Marginal effective tax rates on Canadian rental housing investments: An asset pricing model approach

In this article, the author develops an asset price model framework to calculate marginal effective tar rates for personal rental housing investments. The model overcomes a number of limitations that arise with the use of traditional marginal effective far 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 tar parameters that are typically treated as exogenous in standard METR analyses. These include the value of capital cost claims and accrual-equivalent effective tar rates on capital gains. The model developed is simulated render Canadian tar rules. METR and tar wedge calculations are derived under a variety of economic and tar environments as well as for various holding periods. Comparisons 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 capitol gains inclusion rate, and negatively with real interest rates and the property holding period.