Tax Breaks & Towers: Exploring Canada's MURB Program

[00:00:00] Welcome to The Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate

[00:00:06] the market and provide the tools and insights to build your real estate portfolio.

[00:00:13] What if I told you there was a time when the Canadian government offered such lucrative

[00:00:18] tax breaks for building rental housing that it triggered a construction boom across the

[00:00:24] country?

[00:00:25] Picture it, towering apartment blocks springing up overnight, promising to solve housing

[00:00:29] shortages and offer handsome returns to savvy investors and developers.

[00:00:34] But as with many ambitious plans, there was a dark side.

[00:00:37] Overbuilding, speculative bubbles and substandard living conditions crept into the scene.

[00:00:43] Welcome back to The Canadian Real Estate Investor.

[00:00:46] My name is Nick Hill.

[00:00:47] I am joined today in Every Tuesday and Friday by Daniel Foch.

[00:00:52] Today we are here to unravel the fascinating and sometimes controversial story of Canada's

[00:00:59] MERB program.

[00:01:01] From its lofty beginnings to its tumultuous end, we'll explore how this initiative transformed

[00:01:06] the housing landscape, benefited some and left others wondering what went wrong.

[00:01:13] Stay tuned as we do a deep dive into the wonderful world of MERBs.

[00:01:20] We look at the historical background of MERBs or multi-unit residential buildings, how

[00:01:26] the program worked, the good things that came from it and the bad things that may

[00:01:30] have shut the program down as well as what we can learn from the program to tackle

[00:01:33] today's housing crisis and how it compares to some of the programs that we're seeing

[00:01:37] from the CMHC today through the very same National Housing Act.

[00:01:42] Exactly Dan.

[00:01:43] But before we dive into all that, let's start things off with a bit of a review

[00:01:48] here.

[00:01:49] This one is from Y20degrees.

[00:01:52] Sounds like a boy band from back in the day.

[00:01:55] Five stars title, Do Yourself a Favor and Listen.

[00:01:59] I like this already.

[00:02:01] If you are interested in any type of real estate, you should listen to this show.

[00:02:05] If you hate real estate, it's probably because you don't understand it and you

[00:02:08] should also listen.

[00:02:10] Dan and Nick do an excellent job of explaining real estate investing in simple, easy to

[00:02:15] understand language with facts and statistics to back it up.

[00:02:19] They maintain a professional and neutral position, offering the right balance of fact-based

[00:02:23] information and opinions on every aspect of real estate investing.

[00:02:28] From navigating policy changes to networking, it's all here.

[00:02:33] As a realtor, I listen to improve my knowledge of real estate investing, both

[00:02:37] for my personal growth and to better understand my clients' needs.

[00:02:42] This increased knowledge enables me to serve my clients more effectively.

[00:02:47] Thank you so much.

[00:02:48] Y20degrees, boy band or not, we really appreciate you taking the time to leave that

[00:02:53] review.

[00:02:54] We are overjoyed to hear that this podcast has helped you become a better investor and

[00:02:59] helped you help your clients become better investors.

[00:03:03] Absolutely.

[00:03:04] Love to see it.

[00:03:05] I feel like the review contest that we've been starting every time we read one of

[00:03:10] these has been working actually.

[00:03:12] They have been getting good.

[00:03:13] There's a couple of really good ones on there for sure.

[00:03:15] By the way, Dan, a couple of announcements before we get back into it.

[00:03:19] Sherwin-Williams paint giveaway, 15 gallons, $2,400.

[00:03:23] Dan, you did some math on this.

[00:03:26] Enough to paint well over 200,000 electrical sockets and light switches, which we know

[00:03:31] is an absolute must.

[00:03:32] It's actually different because technically a light switch is a little bit bigger.

[00:03:35] I'm assuming a vintage light switch.

[00:03:37] When 15 gallons, you've got to calculate it properly.

[00:03:41] There you go.

[00:03:42] You can paint more.

[00:03:43] I'm not going to do outlets tomorrow, but 233,000 light switches you can paint with

[00:03:48] 15 gallons of paint.

[00:03:49] For those of you who are your typical landlord who just loves to paint everything white,

[00:03:54] including light switches, then that's what you can do without paint.

[00:03:57] I'm actually headed to one of my rental properties after this, the first one I ever

[00:04:02] required.

[00:04:03] Guess what?

[00:04:04] I got to do some painting there.

[00:04:05] I'm meeting contractor and you know I'm picking up white paint on the way in.

[00:04:10] You know it's going to be Sherwin-Williams.

[00:04:11] I don't have the opportunity to win this 15 gallons, which would be great.

[00:04:16] You do.

[00:04:17] All you need to do is sign up for our meetup group.

[00:04:20] There's a couple other instructions.

[00:04:22] They are all in the show notes.

[00:04:23] Meetup group now has over 2,500 members across the country.

[00:04:26] Man, it has been so cool to see that grow and the outreach of amazing people

[00:04:32] that want to get involved across the country.

[00:04:35] Just had a great call with some gentlemen from Victoria today who want to start one

[00:04:38] up out there.

[00:04:40] Dan, you and I are booked up for almost the rest of the year heading to all these

[00:04:43] different cities across the country to go and launch these events.

[00:04:48] Very exciting, very fun for us to see it.

[00:04:50] Yes, pretty cool when you look at the map.

[00:04:52] We've got 2,500 members, 22 groups across the country, awesome people, great meetups.

[00:04:58] It's crazy that like you're probably getting what 20 to 50 per.

[00:05:02] There's like a thousand people going out to meetups on any given night.

[00:05:06] It's pretty cool.

[00:05:07] Very cool.

[00:05:08] From there, we should mention that we should have them sign up for our next free webinar.

[00:05:15] We are running a free webinar on the realest.ca free course.

[00:05:20] You can check it out if you just go to realest.ca and sign up.

