With the capital gains tax increase looking less and less likely, how should Canadians be thinking about investment properties? Is now the time to buy?
Earlier this year, the federal government announced that it will be deferring the effective date for the proposed capital gains inclusion rate increase to 66.67% from 50% to January 1, 2026.
The proposal to increase to the capital gains tax was first introduced last April applicable to gains above $250,000. (For gains below $250,000, the same 50% capital gains tax would apply.) However, the government didn’t have the opportunity to table the legislation before parliament was prorogued.
However, this capital gains tax increase would have left some people in a tough position.
Some that entered into new construction agreements in 2022 were the most vulnerable, as they would have purchased when real estate values were inflated during the lower COVID-era mortgage rates. (However, this may not be the case for all, as property values in general, are down across Canada compared with 2022, with condos taking the biggest hit in Toronto and Vancouver.)
Family cottage owners and long-time property owners with larger capital gains would also be affected.
However, it’s looking less and less likely that this capital gains tax increase will come through. The new leader of the Liberal Party, Mark Carney, will soon take over as the Prime Minister. Last month, he pledged to scrap the cap increase if he was elected as leader, vowing to replace it with a new program.
Moreover, the next federal election is scheduled for October 20 (and will likely come sooner), and Conservatives have been vocal in their opposition over the increase since it was announced.
I agree with both Mark Carney and the Conservatives that the tax increase is unnecessary, and perhaps harmful to Canada in the bigger picture: It could become a huge deterrent for future investment in Canada and drive successful Canadians elsewhere, like the U.S. where tax rates and policies are more lenient.
Fearing higher taxes, businesses and people looking to invest for the long term with higher more substantial gains would probably think twice about investing in Canada.
Is now the time to invest in property?
Well, we’ve had a flat real estate market for a few years. Home prices have fallen. Interest rate have come down by around 1.50% since the highs of last summer. This could be a great time to buy an investment home.
Rather than worry about taxes or politics, I’ll share the same advice I’ve given to my clients well over the last 30 years: If you’re going to buy, buy with the plan to hold for seven years.
Seven years is enough time to go through any up or down economic cycles and amortize the acquisition and closing costs related to real estate (like the realty fees, the legal fees, any land transfer taxes and the moving costs.) By the end of the seven years, you will also have paid down your mortgage balance significantly.
For example, say you purchase an investment property $750,000 ( which is roughly the forecasted average home price by the end of 2025) and put down a 20% down payment of $150,000.
With a conservative 3% average annual appreciation, this property would be worth $922,405 after seven years. That gives you a gross profit of $172,405.
By this time, you will have paid down $89,970 of your mortgage (thanks for your tenant) after seven years.
Lastly, let’s subtract the following acquisition and disposal costs, which total to $67,340:
- Realtor fees: $52,115 (5% of the sale)
- Legal fees: $3,000
- Land transfer tax: $12,225
By the end of the seven years, this is your net profit:
$172,405 + $89,970 - $67,340 = $195,034.
If you hold the property longer, your profit margin only increases. If you sell, you’d still be under the threshold for any potential higher capital gains tax cap.
That’s not a bad return on a $150,000 initial investment.
Catch up on Steve’s other columns:
- Ask the expert: How Trump’s tariffs will affect your Canadian mortgage
- Ask the Expert: Solutions for a flatlining condo market and new year predictions
- Ask the Expert: Steve Garganis on how the US impacts Canadian mortgage rates
- Ask the Expert: Steve Garganis on future bidding wars and why the feds should allow 40-year amortizations
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