Possible ripple effects of U.S. trade policies on Canada’s real estate market
Any changes to U.S. trade policy will inevitably impact Canadian foreign tax policy due to the countries’ deeply intertwined trade relationship. Small changes in the U.S. may lead to ripple effects in Canada, including higher living costs, increased supply chain prices, and increased global competition. Though larger companies may better handle these disruptions, smaller ones could face higher costs and longer lead times. Canada might respond with tax adjustments and relief programs, thereby impacting the country’s tax expenditures. While the landscape remains uncertain, Canadians should keep a close eye on changes in the real estate sector as Trump assumes the presidency for a second time.
Any changes to U.S. trade policy would inevitably impact Canadian foreign tax policy due to the countries’ deeply intertwined trade relationship.
Here is a look at how Canada could respond to potential scenarios—particularly in the real estate sector—as Donald Trump assumes the presidency for a second time.
Impact on Canadian exports
Canada remains heavily reliant on the U.S. market for key construction materials like iron, steel, aluminum and wood. The U.S. accounts for over 80 per cent of Canada’s exports of these materials.
When Trump imposed steel tariffs in May 2018, Canadian exports of primary metal manufacturing to the U.S. plummeted by 21 per cent until the tariffs were lifted in May 2019. Although Canada responded with tariffs of its own, the impact was still notable.
A repeat of such disruptions would pose trouble for Canadian construction goods. The U.S. remains Canada’s primary buyer—but Canada is just one supplier among many for the U.S. market, underscoring the imbalance in trade dependency.
Tariff uncertainty looms
Trump has a history of introducing tariffs in certain situations. In a social media post on Nov. 25, he stated his intent to raise tariffs on goods from Canada as a means of compelling Canada to address immigration and drug trafficking problems harming the United States. These potential changes to economic and tax policies in the U.S. could have wide-reaching implications on Canada, including further interest rate cuts, a weaker Canadian dollar and a shift by U.S. businesses toward domestic markets.
The federal government’s fall economic statement (FES) indicated that Canada is prepared to swiftly respond to any economic changes, including U.S. tariffs. The FES specifically referenced reciprocal tariffs Canada imposed on U.S. steel, aluminum and other products in 2018 as part of its preparation for potential scenarios.
Consumers should be aware that higher tariffs on U.S. imports may lead to higher prices that add to inflationary pressures, including on housing.
The federal government has tried to alleviate the cost of constructing new homes and improve affordability for purchasing or renting a home by:
– Introducing the underused housing tax (UHT).
– Increasing the withdrawal limit under the home buyers’ plan (HBP).
– Introducing a first home savings account (FHSA).
– Proposing targeted exemptions and accelerated capital cost allowance (CCA) in respect to purpose-built rental housing (PBRH).
Depending on the policies that emerge from the Trump administration, Canada may feel the need to respond. Domestically, these changes might require expanding existing relief programs—such as a further increase to the HBP withdrawal limit—and increasing enforcement efforts regarding new measures that seek to reduce housing that is not rented or lived in, such as the UHT.
Lower corporate income and capital gains taxes
Lower U.S. corporate and capital gains taxes may be part of the Trump administration’s strategy to spur more commercial activity and free up more capital for reinvestment.
Conversely, Canada proposed increasing the capital gains inclusion rate and the withholding tax rate on the disposal of taxable Canadian property by foreign owners—predominantly real estate ahttps://rsmcanada.com/insights/services/business-tax-insights/federal-budget-commentary.htmlnd immovable property—in the 2024 Federal Budget.
To stay competitive, Canada could consider providing an additional form of incentive for foreign entities that deploy capital in Canada for residential real estate development beyond targeted exemptions for PBRH.
The federal government may also consider reducing existing compliance requirements to encourage domestic and foreign real estate development for the country’s growing population.
However, it may be less likely that Canada refrains from enacting a higher capital gains rate and the commensurate withholding tax increase.
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