[00:05:23] We're going to do a full breakdown and presentation of distressed deals, power

[00:05:26] of sales, how to find and execute them.

[00:05:30] You have to join our realest group on school.

[00:05:33] The link for that one is in the bio as well.

[00:05:35] Awesome.

[00:05:37] With all that being said, let's get back into today's episodes.

[00:05:41] MERBS.

[00:05:42] Yes, of course another acronym.

[00:05:45] But if you've been listening to the show, you may have heard this one before and Dan

[00:05:50] already gave it away.

[00:05:51] It is multi-unit residential building, but that is far too long to say.

[00:05:55] We call it MERBS and that comes from the MERB program.

[00:06:01] That program dates back decades all the way to the 1970s.

[00:06:06] In 1970, the average detached home price in Toronto was around $29,000.

[00:06:11] By the end of 1979, the average home cost a little over $70,000.

[00:06:16] Interest rates were around 9%.

[00:06:18] Wow.

[00:06:19] Yeah.

[00:06:20] In 1971 when the MERB program started, the average family income in Ontario was

[00:06:28] $11,000.

[00:06:31] Things were obviously a little different back then after decades of inflate or

[00:06:35] before the decades of inflation that occurred to get us to where we are today.

[00:06:38] Yeah, I mean this really is what they are talking about when they say the good old

[00:06:43] days, I guess.

[00:06:44] Yeah, and the 1970s really were the good old days.

[00:06:46] It marked the height of affordable housing investments for Canada.

[00:06:50] I don't think we've ever built as much housing as we did during that period of

[00:06:53] time.

[00:06:54] Yeah, or as we'll get into it, you'll see had as much public and private sector

[00:06:59] cooperation.

[00:07:01] During the 1970s, governments became increasingly involved in the housing sector.

[00:07:07] The Fraser Institute, who we've quoted a number of times on the show, noted that

[00:07:11] housing policy was used as a vehicle for income redistribution and governments began

[00:07:17] to acknowledge that housing is a fundamental right.

[00:07:21] In 1973, the then federal minister of urban affairs stated that the government

[00:07:26] had in quotes, adopted the basic principle that housing is the fundamental right of

[00:07:31] Canadians regardless of their economic circumstances to enjoy adequate shelter as a

[00:07:37] reasonable cost.

[00:07:40] The following year, the Ontario Ministry of Housing also acknowledged that the

[00:07:45] adequate and affordable housing is a basic right for all Canadians.

[00:07:49] That was back in the early 70s.

[00:07:51] Yeah, I'm just looking at the document here.

[00:07:54] It's like such a 70s.

[00:07:56] This is from the Fraser Institute, the anatomy of a crisis Canadian housing policy in the

[00:08:00] 70s.

[00:08:01] So this decade saw the introduction of a number of important affordable housing policies

[00:08:05] and protections by the government of Canada and the government of Ontario.

[00:08:08] These governments introduced subsidized housing for low income households, financial

[00:08:13] assistance for renters and cash grants for home buyers and adopted rent control

[00:08:17] policies and amendments to the Landlord and Tenant Act.

[00:08:21] Introduced in 1974 as a response to a decline in rental housing production, the multiple

[00:08:29] unit residential program offered a unique flow through provision allowing investors

[00:08:35] to offset non-rental income with a capital cost allowance, that's a CCA, and deductions.

[00:08:41] Now, initially reinstating a tax shelter for small firms and individuals that had been

[00:08:46] abolished in 1972.

[00:08:48] The program was then discontinued due to economic recovery in 1978, revived in 1980

[00:08:54] and ultimately terminated a year later in 1981.

[00:08:57] So let's pause there for a second and talk about what the heck I just said, namely,

[00:09:02] what is a capital cost allowance, Dan?

[00:09:05] Yeah, I think this one's worth noting, especially because it came up in our

[00:09:09] conversation with Housing Minister Fraser and the new housing plan, which was that

[00:09:14] they're going to introduce an accelerated capital cost allowance or an increase.

[00:09:18] I guess you used to be able to decrease or sorry, depreciate any money that you

[00:09:23] spent on capital costs by 6% per year and now you'd be increasing it to which

[00:09:28] is that's over 25 year and now you can increase it to 10% per year.

[00:09:33] So over 10 year depreciation, which in the US this accelerated appreciation is

[00:09:39] actually really effective in getting housing created and it's used by investors a

[00:09:44] lot who want to spend money to improve the values of their properties.

[00:09:47] Right. So to explain that the capital cost allowance is an annual deduction,

[00:09:51] the Canadian income tax code that can be claimed on depreciable assets when

[00:09:56] figuring out taxable income.

[00:09:58] So claimed as a percentage of the assets cost over the number of years,

[00:10:01] the CCA is typically allowed for purchases that are expected to last for several

[00:10:05] years, long term assets that generate benefits for shareholders over a number

[00:10:10] of years such as buildings, but also there's this difference between OPEX.

[00:10:16] So operational expenses, which is like fixing the plumbing things that you need

[00:10:19] to do immediately and CAPEX capital expenditures, which is like doing the roof

[00:10:24] or like something that's going to improve the value of the property and has a

[00:10:26] long-term life.

[00:10:27] And so you can't buy a new roof and then tax deduct all of that against

[00:10:32] your property value, right?

[00:10:33] You have to add it in and you can only tax deduct the depreciation of

[00:10:38] that money that you just spent.

[00:10:39] Perfect. And we're just about to get to that.

[00:10:41] So just to be clear, the deduction is not allowed in full for a single year,

[00:10:46] as Dan was just saying.

[00:10:47] Instead, the full cost is spread out over a number of years on tax returns.

[00:10:52] Now, Dan, you were just mentioning depreciation.

[00:10:54] Let's jump back in there because that plays an important role in this

[00:10:58] process and in what made the MERB program and other programs and other

[00:11:02] tax strategies so attractive to investors.

