This post is the third in a series of blogs meant to highlight results from a poll commissioned by Gen Squeeze to gauge public sentiments about housing wealth. You can read the first blog here and the second one here.
The unfairness within Canada’s housing system is a feature, not a bug. As Gen Squeeze has repeatedly pointed out, ownership of a home confers a unique tax advantage that cannot be claimed for any other asset. That’s because the principal residence exemption largely shelters housing wealth from taxation. To understand the implications of this, let’s look at a couple of scenarios.
Let’s say someone purchased a home in Metro Vancouver in the mid-1970s, when the average home price in the area was less than a quarter of what it is today. If that person (or someone who inherits their home) were to sell in today’s market, they would not have to pay taxes on any of the (big!) profits made from the sale.
Now, imagine another person living in 1970s Metro Vancouver who didn’t purchase a home. But as a renter, let’s say they regularly put money into safe investments on the stock market to slowly build wealth.
The person who purchased a home enjoys two major advantages. First, the advantage of having their mortgage payments directly contribute to owning a valuable asset. Second, the accumulation of all that tax-free wealth from the rise in value of the home they lived in.
The renter, meanwhile, is doubly disadvantaged! In addition to the greater instability of renting vs owning, the renter could only invest money left over after covering their rental costs. Then, when the renter sells their investments, half of any stock market gains would be subject to taxation.¹
For Gen Squeeze, the real problem with this scenario is not that the renter’s investments will be subject to the capital gains tax. In fact, organizations like Canadians for Tax Fairness make the case that all capital gains should be subject to taxation. They point out that exempting half of capital gains from taxation disproportionately benefits the ultra-wealthy—and that since all of the income people earn from working is subject to taxation, it’s only fair that earnings accrued from the rising value of assets be treated similarly.
The real problem is that the homeowner gets to amass hundreds of thousands (sometimes millions) of dollars in tax-free wealth while they sleep and watch TV. Unsurprisingly, this means that many homeowners WANT to see home prices go up, to continue the home price gravy train! So the principal residence exemption incentivizes homeowners to see their homes as investments that should forever increase in value.
This is a key reason why many older Canadians see the wealth accumulated in their homes as particularly important for their retirement, maybe even more important than money in RRSPs or other investments. Eventually taxes will have to be paid on money removed from an RRSP. But not so for the windfalls that come from the increased value of your principal residence (whether via a home equity line of credit or the sale of your home).
It’s no wonder that we find ourselves in an intergenerational conundrum. We’ve set the housing system up to create tensions between older and younger Canadians. On the one hand, older generations want to retire in comfort, and some see ever-rising home prices as contributing to this goal. On the other hand, ever-rising home prices keep many young people from being able to afford a place to call home.
While the principal residence exemption clearly plays a crucial role in the dysfunction of our housing system, our polling suggests that many Canadians are not even aware of it. Here’s what we asked:
As you may know, principal residences (the home in which you or your family regularly live) are sheltered from taxation more than other assets. A person who goes to work today will have 100% of their earnings taxed. If some of those earnings are invested in the stock market, 50% of the return on these investments will be taxed. By contrast, the wealth gained from the rising value of one’s home will barely be taxed at all. Before answering this survey, were you aware of Canada’s tax shelter for home ownership?
52 percent of respondents said they were not aware that principal residences are more sheltered from taxation than income from other sources.
Even more worrying: when asked if it was fair that the capital gains from home ownership were taxed less than earned income, almost half of respondents (46%) said they thought it was. The home ownership tax shelter is so well-integrated into our cultural expectations around housing that many are unaware of the inequalities it helps to perpetuate—inequalities between owners and renters; inequalities between young and old; even inequalities between regions, as the exemption benefits Canadians living in areas where home prices have spiralled up far more than those living in jurisdictions that have not experienced the same rapid increases.
The wealth homeowners have accumulated is not a small sum. Since 1977, Canadian homeowners have collectively gained an additional $3.2 trillion as a result of the rising value of homes.
To put this amount into perspective, consider that the sum of money held in offshore tax havens around the world stands at an estimated $21 to $32 trillion USD ($28 to $42 trillion CAD). Given that Canada represents 0.5 percent of the world’s population, it’s unlikely that Canadians own 10% – or ~$3.2 trillion – of the funds that are sheltered in offshore tax havens. But we do generally own the $3.2 trillion in additional wealth sheltered by the principal residence exemption.
If any of this additional housing wealth was stashed away in Barbados or Luxembourg, we’d rightly be upset about it. We shouldn’t be any less concerned just because this particular tax shelter happens to be on Canadian soil. In fact, given that our home-grown home ownership tax shelter helps put upward pressure on home prices, we should be especially concerned about it.
This is precisely why Gen Squeeze has been so interested in developing policy solutions that start us down the path of taxing housing wealth fairly. Luckily, as we’ve written about in a previous post in this blog series, our polling shows that most Canadians support putting a modest surtax on homes valued above $1 million.
A modest surtax of this kind would not only help to reduce the inequalities created by the home ownership tax shelter, it could also help change our collective sense of what’s fair when it comes to taxing wealth.
Our power grows with the size of our network. So, if you haven’t done so already, we hope you join us to help get the surtax proposal implemented.
1) The one exception to this is if the money was invested in the stock market by way of a Tax-Free Savings Account (TFSA), in which case no capital gains tax would have to be paid. This type of account didn’t exist until 2009, and it has relatively low annual contribution limits. The pros and cons of the TFSA as an investment and public finance tool need careful monitoring, because TFSAs contribute to sheltering wealth (which Statistics Canada shows is disproportionately held by older Canadians) at a time that the population is aging, and demands for additional medical care and retirement income security investments are growing. This is especially worrisome when federal and provincial governments are routinely running deficits even when their economies are not in recession.