After a bruising start to the COVID-19 pandemic, CAPREIT bounced back in 2021. The real estate company grew its revenue by 5.7 per cent, to $993.1 million, and extracted an average of $1,149 in rental income from tenants in each of its roughly 70,000 apartment units.
By July, its stock price was back to where it was before the pandemic began.
According to estimates from a new analysis by Canadians for Tax Fairness, an Ottawa-based think tank, the company also saved approximately $74.94 million last year through a federal tax exemption for companies of its kind.
Real estate investment trusts like CAPREIT, which comprise some of Canada’s largest corporate landlords, have long received special tax treatment from the federal government: so long as they pass along their income to company investors, they are not required to pay corporate income tax.
The latest analysis from Canadians for Tax Fairness, provided exclusively to the Star, estimates that the seven largest apartment-owning REITs in Canada have saved a combined $1.5 billion through this tax exemption over the past decade.
To determine what REITs would have paid in taxes without the exemption, economist and study author DT Cochrane applied Ottawa’s effective corporate tax rate to 12 years’ worth of pre-tax income from REITs with significant residential portfolios, including CAPREIT, Boardwalk, InterRent, Killam Apartment REIT, Morguard Corp., Morguard North American and Northview Apartment REIT.
Together, those seven REITs own more than 145,000 rental units and suites in apartment properties across Canada.
The results demonstrate how major real estate companies have benefited from special tax treatment while rapidly acquiring Canadian rental stock, Cochrane said, a move that critics fear is buoying expensive rent prices across the country.
Now, though, Ottawa appears to be contemplating changes to REITs’ tax requirements.
“We can see that REITs are having a distortionary effect on the housing market, one that has increased rents and contributed to the financialization of housing. So there’s no benefit to Canadians by offering this kind of tax break,” Cochrane said.
Cochrane’s initial report on REITs’ tax savingscommissioned by social services group ACORN Canada, was previously reported in the Star when it was released last year.
CAPREIT disputed Cochrane’s analysis in an interview with the Star, arguing that REITs make up for what they don’t pay in corporate taxes by distributing their income to company shareholders, who are taxed individually on their holdings.
“We’re actually generating taxes for Canada because our unitholders are paying income tax and capital gains tax on their holdings with us. So the notion that we’re not paying our share of taxes is flawed,” said Mark Kenney, CEO of CAPREIT.
Kenney contends that REITs own a “modest fraction” of Canada’s rental units, estimating that the seven largest REITs own a combined five per cent of rental stock.
CAPREIT benefits Canada’s rental market by adding inventory and “investing in the apartment sector,” he said.
But politicians have long expressed concern about companies avoiding taxes by structuring themselves as income trusts (public companies that pool money from shareholders and invest in underlying assets).
In the early aughts, a wave of Canadian corporations sought to convert their businesses into income trusts because income trusts were not, at the time, required to pay income tax.
Then Finance Minister Jim Flaherty told reporters that the trend caused him “growing concern,” estimating that the wave of new income trusts had cost the federal government at least $500 million in tax revenues in 2006 alone.
The department of finance cracked down on income trusts in the 2007 budget, announcing new measures to tax income trusts at the standard corporate rate, but made an exception for REITs.
In the decade since, REITs have become a powerful force in Canada’s rental market. Martine August, a professor at the University of Waterloo’s School of Planning, has found in her research that REITs went from owning zero rental units in 1996 to nearly 165,000 suites in 2017 — representing 10 per cent of Canada’s multi-family housing stock.
In just six years, between 2011 and 2017, the top 20 largest corporate landlords in Canada expanded their proportion of apartment suite ownership from 15.8 to 20 per cent — an increase that vastly outpaces the number of newly-built apartments, according to August.
The analysis from Canadians for Tax Fairness comes on the heels of the 2022-23 federal budget, which promised to review how corporate homeowners are affecting Canada’s expensive real estate market.
Along with new rules on house-flipping and foreign buyers, the department of finance has said it will consider “potential changes to the tax treatment” of large corporate players, like REITs, that invest heavily in residential real estate.
While not naming them in the budget, the Liberals first pointed to REITs’ tax treatment in their 2021 election platform, arguing that “large corporate owners of residential properties such as (REITs) are amassing increasingly large portfolios of Canadian rental housing, making your rent more expensive.”
In his mandate letters to the ministers of finance and housing, issued in December, Prime Minister Justin Trudeau said he was interested in reviewing and possibly reforming the tax structure for REITs, “to tackle the financialization of the housing market by the end of 2023. ”
In a statement to the Star, the department of finance reiterated its intention to examine potential changes to the tax treatment of REITs.
“Houses should be for Canadians to use as homes, rather than as commodities to be traded, and we will make sure that they are being used for this purpose,” said government spokesperson Adrienne Vaupshas.
But Ottawa will likely face ardent pushback from the private sector if it chooses to impose new tax measures on REITs.
Ending REITs’ tax-free treatment would hurt shareholders and stymie investment in the housing sector, said Kenney.
“If we want to see more rental housing in Canada, do you really think that punitive taxation is going to bring more investment?” Kenney said.
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