A review of the Income Tax Act related to non-corporate real estate holdings

The purpose of this thesis is to examine the impact of the new Canadian Income Tax Act on real estate investments and real estate investors. Effective January 1, 1972, this new Act instituted many changes to provisions of the old Act which had been in effect for twenty years, and introduced substantial new tax provisions which will have a significant influence on the overall profitability of most real estate investments. Those provisions of the new Income Tax Act which will have the greatest effect on real estate investments are examined in this thesis, and, wherever possible, these provisions are contrasted with those of the old Act. Also, numerous examples are presented to demonstrate the impact of the various provisions on real estate investments and investors. Each chapter in this thesis examines, analyzes and makes a conclusion as to the effect of the various income tax provisions on real estate investments and real estate investors. Chapter 1 provides a background of the history, structure, and administration of the income tax system in Canada. Who is taxable, what income is taxable^ and how is this income taxed are questions answered in this chapter. Chapter 2 examines the tax treatment of income derived from the ownership and operation of real property. Capital cost allowance, tax shelters, disallowable expenses and hobby farms are discussed. Chapter 3 is devoted to an examination of the most revolutionary new income tax provision -- the taxation of capital gains. The new rules are discussed which categorized the property yielding the capital gain into capital property, depreciable property, or personal-use property, all of which have different rules for the computation of the taxable gain or loss. Included in this chapter, also is the examination of the transitional provisions for capital gains on property owned prior to the enactment of the new Income Tax Act. Chapter 4 examines the special provisions relating to involuntary dispositions, options, non-arm's length transactions and tax free rollovers. Overall, the conclusion of the thesis is that the new Income Tax Act has eliminated or greatly restricted many of the tax provisions which provided great benefits to real estate investors in the past. The tax shelter aspects of the capital cost allowance provisions have been mainly eliminated. Capital cost allowance that is recaptured on rental buildings costing $50,000 or more can no longer remain tax free in capital cost allowance pools. The new capital gains provisions have made gains on property appreciation no longer free from income taxes. These gains are frequently substantial in a country where continual inflation and population growth have stimulated a rapid rise in real property values. Provisions which enabled a taxpayer to transfer property, which has appreciated in value, to related persons, without incurring tax on the capital gain or on prior capital cost allowance claimed, no longer exist except for transfers by a taxpayer to his spouse. A taxpayer can temporarily defer the taxation of capital gains by transferring his property to a controlled corporation or his spouse, however all capital gains and capital cost allowance recaptures will eventually be subject to income taxes upon the death of the taxpayer or his spouse. Under the new Income Tax Act, the real estate investor must face fewer deductible expenses, fewer tax shelters, and eventually much higher taxes.

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