Many Canadian investors and businesses have shifted their thinking of how to handle their domestic equity interests in businesses and real estate.
The pivot is toward viewing those investments as longer-term holdings and less as being disposable positions that may be sold to get the capital needed to seize higher-value opportunities.
Investors are shifting their approach in response to the federal government’s changes to Canadian capital gains tax rules, which went into effect June 25.
Individuals who generate more than $250,000 in capital gains in a tax year must now pay tax on 66 per cent of each dollar above that threshold. Previously, the federal capital gains tax applied to only 50 per cent of those dollars—as it applies to 50 per cent of the first $250,000 in capital gains.
Thane Stenner, senior portfolio manager and senior wealth advisor at CG Wealth Management Canada and USA, told BIV that many of his ultra-high-net-worth clients have newly become more reluctant to sell their equity positions.
In many cases, Stenner said he helped his clients dispose of half of their positions in various investments before June 25.
“We did a ton of pre-deadline analysis and crystallized, typically, half positions before, and deferred the other half to a longer investment time frame,” he said.
He said selling only half of the investments before the June 25 deadline was a “hybrid approach” that he took because many of his clients liked their holdings.
The new capital gains rules, he explained, mean that in many cases investors need to grow their profit by between 10 per cent and 20 per cent just to make up for the increase in taxes.
Harbourfront Wealth Management senior advisor Tom Gilman told BIV that many of his clients contacted him in advance of the changes to discuss how to move forward.
Most of his corporate clients decided to sell some investments and trigger capital gains before June 25, while “100 per cent” of his individual clients who had gains above $250,000 elected to take the tax hit before the June 25 deadline, he said.
The inclusion rate change has pushed some clients into considering income-producing investments that have dividends, he said.
“The attractiveness of capital gains over, say, dividend investing has diminished somewhat,” he said.
Perhaps surprisingly, investors in Metro Vancouver residential real estate did not seem to be in a hurry to sell their properties in the lead-up to the June 25 deadline.
Greater Vancouver Realtors data showed only 2,418 home transactions in June, down 19.1 per cent from the 2,988 sales recorded in June 2023. This was also 23.6 per cent below the 10-year June average of 3,166 home sales.
That data includes sales of primary residences, where there would be no capital-gains tax, but it also includes sales of investment properties, where the new capital-gains tax rate would apply.
Many investors who owned commercial real estate and were considering selling their properties found themselves inspired to make sure that the deals got done before June 25, various realtors told BIV.
Goodman Commercial Inc. principal Mark Goodman told BIV that in the week leading up to June 25, his firm completed five real estate transactions where sellers disposed of a combined total of about $90 million worth of apartment buildings that they had owned for decades.
That is substantially more than his company would normally sell in a week, he said.
The last couple of years have been slow for apartment building sales because interest rate hikes cut into the amount of money buyers were able to borrow to bid on properties, said Goodman, who specializes in selling apartment buildings.
That all changed when the federal Liberal government announced the capital gains tax changes in its spring budget.
“It was a turbo-charged environment where we went from zero to 100 overnight,” Goodman said.
“Some of the sellers saved more than $1 million in tax [by selling before June 25].”
Marcus and Millichap senior vice-president Martin Moriarty agreed.
His firm helped Hartleywood Holdings sell a 53,300-square-foot retail building with 70 underground parking stalls at 818 Thurlow Street, on the southeast corner of Robson and Thurlow streets.
That sale closed just before the June 25 deadline, he said.
“The announcement of the capital gains changes gave brokers and buyers and sellers effectively an end-date to work towards,” he said.
He would not reveal the property’s selling price, but BC Assessment last year assessed its value at $105,308,000.
Another transaction that Moriarty said his firm helped close was the sale of 2211 West 4th Avenue—a deal that was “in the realm of $100 million-plus.”
That full block of real estate included 68,332 square feet of leasable space on the first and second floors on the north side of West 4th Avenue, between Yew Street, where there is an Arc’Teryx store, and Vine Street, where there is a Whole Foods Market store. The transaction also included commercial parking below.
In all, Moriarty estimated that his firm helped broker 10 sales in the lead-up to June 25.
Some large Vancouver investors took the tax changes in stride, while others bemoaned how the decision will discourage investment in Canada.
Varshney Capital director Praveen Varshney told BIV “we didn’t react or panic.”
That was in part, he said, because his company did not have any capital assets—such as apartment buildings—that it had held for many decades.
“We’re holding all current assets for the long term and will deal with whatever taxes are owed then,” he said.
Hardy Capital principal Roger Hardy told BIV that he has been “strategically divesting from B.C. real estate.”
He added that “this capital has been reallocated to more investor-friendly markets with faster growth potential.”
Hardy thought the capital gains inclusion rate changes were “wrong,” he wrote in a text to BIV.
“There’s a tax rate where our province and country becomes unsustainable and uncompetitive, where businesses that can will leave and not come back,” Hardy wrote.
“We are exceeding that tax rate now, as it has been shown in a variety of studies. Once businesses leave, there will be no innovation, and no one left to pay for social programs. It’s a delicate balance but one we are obviously getting wrong in this moment.”•