[00:11:06] Yeah. So depreciation is used to deduct the costs of buying and improving a

[00:11:11] rental property, right?

[00:11:12] So it allows any business to claim what's known as a depreciation expense.

[00:11:17] In real estate, this is exceptionally common because what we buy is a

[00:11:20] depreciable asset, right?

[00:11:22] The house, the house part of it or the built, the structure part of it.

[00:11:26] Rather than taking on one large deduction in the year that you buy,

[00:11:29] like the example that I gave of a roof.

[00:11:31] So whether you buy or improve the property, depreciation distributes that

[00:11:35] deduction across the useful life of the property, a useful economic life of the

[00:11:39] property.

[00:11:40] Depreciation in real estate encompasses two key elements that are integral to

[00:11:44] understanding the concept.

[00:11:45] Firstly, it involves the actual decline in the fair market value of an asset

[00:11:49] over time.

[00:11:50] For example, real estate properties may experience depreciation due to wear

[00:11:53] and tear, aging, changes in market conditions leading to a decrease in their

[00:11:56] overall value.

[00:11:58] Secondly, depreciation in real estate also refers to the accounting

[00:12:02] practice of allocating the original cost of assets over their useful life.

[00:12:06] So this allocation is reflected in financial statements to spread out the

[00:12:10] initial cost of acquiring the asset across the periods during which it

[00:12:14] provides benefits or generates revenue.

[00:12:16] Depreciation plays a significant role in determining the assets,

[00:12:19] financial performance, tax implications and overall valuation.

[00:12:23] And also a lot of this you end up recapturing as a deduction against

[00:12:27] capital gains in the future.

[00:12:28] Right?

[00:12:29] And so this is where it like so anything that hasn't been depreciated can still be

[00:12:33] put in against the capital gains expense, which is called the CCA recapture.

[00:12:36] So these are all things that are way out of scope for you and I to be

[00:12:39] talking about.

[00:12:39] We'll have to have Patrick back on the show and he's been contributing to

[00:12:42] our realist course as well.

[00:12:43] So and hosting the very meetups.

[00:12:45] Yeah.

[00:12:45] Again, if that is fully integrated.

[00:12:49] Yeah.

[00:12:49] OK.

[00:12:50] So as you said, then little out of scope, but important to at least have a

[00:12:55] little bit of understanding for today's discussion.

[00:12:57] So now that we have that kind of base understanding of capital cost

[00:13:01] allowance or CCA and depreciation and the benefits they have for

[00:13:07] Savory real estate investors, let's look at how the Merb program actually worked.

[00:13:14] So the Merb program was a tax expenditure program that operated

[00:13:18] through the federal tax system here in Canada.

[00:13:22] The program allowed owners of eligible rental complexes to defer tax

[00:13:27] on revenue from other sources by writing off certain soft costs, such as

[00:13:32] a promotion expense and the promotion expenses is a cost that companies or

[00:13:37] individuals incur to market their products or services to consumers.

[00:13:42] We also include mortgage fees, legal and accounting fees, interest

[00:13:45] expenses during construction, as well as property taxes.

[00:13:49] So essentially almost every almost everything along the way that's going

[00:13:53] to cost you money with this program, you were able to write it off or put

[00:13:58] it through your capital cost allowance.

[00:14:00] So it did do a lot of favors for investors that were investors and

[00:14:05] developers that were able to take advantage of this program.

[00:14:08] Yeah, for sure.

[00:14:09] So the other two federal housing support programs are the last 50 years

[00:14:14] limited dividend program, which was from 46 to 75.

[00:14:18] And that Fraser Institute docs document actually, they have these

[00:14:22] like cool charts on how housing, how this led to the creation of housing

[00:14:27] and like what percentage it was.

[00:14:29] So the limited dividend program was developed to increase the supply

[00:14:33] of moderately priced rental for low, low income people.

[00:14:36] CMHC provided loans to finance new construction sounds very familiar

[00:14:40] and for the purchase and improvement of existing buildings.

[00:14:42] Sounds very familiar to present day loans were for 95% of a

[00:14:46] project's capital costs.

[00:14:47] Sounds very familiar and we're set at a below market rate of interest.

[00:14:51] I probably don't have to keep repeating this.

[00:14:53] Sounds familiar.

[00:14:55] In return, building owners allowed CMHC to control the rents in their buildings.

[00:14:59] So that's an interesting one though.

[00:15:01] Yeah.

[00:15:01] I mean, in that regard, like they, you know, I mean, it's essentially the

[00:15:04] affordability metric that we're seeing today a little bit.

[00:15:07] Yeah.

[00:15:07] So that's actually a really good comparison because today, so in the

[00:15:12] afternoon of June 4th, I believe the CMHC be releasing information that

[00:15:18] they're making changes to the MLI select program, which is that you'll

[00:15:22] only be able to get up to 50 points from energy efficiency, which means

[00:15:26] that you're going to need to get more points from either accessibility or

[00:15:29] affordability.

[00:15:30] So they're really pushing people to go into the affordability stream.

[00:15:33] And we kind of saw that coming because we saw energy efficiency

[00:15:36] being, I don't want to say abused, but I want to say optimized.

[00:15:40] Let's let's say, right?

[00:15:41] That was kind of the thing that everyone was using to, to get those

[00:15:44] points.

[00:15:44] Well, the affordability piece was taught like it, they weren't in

[00:15:48] Alberta, right?

[00:15:49] In Alberta.

[00:15:49] You just, you just know someone that closed that 90 unit that I sent you

[00:15:52] the other day on affordability in Edmonton.

[00:15:54] Yeah.

[00:15:55] Yeah.

[00:15:55] And, and, um, Nia sent us that one, uh, $18 million building out

[00:16:00] there that, uh, same thing.

[00:16:02] Like he built it on the affordability and concrete construction, beautiful

[00:16:06] building, um, because the incomes are so high in Edmonton and Calgary

[00:16:10] and the rents are so low relative to incomes that even market price

[00:16:14] units are considered affordable based on CMHC's calculation at 30% of

[00:16:18] household income.

