Recent capital gains tax changes led to a record month for commercial real estate transactions in Canada
The recent changes in capital gains taxes have spurred a surge in commercial real estate activity, according to Financial Post.
Colliers Canada reported that these changes, which took effect on June 25, led to a significant increase in asset sales. Property owners rushed to divest before the new tax rules applied, resulting in Colliers closing 156 deals from June 1 to June 30.
This number represents a 26 percent increase compared to June 2023 and marks the highest number of June transactions in a decade.
Adam Jacobs, the national head of research at Colliers, highlighted the impact of the tax change. He noted, “It was a big surprise for us, of course, because the commercial market was down.”
“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,” he continued.
The commercial real estate sector has faced significant challenges since the pandemic-induced lockdowns. Coldwell Banker Richard Ellis (CBRE) reported that the national office vacancy rate soared to 13.4 percent in the fourth quarter of 2020, the highest level since 2004.
By the first quarter of 2021, this rate had increased to 14.6 percent. Although there has been slight improvement, the vacancy rate remains high at 14.4 percent, compared to pre-pandemic levels of around 2 percent.
The industrial market has also experienced a rise in vacancies, increasing from 1 percent to 2.4 percent year-over-year in the first quarter of 2024.
While June saw a record-breaking month for commercial real estate transactions, the industry now faces the challenge of adapting to the new tax environment and its long-term effects on investments.
In response to the recent surge, the sector must address both the new tax implications and broader market difficulties.
Jacobs believes that the higher capital gains tax will not significantly impact all commercial markets.
He explained, “I don’t think it will have a huge effect on downtowns. 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 long-term effect of the increased tax might be minimal.
“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,” he said.
