Federal budget 2024: Canada’s recently unveiled 2024 budget proposes to adjust the capital gains inclusion rate. What does this mean for investors and taxpayers? 

The federal government's proposed change to capital gains taxation is expected to increase taxes on investments.

After unveiling plans to spend billions of dollars to boost Canada's housing supply and social programs, the federal government is framing its plan as a fair way to offset those investments and prevent younger generations from inheriting a bigger deficit.

"I understand for some people this may cost more if they sell a cottage or a secondary residence. But young people can't buy their primary residences yet," Prime Minister Justin Trudeau told reporters Tuesday in Saskatchewan.

Here's what you need to know about the change to capital gains taxation. Click here to find out more.

In a freehold agreement, you fully own the property and land. It is the most common form of ownership in Canada. In a leasehold agreement, you own the property on top of the land but not the land. As a result, you must pay ground rent and condo fees.

Leasehold vs Freehold properties

This blog goes through the definitions of leasehold and freehold ownership in BC, the risks of buying a leasehold property, and the pros and cons of leasehold vs freehold properties.

In this blog you will also learn about various other tips to consider when making the decision to purchase a leasehold vs freehold real estate property.

What is a Freehold property?

With a freehold, you basically own the property and the right to remain in the property in perpetuity, provided you make timely payments to your lender. In the land title office, where your name becomes registered as an owner, you are mentioned as a “freeholder,” thus owning the “title absolute.”

If you have the money to obtain a freehold property, in almost all cases it will be the preferred and best option. In this case, you won’t have to pay annual ground rent, you don’t have to worry about a freeholder (aka landlord) not living up to their duties of maintaining the building, or charging you large sums of money to fix it.

An almost sure example of a freehold property is a detached home. You own the property and the land it sits on, you don’t pay an annual rent to a landlord (although you do pay property taxes like every one else), and you and you alone are responsible for maintaining your house. (like the roof, exterior, windows, etc.)

What is a Leasehold property?

In a leasehold situation, you’re buying the structure and building(s), while leasing the land from the owner. This lease land is often city-owned, but the federal government, First Nations lands, Universities and even private individuals also own and rent out land. The freeholder in this case can also be referred to as a landlord, and a leaseholder essentially has a contract with the freeholder of the land, which outlines important terms such as the length of the lease, and the legal rights and responsibilities of either party.

There are many examples of leasehold properties in the False Creek area of Vancouver, the University of British Columbia, and Simon Fraser University in Burnaby. The leases often expire, for example in 2091, and are then rented out to developers for a set amount of time, usually between 50 and 99 years. The developers or “leasehold landlords” build on and make improvements to the land, then sell or rent out portions of the buildings.

Basically you are buying a “right of exclusive possession” until the end of the lease period, or until you sell that right to another person. You can own the property, but not the land it is on.

What are the risks of a Leasehold property?

• You’re often buying a better lifestyle, but since you don’t technically own the land you often won’t see the benefits of that appreciation. Leaseholds are typically less expensive for that reason – so, if you’re looking for a property that’s fully renovated, big interior size, etc. at a hundred thousand dollars below all the others comparables then this may be an option. Leasehold properties are typically less likely to appreciate in value due to the lack of owning the land.
• Some lease payments may not be prepaid. In the case that they aren’t, the agreement with the freeholder will usually allow for annual lease payments (similar to rent) to be increase periodically, sometimes dramatically, in addition to your strata fees, taxes, and mortgage payments, so that the land is up to date with current market value. If the lease has been prepaid already, this will alternatively be incorporated in to the selling/purchase price.
• If the lease on your unit is soon coming to an end, you won’t be able to say with any certainty whether it will be renewed, and if so, at what cost once rising land values have been factored in. Once the lease runs out, the owner may choose not to renew it or may renew it at a much higher market value. Opting for a property with a longer lease will be beneficial if you are going this route.
• Lenders use the expiry date of the lease as a guideline for loan amortization periods, lending only for five years fewer than the remaining lease. So if a lease expires in 20 years, for example, you would only be able to get a 15-year amortization period for that loan.
• There may be some requests or difficulties from the bank, depending on what type of leasehold it is. They may request more down, and more complicated mortgages (such as reverse mortgages) may not qualify for leasehold properties. Because this lowers the pool of buyers that can purchase, this is a large part of the reason why leasehold properties typically stay on the market for longer, are harder to sell, and do not appreciate as much as freehold’s.