[00:16:19] Saskatchewan would be similar because their incomes are high relative

[00:16:22] to what rents are there.

[00:16:23] So, so it's not to say no, no units are being done with the affordability

[00:16:28] piece, but really only in the prairies where incomes are high relative to

[00:16:32] rents.

[00:16:33] So we're moving in this direction today where like as a result of these

[00:16:37] changes to MLI select where they're really pushing for more an increase in

[00:16:41] the affordability component and they have made some concessions.

[00:16:44] I think they're increasing amortizations from 50 to 55, and then

[00:16:47] they're also going from 40 to 50 on the, um, the regular CMHC non-MLI.

[00:16:51] So it is what it is.

[00:16:53] I mean, like we're there, they're gradually getting back to this

[00:16:56] program, I think closer and closer other than, other than, uh, that,

[00:17:01] you know, tax deductions for rich people.

[00:17:03] Cause I think that, that did exacerbate disparity, right?

[00:17:05] Like if it was like, I know.

[00:17:06] Yeah.

[00:17:07] So anyway, tell me about the other piece there.

[00:17:10] Yeah.

[00:17:10] So after the limited dividend program that Dan was just explaining in

[00:17:15] 1975, the ARP replaced the limited dividend program, credited with

[00:17:20] stimulating the production of almost 123,000 units before being phased out

[00:17:26] in 1978.

[00:17:28] Um, the ARP program offered private developers initially capital grants

[00:17:33] and later interest fee loans to construct low and moderate rental

[00:17:39] housing.

[00:17:39] Now the ARP was followed in 1981 by the CRSP, which offered private

[00:17:45] developers interest free loans to construct moderate rental housing

[00:17:49] in particularly tight market areas.

[00:17:51] That program was then terminated in 1984 and produced about 21,000 units.

[00:17:57] So that being said, those are some other examples of programs that

[00:18:02] CMHC has implemented and worked in conjunction with, with private sector

[00:18:09] developers and investors over the last few decades to, to try to fix the

[00:18:13] housing crisis.

[00:18:14] Cause this isn't the first time we've had one.

[00:18:16] So, but let's get back to the MERB program, Dan, the thing, the

[00:18:19] program we're here to talk about today.

[00:18:21] This was used to promote privately owned rental construction by

[00:18:26] encouraging smaller investors or let's just say well capitalized people

[00:18:31] who otherwise wouldn't have likely been real estate investors.

[00:18:35] They really incentivize them to come in and participate in that market

[00:18:40] segment.

[00:18:41] Yeah, quickly before we move on, I would like, I'll jump in on the,

[00:18:45] the MERB piece that you're mentioning there, but maybe we're going through

[00:18:48] the composition of housing, Canadian housing starts.

[00:18:50] So in from 1946 to 1969, 61.6% of housing starts came from

[00:18:58] conventional and other, and then that moved down to 54% in 1970, in the

[00:19:03] 1970s as a result of the national housing act taking 45.8%.

[00:19:09] And that was through CMHC lending as well as approved lender programs,

[00:19:13] very similar to the MLI select that we're seeing today.

[00:19:16] And then in 1975, the national housing act was doing about 40%

[00:19:21] through CMHC lending and approved lenders doing 20% of all.

[00:19:24] So very similar to the, to the structure that we're evolving towards today,

[00:19:29] where CMHC is really, I mean, like you talk to anybody, it's like,

[00:19:31] there's only reason multifamilies work, like, you know, valued where it

[00:19:36] is the only reason multifamilies getting built.

[00:19:38] Right?

[00:19:38] So during the MERB program, it was a similar thing, right?

[00:19:42] Developers would start a MERB and seek investors to purchase rental

[00:19:45] units in the building.

[00:19:46] The development costs for land servicing and utilities were

[00:19:48] aggregated and assigned to investors on a unit by unit basis.

[00:19:51] These costs could be written off against the income.

[00:19:55] In most cases, this would result in the investor receiving a large tax

[00:19:58] refund in the initial year of ownership.

[00:20:00] It doesn't sound like a bad deal to me.

[00:20:01] Now, once that project was finished, rental revenues were pooled as,

[00:20:06] as, as were expenses such as interest taxes, insurance and repairs.

[00:20:12] The property manager in this case would then provide an annual

[00:20:15] accounting for the building for each unit.

[00:20:18] And then investors could then claim their share of that rental subsidy

[00:20:23] as a loss that could they, that then they could deduct that from their income.

[00:20:29] So if the owners were allowed to claim a 5% CCA reduction, even if that

[00:20:36] deduction generated a rental loss, it effectively allowed them to write off

[00:20:39] rental losses against their income.

[00:20:41] Current regulations allow only principal business corporations whose

[00:20:45] principal business relates to real estate development to use CCA

[00:20:48] losses to reduce income taxes.

[00:20:50] So after all that being said, the question is, did it work?

[00:20:56] Right.

[00:20:56] Its goal was to incentivize the building of more homes.

[00:20:59] And if that was its goal, then yeah, it, it kind of did during

[00:21:03] the years of the MIRB program, a total of 195,000 units were produced.

[00:21:10] Now, nationally that was at a cost of $2.4 billion in foregone tax revenue.

[00:21:18] Now, as many people in real estate and commentators on the economy are

[00:21:24] looking back on this program to see if it's something that we could replicate

[00:21:28] today to battle today's housing crisis.

[00:21:32] Canada's housing agency, CMHC has looked back at, at this program

[00:21:37] nearly five decades ago to examine whether this long abandoned tax shelter

[00:21:42] that did spur construction and apartment buildings is, would be a good fit for today.

[00:21:48] So Dan, I pulled this from a CBC article.

[00:21:51] Can you, can you read this, this section of me right here?

