Marginal Effective Tax Rates On Canadian Rental Housing Investments: an Asset Pricing Model Approach

Abstract

In this article, the author develops an asset price model framework to calculate Abstract marginal effective tax rates for personal rental housing investments. The model overcomes a number of limitations that arise with the use of traditional marginal effective tax rate (METR) calculations in this context. In particular, the asset pricing model (APM) framework can be used in simulations to derive precise estimates of key endogenous tax parameters that are typically treated as exogenous in standard METR analyses. These include the value of capital cost claims and accrual-equivalent effective tax rates on capital gains. The model developed is simulated under Canadian tax rules. METR and tax wedge calculations are derived under a variety of economic and tax environments as well as for various holding periods. Compari sons of estimates from the two approaches show that the traditional approach can entail significant biases, which tend to vary positively with the inflation rate, the capital cost allowance (CCA) rate, the debt ratio, and the capital gains inclusion rate, and negatively with real interest rates and the property holding period.

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