The Quiet Death of the Investor Condo? MURBs May Change the Game
How a proposed federal tax change could transform housing construction
Highlights
The federal government has committed to reintroducing an obscure 1970s tax provision that incentivizes the construction of small-scale rental housing, such as townhouses and multiplexes.
The “MURB (Multiple Unit Residential Building) tax provision” could have a radical impact on housing construction in Canada, with both intended and unintended consequences. We make five predictions on the impact it is likely to have.
Prediction 1: The MURB Provision will facilitate the construction of rental multiplexes and townhouses, not high-rise apartments.
Prediction 2: The MURB Provision constructed housing will likely come from a consortium of mom-and-pop investors, rather than individual investors.
Prediction 3: Investors using the MURB provision will have a different composition than those in the 1970s.
Prediction 4: The MURB Provision is likely to kill investor pre-construction financing of condo units. We should see this as an opportunity to develop new models of condo financing.
Prediction 5: The MURB Provision may lead current investors of single-family homes to sell those units and invest in MURB Provision-eligible apartment construction. The federal government could accelerate this effect and increase the supply of owner-occupied housing by providing incentives for investors who sell their existing stock of single-family homes to families (and only those who meet an owner-occupier requirement) and reinvest the proceeds into a MURB-provision eligible project.
Nobody’s heard about the MURB
When it comes to the federal government’s housing plan, which they’ve billed as the “most ambitious housing plan since the Second World War”, the creation of Building Canada Homes has received the most attention from the media, while we’ve focused much of our attention on GST Reform. However, the promise to reintroduce a relatively obscure tax provision from the 1970s has the greatest potential to transform homebuilding in Canada. The reintroduction of the MURB Provision (Multiple Unit Residential Building tax provision) could be exactly what’s needed to scale up “missing middle” housing in Canada. It could also be the final nail in the coffin for pre-construction condo financing.
What was the MURB provision, and how did it work?
When the measure was introduced in Budget 1974, Finance Minister John Turner described it as follows:
Specifically, in respect of new, multiple-unit residential buildings for rent, started between tonight and December 31, 1975, the capital cost allowance rule will not apply. This means that an owner of an eligible rental unit will be permitted to deduct capital cost allowance against any source of income at any time. I am confident that this measure will attract a significant amount of private equity capital into the construction of new rental housing.
The MURB provision “allows individuals and corporations not in the business of real estate to deduct losses created by capital cost allowances on rental property from non-rental income” (emphasis added). In other words, an owner (in whole or in part) of a MURB provision-eligible apartment building can deduct some of the expenses associated with that building against their personal (or corporate) income.
Capital cost allowances are a form of economic depreciation that can be applied against income:
You might acquire a depreciable property, such as a building, furniture or equipment, to use in your business or professional activities.
Since these properties may wear out or become obsolete over time, you can deduct their cost over a period of several years. This yearly deduction is called a capital cost allowance (CCA).
As part of Budget 2024, the federal government increased the capital cost allowance rate from 4% to 10% for new purpose-built rental housing, which enables owners to claim 10% of the building's book value against their taxes each year, a moved designed to “incentivize builders by moving projects from unfeasible to feasible, through increased after-tax returns on investment.” The Budget notes that this does not reduce lifetime depreciation expenses, but rather front-loads them:
The measure does not change the total amount of depreciation expenses being deducted over time, it simply accelerates it. Allowing homebuilders to deduct certain depreciation expenses over a shorter period of time allows homebuilders to recover more of their costs faster, enabling further investment of their money back into new housing projects.
In a very real sense, the Trudeau government’s increase from 4% to 10% laid the groundwork for the reintroduction of the MURB program, as a 4% depreciation rate might not be lucrative enough to attract mom-and-pop investors into rental housing construction. That said, we don’t know exactly how closely a re-instituted MURB program will mirror the design features of the 1970s-era program. If the federal government alters some or all of the details, it would alter the program’s outcome.
What qualifies for the MURB provision?
In the 1970s era program, a building qualified for the MURB provision if:
It had two or more rental units.
Construction started after November 18, 1974 (which coincided with the introduction of the program, as it was to incentivize the development of new buildings). For the program, construction was deemed to have started at the “installation of footings”.
At least 80% of the building was used for housing (though not necessarily rental housing), although only the portion used for rental purposes could be included in the flow-through of capital cost expenses.
The owner/operator was in possession of a MURB Certificate, provided by the CMHC, which verifies that the project meets the conditions set above.
The current federal accelerated capital cost allowance (ACCA) provision requires that the building have four units, not two. It is likely, though not certain, that the modern version of the MURB provision will also have a four-unit minimum requirement.