[00:21:54] Yeah, it's interesting because around the time this article came out

[00:21:58] and we covered it last time on the show when it, or around when it came

[00:22:00] out and I was, that was when I was presenting at Veritas alongside

[00:22:05] CMHC's chief economist, Aled, who is a brilliant guy.

[00:22:09] And we talked a little bit about this in the round table with all

[00:22:13] of the speakers the night before Anthony, who was on the actually go back.

[00:22:16] Everybody should go back and listen to that episode is great, but

[00:22:18] Yeah, great guy.

[00:22:19] A lot of fun.

[00:22:20] Yeah.

[00:22:20] And so we chatted a little bit about this, this program and how, whether

[00:22:23] or not they were going to gradually trend in that direction.

[00:22:26] So the CBC article says not so long ago, the federal government,

[00:22:29] liberal government announced that it was immediately lifting the GST from

[00:22:32] the construction of all new rental apartments, a move developers had long

[00:22:36] called for, but internal records show the Canada mortgage and housing

[00:22:40] corporation recently reviewed another kind of tax measure, one that

[00:22:43] was introduced in 1974 and ended in 1982 and which rewarded often

[00:22:47] wealthy professionals with tax deductions.

[00:22:49] They invested in housing.

[00:22:51] And I honestly think like the capital costs, accelerated capital

[00:22:54] cost allowance that we saw in the housing plan was their

[00:22:56] version of giving this back.

[00:22:58] They obviously weren't going to go back to what it was before

[00:23:00] because there was huge negative consequences, which I think you're

[00:23:02] going to get to later, but many housing stakeholders suggested that

[00:23:05] to promote investment in new rental housing construction and restore

[00:23:08] affordability, the federal government should reconsider the tax policies.

[00:23:11] Previously in place in the 1970s, particularly the Merb program said

[00:23:16] the briefing that was sent to housing minister Sean Frazier and

[00:23:18] was released under the access to information laws.

[00:23:21] The Merb scheme allowed investors to claim depreciation and certain

[00:23:25] other costs of an apartment building against unrelated income.

[00:23:29] So like if you're a doctor, it was really good for people like who

[00:23:31] made high earners, right?

[00:23:33] If you were a doctor and you're making a million bucks a year and you

[00:23:36] had losses on your rental building, you could claim the losses of your

[00:23:39] rental building against your actual income.

[00:23:41] I think it's, it's easy to understand now in the current tax

[00:23:44] environment, why this one's going to be hard to pass, right?

[00:23:46] So it was however, credited with encouraging the construction

[00:23:50] of about 195,000 units at a cost of 2.4 billion in foregone taxes.

[00:23:54] Although the CMHC said there are some questions about

[00:23:57] the program's true influence.

[00:23:59] So to continue the CMHC noted that there was no affordability requirements.

[00:24:04] It also said that there were reports of many abuses to the program,

[00:24:09] including investors only buying buildings as tax shelters and having

[00:24:15] a lack of oversight that in some cases led to poor construction.

[00:24:20] Now, some parts of the briefing notes are redacted.

[00:24:24] So it's not totally clear whether CMHC endorses or disapproves of

[00:24:30] reinstating this program in some form.

[00:24:33] Now the agency, which did decline to comment also noted that taxation

[00:24:38] is the purview of the finance department.

[00:24:41] So, Hey, not our, not our problem basically.

[00:24:44] Now since eliminating the, since the elimination of the MIRB

[00:24:46] program in 1982 tax policy in relation to rental housing development

[00:24:51] has remained largely unchanged and current tax regulations are less

[00:24:54] favorable to rental investments than they have historically been.

[00:25:00] More rental units per year were built during the late 1960s and early

[00:25:04] 1970s, a number that is still higher than the level today,

[00:25:08] despite the housing crisis.

[00:25:11] So let's talk about why this program was phased out and shut down

[00:25:14] and the abuses that you keep telling me about.

[00:25:17] Yeah.

[00:25:18] So before we get into this, you know, I, I, there's a lot of research

[00:25:21] that went into this episode and it was so hard to find.

[00:25:24] We kept on looking for like news articles of like, you know, sketchy

[00:25:27] lawyer who has 17 buildings then, you know, runs away with all these tax

[00:25:32] dollars and you couldn't, I couldn't find anything back then.

[00:25:35] So if anyone's got some stories, some anecdotes, we'd, we'd love to,

[00:25:39] we'd love to hear them and even include them in a follow-up episode.

[00:25:42] But from what I did find a 1981 report from CMHC found that it's a rate

[00:25:47] basically when it was closed or being closed up kind of in the latter years.

[00:25:52] That this report from CMHC found that it attracted many private

[00:25:57] investors to rental housing, but it was widely being used by professionals

[00:26:00] and other high income individuals to do exactly what Dan just said,

[00:26:04] reduce their income taxes on their employment earnings.

[00:26:08] So again, well-paid doctors, lawyers, you name it, you know, buy a building.

[00:26:13] And that actually, not only do you have a cashflow in investment, but you

[00:26:16] actually now have something that you can write off your taxes to reduce your income.

[00:26:19] So there is evidence that some promoters may be overvaluing projects.

[00:26:24] The report said even investors who tend to not be so conversant with real

[00:26:31] estate matters generally are purchasing the asset solely as a tax shelter aspect

[00:26:35] with no recognition of possible poor investment prospects due to inflated

[00:26:40] purchase prices. So again, that sounds a lot like today too, right?

[00:26:43] Like you've got, you've got, I mean, buildings were trading in like the two,

[00:26:47] three caps, like for years in Toronto, like during COVID because there was

[00:26:52] this cheap debt and you had people who were incentivized to buy it for

[00:26:57] the wrong reasons.

[00:26:58] And like, this is the same thing as why the government has been going after

[00:27:01] foreign investment. Like you can't have irrational consumers in the market.

[00:27:05] Right. It doesn't help this, this improvement sentiment.

