Realtors across Canada are disappointed with Ottawa's refusal to change capital gains tax rules covering the sale of small commercial properties.

In his recently announced budget, Federal Finance Minister Jim Flaherty did not heed requests from realtors who had called for a capital gains tax rollover on smaller properties that are sold for the purpose of purchasing new ones.

Realtors had sought a tax exemption if the sale of one property and purchase of another occurred within six months of each other.

"We feel it's a missed opportunity," says Lorne Weiss, vice-chairman of the Canadian Real Estate Association's federal affairs committee.

Lorne Weiss

Toronto-based CREA represents 88,000 real estate professionals across Canada.

Weiss, a Winnipeg-based realtor who specializes in commercial sales, says the lack of a rollover hurts so-called small or "passive" investors who rely on their jobs rather than investments for their livelihoods, because they do not receive the same tax exemptions as large corporations that focus on real estate acquisitions.

A revised capital gains rollover would have spurred more investment activity, increased the availability of rental housing and sparked more renovation-related business, he adds.

"We were led to believe that this government had a commitment to doing something about capital gains," says Weiss. "It was made clear in our minds during the election campaign and, also, in comments that the minister of finance made subsequent to the election."

Sellers now pay a 50-per-cent tax on 50 per cent of their capital gain, resulting in a net tax of 25 per cent on the capital gain.

A rollover only occurs now on a small commercial property if it is sold to a publicly traded corporation or limited partnership for shares instead of cash.

Although they're often criticized for acceding to the United States government on many issues, the Tories chose not to follow the U.S. example of allowing a capital gains tax rollover if the same owner sells and purchases commercial sites within 90 days.

"We're not asking for an exemption, as is the case when somebody sells their property in return for shares," says Weiss. "We're suggesting that the government should defer collecting that tax. They'll ultimately get that tax - and they'll get it on a larger property."

Dan Schulz, an apartment sales specialist with Colliers International in Vancouver, says a capital gains rollover would have created more economies in the market as investors "trade up" to new buildings.

"People never really sell - unless there's a death, divorce or darned good reason," says Schulz.

On the other hand, he says, the U.S. rollover results in a lot of transactions south of the border, creating a more balanced supply-and-demand market.

"Whereas here in Vancouver, it's always very unbalanced - very low supply and very high demand," says Schulz. "With no capital gains provision coming in, it will continue to be very low supply and very high demand."

The CREA's Weiss contends the current situation has also had a negative effect on the regeneration of cities, because buildings are not selling and buyers are not spending the "significant amount of money that they usually would" to upgrade and improve the property.

"Properties are staying stagnant, and they're staying in the hands of families long after they're really considered to be useful, other than the fact that they become a tax liability," says Weiss.

Frank Mayer, a real estate market analyst with Toronto-based Desjardins Securities, says he's disappointed because the Tories "haven't come forward with anything.”

Mayer says the current capital gains tax effectively freezes properties.

"A lot of property doesn't change hands because some of the potential vendors don't want to pay taxes," says Mayer. "So the property becomes illiquid. (The capital gains tax) adversely affects the liquidity of the market.

"In other words, people that would normally sell because of family circumstances or health reasons or estate reasons will defer that (sale) because of the potential tax bite."

Selling to a corporation or limited partnership is not the typical model for the small investor, adds the CREA's Weiss. Some properties remain in the hands of one owner for several decades.

"And most of the small investors that we're talking about, that are paying capital gains tax when they cash in, are people earning $100,000 a year or less (in income from their jobs.) These are not the wealth," Weiss notes.

CREA has sought to change capital gains rules for several years. The group maintains its proposal would boost Canada's productivity, expand rental housing and encourage urban regeneration, while providing other benefits.

Pierre Beauchamp, CREA's chief executive, has accused Ottawa of unduly influencing typical market activity as small investors hold onto their properties instead of selling and re-investing.

"The small investor is your neighbour who owns a duplex or any small commercial building and, perhaps, would like to buy something bigger," says Weiss, who calls small investors the "backbone" of the rental-housing industry.

"If they sell their existing property, by the time they (receive) their recaptured depreciation and they've paid their capital gain (tax), they don't have any capital left to go forward."

Weiss says the lack of a capital-gains exemption for small investors brings the rental-housing industry to a halt.

In most cases, the rental-housing market is based on the sale of existing buildings rather than the construction of new ones.

Finance Minister Flaherty did make one notable change that applies to real estate. His budget's accelerated capital cost allowance will allow manufacturers to write off their investments in new equipment in two years instead of seven.

But Weiss says the benefit is "not widespread" and does not apply to the sale and acquisition of apartment buildings and other commercial sites.

"In Canada right across the country, if we have one thing in common, it's a shortage of rental properties," says Weiss.

Current rules allow for real estate investors to write off four per cent of a building's depreciation per year. The allowance is designed as a "rainy day fund" to pay for repairs and renovations as a building ages.

"But the bottom line is, the typical small investor, by the time they've paid their taxes and paid down their mortgage, they're back to not having any funds to re-invest," says Weiss.

(Monte Stewart can be reached at monte@businessedge.ca)