Canada's capital gains tax hike spur wave of commercial real estate sales

Canada’s capital gains tax hike has triggered a flurry of commercial real estate sales, as property owners rushed to divest before the new tax implications took effect.

Colliers Canada reported closing 156 deals in June, a 26% increase from June 2023 and the highest number of June transactions in a decade.

Adam Jacobs, national head of research at Colliers, attributed this spike directly to the impending tax changes.

“It was a big surprise for us, of course, because the commercial market was down,” Jacobs said in an interview with the Financial Post. “Everyone had an opportunity to do a deal at the old capital gains tax so I think that was what we saw people do: ‘I think I’ll just cash out now and do the deal before I have to deal with more taxes in the future.’ It’s already a difficult market, and it’s getting more difficult.”

This flurry of activity comes amid ongoing challenges in the commercial real estate sector. According to Coldwell Banker Richard Ellis (CBRE), the national office vacancy rate stands at 14.4%, significantly higher than pre-pandemic levels of around 2%. The industrial market has also seen vacancies increase from 1% to 2.4% year-over-year in the first quarter of 2024.

Despite the short-term sales boost, industry experts are now assessing the long-term implications of the new tax landscape. Jacobs believes the impact may be limited in certain markets.

“I don’t think it will have a huge effect on downtowns,” he said. “For years, the downtown buildings have been owned by the likes of Omers, Sun Life, or Canada Pension Plan — the kind of owners who have a very long-term view. They have very big assets under management, so they’re not going to sell simply because they don’t like this market.”

Jacobs also suggested that the overall impact of the higher capital gains tax might be minimal when considered over longer investment horizons.

“We talk about it like the capital gains tax was zero before. There was already a capital gains tax and now there’s a little bit more. But I’ve definitely heard some arguments that say, when you do the math on your rate of return over five, seven, ten years, this (capital gains tax) doesn’t really make a huge difference,” Jacobs said.

CMP

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