[00:27:10] And exactly. Yeah.

[00:27:12] There's a great visual on the Canadian center for housing rights as well.

[00:27:15] But I'll do that after because it chronicles kind of like from the 70s to

[00:27:19] 2020s, like how we went from the height of affordable housing investments in

[00:27:23] Canada all the way to present day where we are now.

[00:27:25] Yeah. But let's go through the abuses first.

[00:27:28] So there was some of these ways that the program was abused by the

[00:27:31] private sector, primarily overbuilding and speculation.

[00:27:33] So the generous tax incentives led to a surge in the construction of

[00:27:37] multiple unit residential buildings or MIRBs.

[00:27:40] And that created some overbuilding, which created excess supply,

[00:27:43] which would be a great problem to have today.

[00:27:46] And that the rental units exceeded demand.

[00:27:49] So vacancy rates increased and investors who were driven by tax

[00:27:53] advantages rather than market demand sometimes funded projects that were

[00:27:55] not really economically viable in the long run.

[00:27:58] The next piece was tax shelter abuse.

[00:28:00] Some investors exploited the MIRB program primarily as a tax shelter

[00:28:03] rather than as a genuine investment in housing and creating rental housing.

[00:28:09] So the primary motivation for many investments was to produce taxable

[00:28:12] income rather than create sustainable rental housing, leading to

[00:28:16] inefficiencies and market distortions similar to the ones that we're seeing today.

[00:28:19] Yeah, exactly. And so if you take that, you know,

[00:28:22] non-traditional investor developer, you add in speculation,

[00:28:26] you put in the ability to overbuild,

[00:28:29] and then you tie on a tax shelter that is also abused.

[00:28:33] Well, that equaled poor quality builds and maintenance issues.

[00:28:38] And so the focus on tax benefits rather than the long term

[00:28:42] success of those properties led to the construction of lower quality

[00:28:46] buildings or inadequate maintenance.

[00:28:50] So this resulted in the deterioration of some of the housing stock

[00:28:53] and really some suboptimal living conditions for the tenants

[00:28:57] that found themselves in these buildings.

[00:28:59] Now, that impacted the market because the program's incentives

[00:29:03] weren't always aligned with the actual housing needs.

[00:29:06] Right. If the lawyer, you know, this evil lawyer that we've made up,

[00:29:09] if he's there and, you know, I don't think he's too concerned

[00:29:13] about the living conditions or if that was the right place

[00:29:17] to build this from a demographic or supply and demand point of view.

[00:29:21] You know, he's just thinking about the tax shelter.

[00:29:24] So that led to mismatches in where and in what type of housing

[00:29:30] was being developed in some regions, even experienced an oversupply

[00:29:34] of rental housing back then, while others still face shortages

[00:29:37] kind of distorting local housing markets.

[00:29:40] Again, sounding quite familiar to the issues we face today.

[00:29:44] Yeah. And I mean, that distortion became exceptionally clear

[00:29:47] when you look at a city by city comparison of purpose

[00:29:50] built rental stock as a percentage of all households by city.

[00:29:53] I think the latest data we have on that is like 2016.

[00:29:55] But, you know, it's it's becomes pretty clear that like so Calgary

[00:29:59] was a small city compared to some of the other major metros

[00:30:02] during that period of time when the bulk of rental housing was built

[00:30:04] under the program from the 70, you know, whatever, 70s and 80s.

[00:30:09] Whereas places like Montreal, Ottawa, Winnipeg and Edmonton

[00:30:12] got much more of the purpose built rental merb buildings.

[00:30:17] Montreal being, I think, the leader of purposeful

[00:30:19] rental construction during that period of time.

[00:30:22] Due to a combination of factors, such as the reluctance

[00:30:24] municipalities to zone sufficient land promptly,

[00:30:27] inadequate oversight, leading to substandard construction

[00:30:32] and a change in government, the program was eventually phased out in the 1980s.

[00:30:36] The phase out aimed to address market needs more effectively,

[00:30:38] reduce the exploitation of tax benefits and curb abuses that you were mentioning,

[00:30:42] leading to the discontinuation until it's kind of been resurrected

[00:30:45] and its new MLA select forum today.

[00:30:48] It's coming back, but with a different name.

[00:30:50] So, you know, what's old is new again, sort of, as you were just saying,

[00:30:56] Dan, on the surface, the parallels between the mid and early 70s

[00:31:00] and today's issues seem numerous, right?

[00:31:03] Economically, both eras saw high levels of global inflation,

[00:31:07] higher interest rates, rapid population growth in Canada

[00:31:11] and rapidly surging rents. Sound familiar?

[00:31:14] You're right, because it is we're experiencing that all of that right now.

[00:31:17] And that is exacerbated in places like Vancouver,

[00:31:21] Calgary, Toronto and other major cities.

[00:31:23] And we are in more dire need of housing units today

[00:31:28] than we were back in the 70s.

[00:31:29] Remember, according to CMHC,

[00:31:31] we need 3.5 to 4 million homes by 2030.

[00:31:35] So the public and private sectors have come together before

[00:31:40] and need to come together again in order to accomplish these goals.

[00:31:46] That was true back then, and it's true again now.

[00:31:49] In a 1982 article in the Financial Post, Richard Schiff,

[00:31:52] the chairman of Bramley, which is one of the largest rental developers

[00:31:55] in Toronto, is quoted as saying,

[00:31:57] I fully realize that to proceed in the rental market today

[00:31:59] without some form of government assistance would be economic suicide.

[00:32:03] With the decline of the private sector rental in the early 1970s,

[00:32:08] the federal government, again, became very involved

[00:32:10] in stimulating rental housing supply,

[00:32:12] launching private sector rental supply incentive programs

[00:32:15] designed to bridge the gap between financial recovery,

[00:32:19] rent and market rent levels,

[00:32:21] and thus entice private developers back into development.