Why was the MURB provision introduced?
In his November 18, 1974, Budget speech, Finance Minister Turner provided a grim picture of the state of housing construction:
I have already referred to the short-term prospects for construction of new housing. The projected weakness in this sector of our economy troubles me a good deal. It threatens to reduce employment, raise production costs and increase housing prices and rents. Even more important, a reduction in the supply of new housing could lead to a lower standard of accommodation than Canadians deserve.
Given Canada’s inability to build housing at the same rate as population growth, and the current decline in homebuilding, particularly in the Greater Toronto and Greater Vancouver areas, this paragraph could have just as easily been written today.
How did the MURB program benefit investors?
Being able to both deduct depreciation expenses from personal income and front-load those expenses provides significant tax savings for investors. It provides a tax advantage to building new rental housing over other forms of investment. Most notably, it offers tax advantages for building new rental stock, rather than buying existing single-family homes and renting them out.
Why was the MURB program cancelled?
Irony might not be dead, but it probably killed MURB.
Most of the reasons why MURB died are drenched in irony. One ironic reason it was cancelled was the same reason it was created: it was a tax provision designed to help wealthy investors who tax-advantaged building rental apartments over other forms of investment. As Finance Minister Alan MacEachen stated as part of the October 1980 budget:
Tax incentives tend to pyramid with the result that a number of profitable corporations or wealthy individuals pay little or no tax.... We now have a tax system characterized by higher tax rates relieved by a complex network of incentives and tax preferences. One question is whether the economy might not be better served by a tax system with lower rates but with fewer and more selective incentives.
Ironically, the one tax provision the MacEachen 1980 budget extended was the MURB provision. It would be phased out shortly after.
Also, somewhat ironically, the measure died in part because it was seen as too successful. It ended up building more rental housing than anticipated, and had a higher revenue cost to the federal government than forecast. The year before the MacEachen budget, John Crosbie, Finance Minister in the short-lived Joe Clark government, allowed the provision to expire on the grounds that the housing shortage was over:
Finally, I have reviewed the special capital cost allowance provisions for multiple-unit residential buildings. This tax shelter was introduced in 1974 and has been extended many times since. The pressure on vacancy rates is not now as serious as previously. Thus, I am letting this provision expire, as currently provided, on December 31 of this year.
This viewpoint that the MURB program led to high levels of housing construction was not universally shared. In a 1981 report prepared for the CMHC, Clayton Research argued that while rental construction was robust in the 1970s, the MURB provision was not worth the cost:
There is little question that MURBs were an important component of the recovery in rental construction in the mid to late 1970's. However, it appears likely that, if left to its own devices, the rental market would have begun to respond to the excess demand on its own - albeit at higher rents.
The main beneficiaries of the MURB provision from the supply side of the market have been the developer/promoters and investors with high marginal tax rates. There is evidence that some promoters may be overvaluing projects. Investors, who tend not to be conversant with real estate matters, generally are purchasing the asset solely on its tax shelter aspect with no recognition of possible poor investment prospects due to inflated purchase prices.
The conclusion that the market would respond in the absence of the MURB provision did not age well. Private-sector rental construction in markets such as Toronto largely ceased in the 1980s for several reasons. One of those reasons is that the absence of the MURB provision made investing in other assets, such as condos, more attractive.
Figure 1: Number of Rental Units in Apartment Buildings in Toronto by Year of Construction
Source: @itsahousingtrap via Brandon Donnelly.
Given that analysts are still debating the impact of a policy that ended 40 years ago, it is somewhat of a fool’s errand to predict how reintroduction will affect homebuilding in Canada. That said, given what we know of the program's past performance, combined with the current state of the market, we believe that a new MURB provision could absolutely transform the homebuilding industry in Canada.
What impact will the reintroduction of the MURB provision have?
We believe that the MURB provision, if designed like the 1970s program, will have large intended and unintended consequences. Specifically, we would make the following five predictions.
Prediction 1: The MURB Provision will facilitate the construction of rental multiplexes and townhouses, not high-rise apartments.
Two factors are driving this prediction:
The MURB provision tends to attract smaller-scale investors, who, even in large groups, lack the resources to build high-rises.
The nature of the MURB Certificates.
Recall that the MURB Certificate is issued after the “installation of footings” which we can think of as being when the CMHC records a project as a housing start. The definitions around “installation of footings” and “housing starts”, a contentious issue to this day, as the Association of Municipalities of Ontario (AMO) challenged the CMHC on their methodology of determining housing starts:
AMO: CMHC website defines a start as footing poured, not entire foundation. Please clarify.
