Destabilizing speculation

Cancellation of the capital gains tax exemption could have major consequences

There is little doubt that the Canadian real estate market is overheated, and although several tax regimes have failed to reduce real estate prices in recent years, the government still has a “nuclear option” to its disposition.

The federal deficit ballooned before the COVID-19 pandemic prompted the government to roll out several income support programs, increasing the country’s debt – and with no hope of paying it back soon, taxes are more than likely to rise. ‘to augment.

A recent report explored several scenarios that could play out in the Canadian real estate market over the next five years, one of which was that the capital gains tax exemption on primary residences could be repealed. Such a bold move would surely bring activity to a virtual standstill in the real estate market, which, in theory, could remedy endemic affordability issues.

However, the ramifications would be unlike anything real estate-related tax regimes have had before, posits Jamie Golombek, managing director, tax and estate planning at CIBC Private Wealth, who authored the report with RE/MAX and the Conference. Board of Canada. For starters, the cancellation of the capital gains tax exemption could even upset the retirement plans of millions of Canadians.

“Canadians’ primary residences represent the greatest store of value for most homeowners and removing a significant portion of that value by eliminating the exemption could provide a profound market chill,” Golombek said in the report. “While this will theoretically improve government coffers, it would be a blow to Canadian household net worth, which in turn could swing the housing market significantly from hot to cold.”

Little choice but to tax

Despite the deleterious effects such a decision could have on the wealth of Canadians, Brian Poncelet, an independent certified financial planner, expects it to be announced in one of the next federal budgets, the next of which will take place April 7.

Capital gains are normally taxed at 50%, but Poncelet thinks a principal residence tax would be about half that amount. Echoing the report, he believes the government will have no choice but to tax Canadians heavily because of extravagant spending.

“The housing market should have been dealt with years ago. The horse ran away from the stable five days ago and they just decided to close the door,” he said. “I could see them saying, ‘Instead of 50%, we’re going to lower it to 25%.’

A strident capital gains tax on primary residences, however, could open another Pandora’s box. Bradley Watson, host of Toronto’s #1 Real Estate Podcast and a Sutton Group broker – Summit Realty Inc., argues that such a tax would rob end-user homeownership of its intrinsic value and create unsustainable rental demand.

If capital gains are taxed about as much on a principal residence as on an investment property, it could spawn a class of investors who view real estate purely in terms of operating assets. But given that Canada’s major urban areas already have too little rental supply, rising demand will invariably lead to higher rental prices, Watson surmises, which would spill over to secondary and tertiary markets.

“Investors will go into lower-priced assets in smaller markets knowing that the advantage of a primary residence is no longer there,” Watson said. “If a primary residence equals an investment property, you’ll see people moving into the rental market for housing and investing in neighborhoods that offer better returns on investment. Why buy a $1.3 million detached house in Toronto and pay a mortgage when it’s better to own a house as an investment vehicle that will provide you with a more valuable source of income than owning the house in which one do you live?

True, the housing market in its current state is as untenable as Watson’s theory of what might happen to the rental market, which is already stretched to the limit in many national markets, but other tax regimes such as property taxes foreign buyers and speculation have not achieved their desired results. However, it’s hard to imagine that buyers and homeowners wouldn’t shudder at such a scenario. Housing as an asset class rather than a family decision, Watson says, would be destabilizing.

“Every real estate purchase would then become a business decision,” he said. “Where that leads to business and profitability, decisions would spill over to communities on the periphery. The way this will affect the rental market is that you would have an influx of not only immigrants, but also locals choosing to rent because they would no longer see the value of the property, and the competition between tenants would be so high that it would drive up rental prices. ”

political suicide

However, Ben Myers, president of Bullpen Research and Consulting, notes that the homeownership rate in Canada hovers around 70% and that the cancellation of the capital gains tax exemption on residences main ones would be political suicide.

“I find it hard to believe that would fly in a country that is 70% homeowners, a high percentage of whom are also voters,” Myers said. “For a government to make this kind of change, it would certainly bother a lot of people. Many people plan to sell their homes when they retire and move into smaller rentals or accommodations, or even become snowbirds, so they expect to keep all of their capital gains when they do.

If the federal government were to implement such a bold policy, Myers believes that fewer Canadians would sell their homes, which would exacerbate the supply problem in the resale market – demand has exceeded available inventory even more than usual in the over the past year, driving up selling prices at an accelerated rate. But if a capital gains tax on primary residences were digestible – that is, even lower than Poncelet’s 25% estimate – it could very well fly.

“If it’s small enough it wouldn’t have a big impact, but if it was too big it would have a big impact,” Myers said. “It all depends on the price. If they impose a huge tax, it will affect people’s decision to move because they will not want to pay that tax. In Toronto they added a second land transfer tax and that certainly didn’t seem to slow anyone down.

In light of recent news that Jagmeet Singh’s New Democrats will support the federal Liberals in most policy decisions, essentially forcing the latter to enjoy de facto majority government privileges, Poncelet may see the door open on the introduction of a capital gains tax on primary residences, particularly because, he suspects, it would not alienate their bases. Moreover, even taxes targeted at investors could be considered, he added.

“If you have four properties, they might say, ‘You have to pay a little extra.’ Politically, if you have four properties, you probably won’t vote for the NDP or the Liberal, so they think, “If I’m boring you, and I know there’s a good chance you won’t vote for me, is do I really care??’”