[00:32:24] So with all that being said,

[00:32:25] I think we need to change the mindset around developers and investors

[00:32:30] and incentivize them to build and allow them

[00:32:34] to take advantage of these public programs, not abuse them, obviously,

[00:32:38] but reward them for their work and their risk.

[00:32:43] We have to stop villainizing people.

[00:32:45] For instance, many people called out the abuse in the USA.

[00:32:50] So if you have a bonus depreciation in the USA,

[00:32:52] you have something called bonus depreciation

[00:32:54] that has been available to investors who purchase multifamily assets

[00:32:57] for the last few years.

[00:32:59] And that's very similar to the Merb program of the 1970s.

[00:33:03] In the USA, there's also something called the 1031 Exchange,

[00:33:06] which I know Canadians really wish they had up here.

[00:33:09] And that's to encourage reinvesting into similar assets.

[00:33:13] So quick unpacking of the 1031.

[00:33:16] 1031 Exchange is a swap of one real estate investment property

[00:33:20] for another that allows capital gains taxes to be deferred.

[00:33:24] So the 1031 is a tax break.

[00:33:27] You can sell a property.

[00:33:29] You can sell a property held for business or investment purposes

[00:33:32] and swap it for one that you purchase for the same purpose,

[00:33:35] allowing you to defer the capital gains on that sale,

[00:33:39] proceeds from the sale must be held in escrow and a third party,

[00:33:42] but then used to buy the new property.

[00:33:45] You can't receive them even temporarily.

[00:33:47] So why is it in the States and in the past,

[00:33:52] we've seen programs and incentives for investors

[00:33:55] and developers and public private cooperation.

[00:34:00] And now it's people that use these

[00:34:04] or people that try to take advantage of these programs

[00:34:07] or optimize, as you say, not take advantage,

[00:34:08] but people who try to optimize these programs

[00:34:10] and actually produce the stuff that we desperately need

[00:34:14] are being villainized

[00:34:16] or there's an extraordinary amount of red tape around this stuff.

[00:34:21] Yeah, I think it is interesting.

[00:34:23] One of the most frustrating constants in the housing crisis debate

[00:34:26] is how all the different parties villainize each other.

[00:34:28] Like landlords are against tenants,

[00:34:31] tenants are saying or landlords are saying tenants are not paying the rent

[00:34:34] and that it's causing backlogs in the landlord and tenant board.

[00:34:37] And that's why we have this, you know, there's no units available

[00:34:41] and tenants are saying landlords are parasites.

[00:34:43] And I'm just like, you know,

[00:34:45] and then let's not forget about developers.

[00:34:46] They're just rich, greedy, horrible people.

[00:34:48] Yeah, and developers say that the municipal governments,

[00:34:51] like, you know, the municipal governments

[00:34:53] are the ones with their hands out with development charges.

[00:34:55] All over again, there's like eight Spider-Man.

[00:34:57] That's exactly what it is. Yeah. No, it is a Spider-Man meme.

[00:35:00] Yeah, I think it's tough, right?

[00:35:02] The reality is like we're just very conflicted as a society right now,

[00:35:07] I think in Canada and everybody wants to blame the other person

[00:35:10] and not take accountability on their own.

[00:35:12] And I think like, you know,

[00:35:13] like one of the things we talk a lot about on the show is,

[00:35:16] you know, trying to have that level of accountability.

[00:35:18] Like what's the...

[00:35:19] And like this is just economics as well.

[00:35:21] Like what's the best way to make a lot of money?

[00:35:23] We'll solve a real problem.

[00:35:24] What's the realest problem?

[00:35:25] The realest problem.

[00:35:27] The realest.ca problem.

[00:35:28] The realest problem in Canada right now is the housing crisis.

[00:35:32] So like if you're going to solve the housing crisis,

[00:35:35] you're going to make, you know,

[00:35:36] you're likely going to be financially rewarded for doing that.

[00:35:39] And that should be okay.

[00:35:43] Like... Exactly.

[00:35:44] Why is that looked down upon?

[00:35:46] Well, because I think a lot of people have this like,

[00:35:49] this perspective of the government

[00:35:53] that the government would do a good job building housing, right?

[00:35:55] And we saw like examples of that in like the USSR,

[00:35:58] or like, you know, stuff like that.

[00:36:00] I mean, that's like a very extreme example.

[00:36:02] Maybe, but I like it.

[00:36:04] No, but you know,

[00:36:05] I look at like the Toronto community housing

[00:36:07] would be a good example.

[00:36:08] Like you want to talk about bad landlords and like,

[00:36:11] I don't really know that much about it,

[00:36:13] but like I imagine it's like a lack of staffing,

[00:36:16] public sector bureaucracy, a lack of funding,

[00:36:18] but like they had like a floor of a building collapse.

[00:36:20] They had like, you know,

[00:36:21] like some of the worst unit quality

[00:36:22] in the province of Ontario,

[00:36:25] probably in the whole country.

[00:36:27] And that's what happens when the government owns housing.

[00:36:30] And it's because the government's either doing a bad job at it,

[00:36:32] underfunding it, it's too disjointed, whatever.

[00:36:34] And so a lot of people are like,

[00:36:35] oh yeah, the government should just be the ones doing it.

[00:36:37] It's like, I just don't know.

[00:36:38] Like that's just not the answer.

[00:36:39] Like sure, I'll entertain the idea,

[00:36:41] but like show me a good example.

[00:36:43] And then they point to like Scandinavia

[00:36:44] or something like that.

[00:36:45] And it's like, okay, well, yeah.

[00:36:46] They do a bit of a better job at everything,

[00:36:48] apparently when you look at all the global metrics,

[00:36:50] even of happiness, quality of life and everything.

[00:36:52] But, you know, my thing would be look at,

[00:36:55] if there's no example to point to,

[00:36:57] do you want to be the first one to find out

[00:37:00] in the midst of a housing crisis?

[00:37:01] No, we know that public private sector stuff works.

