By Canadian Press

Capital gains tax on main residences unlikely to solve housing problems, experts say

Sep 10, 2021 | 1:17 PM

HALIFAX — Housing affordability is front of mind for Canadian voters, with the three major parties each vowing in their election platforms to make it easier for families to purchase homes.

One market-cooling option in the policy toolkit: taxing capital gains on the sale of principal residences.

Politically, it’s not an easy proposal to sell. The proposal is so unpopular with voters that when a senior bank economist suggested in a research paper earlier this year that the principal residence exemption from capital gains tax be reviewed, he later clarified that the idea was being floated as a “theoretical exercise.” 

The Canadian government first introduced capital gains taxes in 1972, but exempted primary homes from taxation in a bid to encourage home ownership. Half a century later, bidding wars, blind offers and double-booked viewings – once the stuff of big-city lore – have become ubiquitous in rural and suburban areas across the country.

The Liberal party’s campaign platform says the government would create an “anti-flipping” tax that requires most properties to be held for a year to curb speculation, which critics say is essentially a capital gains tax.

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Yet amid the worsening housing crisis, some say it’s time to reconsider the concept. 

“Policymakers should put everything on the table, including … the principal residence exemption from capital gains tax,” RBC senior economist Robert Hogue said in a research report in March. He later noted that this proposal was not intended to be a policy recommendation, saying it was “more of a theoretical exercise than a politically viable one.”

“With many Canadians having built their wealth (and retirement plans) on realizing the full value of their home, any amendments would have to carefully balance the impact on the housing market and the financial security of Canadians, and apply only on a go-forward basis,” Hogue wrote in the revised note. 

Politicians appear to agree. None of the plans put forward by Canada’s main parties suggest lifting the capital gains exemption for principal residences, with the exception of the Liberal party’s proposed anti-flipping tax.

That’s because it would be “political suicide,” said Tim Cestnick, a tax and personal finance expert and CEO of Our Family Office Inc.

“Many Canadians look at their homes as their pension plan,” he said. “If the government were to just change the rules and start taxing gains, that could put a lot of people into a very challenging retirement situation.”

Conservative Leader Erin O’Toole said during Thursday’s leaders debate that “Canadians are worried (Liberal Leader Justin Trudeau is) going to be taxing their primary home sales.”

The tax proposed in the Liberal platform would in practice apply to very few people since most Canadians purchase a home with the intention of living in it rather than as a short-term money-maker, said Paul Taylor, president and CEO of Mortgage Professionals Canada.

The promise means, he said: “If you’re in the business of purchasing a home, renovating it and selling it, the government will credit you all the investments into the property you’ve made … but any appreciation beyond your investment, if you own the home less than 12 months, will be 100 per cent taxable income.”

“I think it’s quite specifically targeted at those that are using the return from real estate as income without declaring any tax on it,” he said, noting that there are a lot of “off ramps” built in for people experiencing life changes that might require selling a home shortly after purchasing it.

“It seems quite targeted in the initial description of it but the devil may well be in the details.”

Taylor says it isn’t surprising to see critics characterizing the Liberal proposal as the thin edge of the wedge on taxing capital gains on primary residences, however, “because it is technically what they’re doing.”

He questions how effective the promise would be. For instance, he wonders how CRA would determine the difference between someone selling for legitimate reasons and those who are flipping strictly to make money.

To the extent that it did deter flippers, Taylor said that wouldn’t necessarily have the impact on housing prices that the Liberals hope.

“There are some folks that are buying dilapidated homes, investing in them to make them habitable again and then selling them, which actually adds to the housing stock, which we all concede is suffering from considerable supply constraints at the moment.”

Indeed, many experts say limited housing supply — the number of new listings hitting the market each month — is the biggest contributor to the heated market.

“The problem is we haven’t been building enough homes,” said Scotiabank senior vice-president and chief economist Jean-François Perrault. “The number of Canadians has increased but the number of homes isn’t increasing fast enough to keep up.”

Cestnick agreed.

“I actually don’t think (the Liberal proposal) would even help the housing market very much. The impact would be very nominal,” he said, also pointing to the supply side as the bigger pressure point.

“It also doesn’t alter the fundamental imbalance in the housing market.”

Perrault added: “You’re not going to effect meaningful, lasting changes on the affordability side unless we simply have a better balance between the number of homes for sale versus the number of Canadians that need homes.”

The solution is rather to ease obstacles to new construction for all forms of housing — affordable housing, rentals and single-family homes, he said.

“One thing is certain: there are no silver bullets,” RBC’s Hogue said in his March report. “All demand-side options have side effects and work, at best, for a limited time.”

— With files from Joan Bryden in Ottawa

This report by The Canadian Press was first published Sept. 10, 2021.

Brett Bundale, The Canadian Press