Tips if you’re thinking of purchasing a Leasehold property

• Find a realtor that is familiar with leasehold properties and can advise you accordingly.
• Consider how many years are left on the lease and how it might affect your budget and the value of your property. 99 year leases are the safest bet. You’re not going to be living in your property for 99 years, and even if you sell it in 30 years you’ll still have 69 years left on the lease for the next person.
• Look for long leases – 25 years or longer – and preferably for a length of time that far exceeds the time you plan to live there.
• Factor in service charges and related costs in to your budget (if any)
• Separate your needs and wants and really break down if you need to be in the heart of downtown or if you can take 20 minute bus, live a little bit further out of town, and purchase a freehold.
• Talk to your bank or mortgage broker prior to putting an offer in to see if you qualify based on the leasehold property you are thinking of purchasing. The length of the lease may also affect whether or not you are able to qualify.
• Check and make sure the lease is prepaid. If it was not prepaid, then make sure that you are able to handle the annual payments that go along with this.

If you’re thinking of purchasing a leasehold property call now and whatever you end up choosing, I am here to help.

Tax rate will be 20% for properties sold within a year of purchase, sliding to zero over following year

The B.C. government has announced plans to introduce a tax of up to 20 per cent on profits made when properties are sold within two years of their purchase.

The 20 per cent rate will be in place for a year after purchase and will slide to zero between 366 and 730 days after the acquisition.

B.C. Finance Minister Katrine Conroy announced the tax as one of the province's latest tools to try to curb speculation over housing in a province where many struggle to afford appropriate shelter.

"Prices went up as governments stepped back and speculators moved in," said Conroy during her speech presenting her latest budget in the legislature.

"That's why we're bringing in a home-flipping tax as our latest measure to crack down on bad actors."  CLICK HERE TO FIND OUT MORE

New Property Transfer Tax exemptions for first-time buyers and new homes in BC

More specifically, as part of the 2024 provincial budget, three exemption changes are being introduced to the PTT.

Firstly, the threshold to be eligible for the first-time homebuyers’ exemption will be increased from a fair market value of $500,000 to $835,000, with the first $500,000 exempt from the tax. The phase-out range for the complete elimination of the exemption will be $860,000, while properties with a fair market value under $500,000 will be completely exempt. These changes will start on April 1, 2024.

Secondly, the newly built home exemption for purchasers who buy a new home for their principal residence will grow from $750,000 to $1.1 million on the fair market value. Homes with a fair market value between $1.1 million and $1.15 million will see a phase-out range of the exemption. This exemption change will also start on April 1, 2024.

Thirdly, a brand-new PTT exemption will be created for purchases of new qualifying secured purpose-built rental housing buildings, with such buildings required to contain at least four apartment units, be non-stratified, and be used as rentals for at least 10 years, and the residential uses of the building must be entirely used for rental purposes. This specific PTT exemption will apply to transactions for such buildings between January 1, 2025, and December 30, 2030. With home ownership out of reach for many given the elevated home prices, such a policy will help catalyze more “missing middle” rental housing.  Click here to read more

COURT ORDERED SALES

This introduction on foreclosure properties in BC will give you some insight into the process of buying a property by way of a Court Ordered Sale, including some of the risks involved. We realize that this is not a “how to” for Court ordered sales; rather, it is an overview of the various components of the process.

WHAT IS A FORECLOSURE PROPERTY?

When a property owner is unable (or unwilling) to repay a mortgage on a property, a lender can apply to the BC Supreme Court for the right to sell that property and recover its investment. Through the foreclosure process the lender can apply for and receive “Conduct of Sale” that will give it control of the sale process and allow it to list the property for sale with a Realtor, market the property and solicit offers. The process is very specifically regulated by the Court, and any ultimate agreement to sell the property must be approved by the Court. These sales are referred to as foreclosures, or Court Ordered Sales.

THE SALE PRICE

As with most other property offerings the terms and conditions of a Contract of Purchase and Sale, including the ultimate sale price, is usually negotiated between the Vendor (lender) and a Purchaser. Having said this, the Lender still has an obligation to be able to show the Court that any sale is based on fair market value and that the property has been adequately and broadly marketed.

Once the Vendor and Purchaser agree to the terms and conditions of a purchaser agreement on a foreclosed property, the sale process is far from being done.