[00:37:04] We know that incentivizing the large developers,

[00:37:08] the midsize developers,

[00:37:09] and then especially incentivizing

[00:37:11] the small cap citizen emerging developer

[00:37:15] to go and build a fourplex

[00:37:17] or build a fiveplex or something like that,

[00:37:18] or renovate into a fiveplex.

[00:37:21] We know that that stuff can go a very long way.

[00:37:24] So,

[00:37:25] Yeah, so let's maybe wrap it up here

[00:37:26] with like a little bit of a chronology

[00:37:28] because this came from the Canadian Center

[00:37:30] for Housing Rights.

[00:37:31] And it's really good summary

[00:37:32] of how these affordable housing programs

[00:37:33] have evolved over time.

[00:37:34] So you can see this, right?

[00:37:35] Yep.

[00:37:36] Okay, so it started in the 1970s,

[00:37:37] which we talked about the MER program,

[00:37:39] the height of affordable housing investments in Canada.

[00:37:41] What happened in the 1980s, Nick?

[00:37:43] I was born and things were great.

[00:37:45] Late 80s, you were born in the housing peak.

[00:37:48] So 1980s, cutbacks to that height of affordability

[00:37:53] were made.

[00:37:54] So cutbacks to government investments

[00:37:56] in affordable housing began.

[00:37:59] And in the 1990s,

[00:38:00] government cutbacks to affordable housing

[00:38:03] became much more drastic

[00:38:04] and they really started aligning policy

[00:38:06] more with home ownership.

[00:38:07] And then 2000s responsibility

[00:38:09] for funding affordable housing

[00:38:11] is devolved to municipality.

[00:38:15] So the federal government stepped back

[00:38:17] and said, this is your problem now.

[00:38:19] And the government of Ontario also devolved

[00:38:21] the responsibility for funding

[00:38:23] and administering existing social housing

[00:38:25] to municipal service managers,

[00:38:27] but retained responsibility for supportive housing.

[00:38:30] And then in 2010s,

[00:38:32] the crisis deepened,

[00:38:33] but housing commitments began to emerge.

[00:38:35] So you started to see

[00:38:37] the number of affordable housing units increasing.

[00:38:39] You started seeing Ontario's Housing Services Act,

[00:38:42] some things being talked about at the federal level

[00:38:45] and then brings us to the 2020s present day.

[00:38:48] 50 years later,

[00:38:49] after the height of the affordable housing investments

[00:38:53] in Canada from the government,

[00:38:55] we hit COVID,

[00:38:57] the housing crisis is drastically worsened by COVID-19.

[00:39:03] And it has pretty much been a roller coaster

[00:39:06] and a bit of a mess since then

[00:39:08] over the last four years, Dan.

[00:39:09] And I think that we've got a lot of work to do

[00:39:12] to get ourselves out of it.

[00:39:13] But if there's one thing we can take away

[00:39:16] from this episode and from the MERB program

[00:39:19] and other programs is that they do work

[00:39:24] and that there is potential for them to work even better

[00:39:27] because we now can look back

[00:39:28] and look at the lessons learned,

[00:39:30] how to reduce the abuse or how to reduce

[00:39:34] the nefarious activity or foul play in there

[00:39:37] and how to incentivize citizen developers,

[00:39:41] mid-cap developers and large cap developers to go

[00:39:44] and use these government incentives

[00:39:47] to really help accomplish their own goals

[00:39:49] as well as to help us work our way

[00:39:52] out of this housing crisis.

[00:39:53] So that is it for the episode.

[00:39:55] If you are looking to buy or sell real estate,

[00:39:58] call Daniel Foesch.

[00:39:59] If you need a mortgage,

[00:40:01] whether it be for your first, second or 10th place

[00:40:05] or if you're looking to do a construction project

[00:40:07] and need financing for that,

[00:40:08] reach out to me.

[00:40:10] Both of our information is in the show notes

[00:40:12] and then free paint.

[00:40:14] Yeah, make sure you enter our giveaway

[00:40:16] with Sherwin Williams for a chance to win 15 gallons

[00:40:19] with just $2,400 worth of free paint.

[00:40:21] Make sure you attend a meetup

[00:40:23] because I think you got to do that

[00:40:24] to get extra ballot in the contest.

[00:40:27] So meetups second Tuesday of every month,

[00:40:28] 22 cities across Canada, 2,500 members.

[00:40:31] We're trying to get that to 5,000 by the end of the year.

[00:40:33] For sure we're gonna do it.

[00:40:34] And check out realist.ca.

[00:40:37] We have an upcoming free webinar on June 19th

[00:40:39] about distress deals, how to find them,

[00:40:42] how to buy them, how to negotiate.

[00:40:44] And I have three power sale listings

[00:40:45] coming in the next couple of weeks.

[00:40:46] So I will have some good examples of one of them's

[00:40:51] that the racetrack deal that you were very excited about.

[00:40:53] Yeah, we should chat about it.

[00:40:54] We'll do the lore on that.

[00:40:55] No, yeah, we'll do the lore on it

[00:40:57] once I get it listed.

[00:40:58] But anyway, thank you.

[00:41:00] Always appreciate it.

[00:41:01] Keep the reviews coming.

[00:41:02] We love you and we'll see you on next Tuesday or Friday.

[00:41:07] The Canadian real estate investor podcast

[00:41:09] is for entertainment purposes only

[00:41:11] and it is not financial advice.

[00:41:14] Nick Hill is a mortgage agent with Premier Mortgage Centre

[00:41:18] and a partner in the G&H Mortgage Group.

[00:41:21] License number 10317, agent license M21004037.

[00:41:29] Daniel Foch is a real estate broker

[00:41:31] licensed with Rare Real Estate,

[00:41:34] a member of the Canadian Real Estate Association,

[00:41:37] the Toronto Real Estate Board

[00:41:39] and the Ontario Real Estate Association.