Capital Gains Tax on Homes, a Step too Far

In February, the red-hot housing market warmed up Canada’s frigid temperatures. The immediate future might not be certain, but public policymakers are exploring a series of tools to cool off the real estate market that has been soaring since the early days of the coronavirus pandemic, and before that. One of these ideas is a capital gains tax on home sales.

The average Canadian house price climbed at an annualized rate of 20 per cent, hitting $816,720 in February, according to the Canadian Real Estate Association (CREA). Sales activity was sizzling, with more than 58,000 changing hands. The positive development was that new listings surged, and new housing construction activity remained decent in the first couple of months of 2022.

With the Bank of Canada (BoC) raising interest rates by 50 basis points at its April policy meeting, could the housing market start seeing signs of a slowdown in the coming months?

“As expected, after a bit of a lull in January, we saw the first batch of spring 2022 listings come to market in February, and they were quickly scooped up by buyers,” said Cliff Stevenson, Chair of CREA, in a news release. “It’s unclear if this is the beginning of a re-emergence of some of the many would-be sellers who have been dormant for the last two years, or if the supply will fade towards the summer like it did in 2021.”

Could a capital gains tax on primary residences be the solution to the country’s housing affordability crisis? Industry experts have weighed in on the proposal.

Will a Capital Gains Tax on Home Sales Help Canada?

In January, Canada Mortgage and Housing Corporation (CMHC), the national housing agency, published a report titled “Housing Wealth and Generational Inequity.” It outlined a list of policy incentives that could provide an answer to the nation’s housing affordability crisis.

One idea was a home equity tax on properties valued at $1 million and more.

According to the report, the federal government would institute a 0.2 per cent levy for homes valued between $1 million and $1.5 million, and up to one per cent of residential properties valued north of $2 million.

Study authors forecast the average annual surtax would range between $408 and $14,710. It is estimated that approximately nine per cent of Canadian homes would be affected, mainly in British Columbia and Ontario.

How much would it raise for Ottawa? The report projected that it would generate as much as $5.83 billion for government coffers.

In addition to raising funds for the government, the report, which was authored by Dr. Paul Kershaw, founder of Generation Squeeze and a University of B.C. professor in the School of Population & Public Health, says it would diminish tax shelter in housing.

“Reducing the tax shelter will disrupt feedback loops that fuel rising home prices,” the report stated. “This would slow the escalation of home prices and improve affordability; reduce inequalities, including between renters/owners and younger/older Canadians; and attract savings and credit towards economic activity outside of the housing sector, which may produce more jobs and innovation than is often found in real estate.”

Not everyone is on board with this proposal.

“They’ve got it backwards. Higher taxes won’t make homes less expensive; higher taxes make everything more expensive,” the Canadian Taxpayers Federation said in a statement, adding that governments should consider reducing red tape and taxes to spur better affordability.

“We are not going to tax our way to more homes. You build more homes with hammers, not tax hikes.”

Others, including RBC Senior Economist Robert Hogue, think everything should be on the table, even “sacred cows like the principal residence exemption from capital gains tax.” RBC Economics immediately dismissed the measure, calling it a “theoretical exercise” rather than a “politically viable” option.

Some believe that there is very little political will to float the idea at any level of government.

In an interview with CTV News, former CMHC CEO Evan Siddal called it “political suicide” for elected officials to even think about it during the election and non-election seasons.

“There are lots of options,” Siddal noted. “But politicians just aren’t allowed to have this conversation because the opposition — and it’s any colour — will skewer them for it. And so we don’t have the debate that we need to have.”

Instead, Siddal purported, the government could assess mortgage insurance and increase the minimum down payment from five to 10 per cent and 10 to 25 per cent.

What is the Realistic Solution Anyway?

Since the start of the recent federal election campaign, housing experts have argued that additional supply is the realistic solution to Canada’s sizzling real estate market. By addressing historically low inventories and lacklustre residential listings – new and active – the price of homes in major urban centres, suburbs, rural communities, and cottage country would come down.

Last summer, Christopher Alexander, the senior vice president of RE/MAX Canada, stated that the best public policy intervention is one that addresses supply issues, from trimming red tape to speeding up regulatory approvals.

“The solution should not be about changing market dynamics but should focus on tackling supply challenges,” Alexander noted.

Sources:

• RBC Economics
• CREA
• CMHC