SUBJECT CONDITIONS

An accepted offer on a property, subject to a Court Ordered sale process, can include purchaser’s subject conditions such as due diligence, appraisal, inspection, financing, etc. These sorts of conditions are typical in most real estate transactions and are always recommended so that a purchaser can make an informed decision. A deal, though, also needs to be subject to approval by the Court. The Court approval condition is a third party condition that can only be set in motion once the purchaser’s conditions have been fully satisfied and waived.

Once the contract is non-conditional on the Purchaser’s part, an application can be made for Court approval. A hearing date is set and the parties prepare for approval.

"AS IS WHERE IS"

It is important to note that properties subject to foreclosure and the Court ordered sale process are sold “as is, where is”. Since the vendor is the lender of the property (and not, in fact, the property owner), it cannot be expected to be knowledgeable about the property to the extent that it can make various disclosures, representations or warranties as to the state and condition of that property. In other words, as a prospective purchaser, it’s a very good idea to retain the appropriate experts to undertake due diligence for things such as zoning and development potential, building condition, financing, environmental condition and other relevant inspections. Once the sale is non-conditional (and assuming it is approved by the Court), there is no turning back.

APPLICATION

Once there is a non-conditional agreement between the lender and the purchaser (subject only to Court approval), the solicitor for the lender will schedule a hearing date for the application to be heard by the Court. Applications are typically accompanied by affidavits or reports from the lender, Receiver (where applicable), the Realtor and other parties familiar with the file, that would outline the history of the file, the outstanding balance of the loan, any efforts to collect outstanding balances and marketing efforts that will have been undertaken in order to sell the property for the highest possible price. Depending on the nature of the asset these reports can also include an appraisal and other supporting documentation. The objective of this information is to ensure that the Court is supplied with sufficient background so as to satisfy itself that the proposed sale is, indeed, indicative of fair market value; having been marketed in a comprehensive and generally acceptable fashion. A hearing is typically within 14 days of the application being made to the Court.

PUBLIC DISCLOSURE

An interesting (and sometimes exciting) aspect of the Court approval process in British Columbia is that all of that information supplied to the Court as part of the application process to the Court is available for public scrutiny. The agreed upon sale price will be made public in order to ensure a fair and transparent approval process. Others who have expressed interest in the property will typically have the ability to attend the hearing and observe the proceedings, and even submit competing offers. This means that, unlike the conventional property purchase process, the prospective purchaser with the accepted offer on the property is not necessarily the party who will walk away as the new owner. The hook is though, that any new offers being presented to the Court at the hearing must also be non-conditional and be accompanied by a non-refundable (pending Court approval) bank draft or certified cheque.

THE COURT PROCESS

On the determined Court date, representatives for the vendor and the purchaser (with the now subject-free contract) will attend court, along with any other interested parties or prospective buyers who wish to submit an offer on the property to the Court. In some cases, no new buyers will present themselves in court. In other cases, we have seen multiple offer scenarios develop before our eyes.

If other parties do show up, they will typically be required to submit an offer in a sealed envelope for consideration by the Court. The new offer will obviously need to be higher than the agreed upon sale price between the seller and the original buyer. While this scenario might appear to provide an unfair advantage to the newcomer, it is worth noting that the Court will always allow the original purchaser to revise its offer, if desired.

REVIEWING ALL OFFERS

The Court will consider all of the information before it in making a decision on the approval of an offer. If there are multiple offers the Master (Judge), will then open the offers and will review them… and typically, choose the highest bid. It is important to note that the highest offer on paper might not always be the best offer as the Court will also often take into consideration the amount and status of the deposit, the proposed completion date and other factors that might impact the transaction.

Occasionally, the judge might decide that none of the offers are worthy of approval. This might be the case if, for example, the underlying owner is able to convince the Court that the offer(s) is in fact, below market value or if the Court determines that the property has not been sufficiently exposed to the market.

APPROVAL PROCESS

When the deal is approved, the Court will issue what is known as a “Vesting Order”. The order is the approval by the Court and it provided instruction to the Registrar to effect the transfer of the title of the property to the successful bidder. The Vesting Order also serves to extinguish any and all financial encumbrances that could limit the new owner’s rights under the title. The Vesting Order will not extinguish encumbrances such as access easements, reservations of the Crown, restrictive covenants or other non-financial registrations on the title.