CMHC: A new construction start: 100% of foundation has been installed when our field enumerator makes the determination that concrete has been poured for the whole of the footing around the structure. This can take different forms depending on the type of foundation.
For the AMO, this distinction matters, as housing starts are used as municipal performance metrics in programs such as the Building Faster Fund and the Housing Accelerator Fund. For investors in MURB Provision-eligible apartments, their projects are far more valuable when the MURB Certificate is obtained, which biases them towards projects that can meet the foundation/start criteria as quickly as possible:
Although the Department of Finance managed the MURB program, a compliance certificate from CMHC was required. A key condition was that construction had begun – defined as the point when footings were poured. This emphasis led to a focus on projects where there was no subgrade development, since being able to claim soft costs as soon as possible improved the economics for investors.
The built-in speed incentive of the MURB Provision will favour low-rise projects, such as multiplexes and townhouses, and other forms of missing middle housing over mid- and high-rise projects, as it allows investors to achieve a faster return on capital.
If the MURB provision ultimately has little impact, the most likely cause will be regulatory barriers that prevent the construction of these forms of housing. This could be due to a combination of silly games played by municipalities, elevator regulations, and slow single-egress reform.
Prediction 2: The MURB Provision constructed housing will likely come from a consortium of mom-and-pop investors, rather than individual investors.
This one is straightforward. In the 1970s, there were a high number of individual investors and small partnerships that invested in these projects. But given that construction costs and home price-to-income ratios are substantially higher today than they were in the 1970s, the cost of entry is higher today than it was then. That will likely result in the average number of investors in a consortium being higher today than it was in the 1970s.
In the 1970s, promoters emerged who would sell portions of these projects to individual investors, essentially providing a matchmaking function to bring investors together, in exchange for a proceed of the profits or some other financial compensation. This promoter could be the project developer or a separate entity entirely. We predict that a significantly higher proportion of projects will utilize this model (rather than relying on individual investors or a small pool of investors with pre-existing relationships) than was the case in the 1970s. Given the potential for less savvy investors to be exploited under such models, it will be crucial that governments closely monitor investment activities and take action against bad actors.
Prediction 3: Investors using the MURB provision will have a different composition than those in the 1970s.
Not only will the consortiums be different, but the individual investors that make up those groups will have a different composition than in the past. In the 1970s, groups such as doctors and lawyers made up a disproportionate portion of investors in MURB-provision apartments due to their high marginal tax rates. In Ontario, reforms implemented in 2001 allow licensed professionals, along with several others, to form professional corporations, which lower their marginal tax rates and make the MURB provision somewhat less attractive to them.
Despite this, we believe there will still be substantial appetite for the MURB provision, given the large number of Ontarians who have invested in real estate over the past few decades, from purchasing pre-construction condo units to buying single-family homes and renting them out.
Prediction 4: The MURB Provision is likely to kill investor pre-construction financing of condo units.
When the MURB provision was eliminated in the early 1980s, investor activity shifted from rental construction to the condo market. Re-introducing this provision would cause the opposite shift, as MURB-provision buildings would enjoy a substantial tax advantage over financing pre-construction condos.
In many parts of the country, pre-construction condo purchases are in a state of limbo, due to a combination of falling prices and the post-pandemic rise in interest rates. Layering MURB on top of an already weakened patient would probably kill it.
Given the widespread (but not analytically verified) belief that a condo financing model relying on pre-construction sales leads to units more suited to the needs of investors than residents, perhaps we should view this as an opportunity, not a threat. The federal government should re-imagine the condo market and work with industry to develop financing models that do not rely on mom-and-pop investors to get housing built.
Prediction 5: The MURB Provision may lead current investors of single-family homes to sell those units and invest in MURB Provision-eligible apartment construction.
Similarly, since the MURB provision offers tax advantages for building rental housing but not for buying existing housing and renting it out, it could also eliminate, or at least significantly reduce, the phenomenon of mom-and-pop investors purchasing single-family homes and renting them out. This would benefit both the rental and ownership markets. The federal government could accelerate this effect and increase the supply of owner-occupied housing by providing incentives for investors who sell their existing stock of single-family homes to families (and only those who meet an owner-occupier requirement) and reinvest the proceeds into a MURB-provision eligible project.
In short, don’t sleep on MURBs
We hope the federal government will begin consultations on a redesigned MURB provision and institute it by the start of 2026. If done correctly, it could accelerate the construction of missing middle rental housing, put more single-family homes back into the hands of families, and aid in the development of a condo financing model that does not rely on mom-and-pop investors.