Fixing the Home Ownership Tax Shelter: New study published by the Canadian Tax Journal
Last year marked half a century since the Government of Canada created the home ownership tax shelter. This shelter exempts increases in the value of principal residences from taxation. No other wealth windfall enjoys such favourable tax treatment.
Finance Canada reports that the home ownership tax shelter (or HOTS) costs Canadians $10 billion annually at the federal level. It costs provinces another ~$5 billion. This makes the HOTS by far the largest housing subsidy offered in Canada – although no mention of it is made in the National Housing Strategy. At a time when politicians are decrying Canada’s housing affordability crisis, it may come as a surprise that we choose to subsidize so generously many of the most securely housed Canadians.
A new study by Generation Squeeze Founder, Dr. Paul Kershaw, published by the Canadian Tax Journal revisits the Principal Residence Exemption (PRE), along with public support for reducing the home ownership tax shelter.
The study maintains that eliminating the PRE is not now the best step to fix the harm caused by the HOTS.
Just as offshore tax shelters motivate moving money out of Canada to preserve assets, so too the HOTS motivates Canadians to bank on rising home prices to gain wealth. Treating home ownership as an investment strategy means many regular Canadians benefit when home prices rise beyond local earnings – despite these same prices crushing affordability for younger generations, newcomers of any age, and older renters. In the mid-70s, it took the typical young person 5 years of full-time work to save a 20% down payment on an average priced home. Now it takes 17 years.
Unfortunately, fixing the problem a half-century later by eliminating the PRE is fraught with challenges:
- Elimination of the PRE would need to apply retroactively in order to tax the housing wealth produced by previous housing price inflation. However, many will question the fairness of applying a tax policy change to earlier purchases, and understandably so.
- Retroactive elimination of the PRE would be nearly impossible for administrative reasons.
- Elimination of the PRE only on a “go forward basis” would shelter the wealth created from rising home values over the last five decades. This approach would fail to address many of the wealth inequalities that motivate calls to review the taxation of housing wealth in the first place.
- Any approach to eliminating the PRE would require dramatic expansion to a complex system to measure and audit the capital “gain,” because investments in any home improvements would need to be subtracted from the home’s market value at the time of sale.
The new study argues that these problems can be avoided by an alternative tax policy that would leave the PRE in place, but soften the HOTS sharpest edges. The alternative is a modest price on housing inequity that would add a small annual property surtax of between 0.2 and 1.0 percent on home value above $1 million. The tax would be collected either by federal or provincial governments. About 90% of Canadians would be exempted from the surtax, including all rental properties. Owners of homes above $1 million could defer payment of the surtax until the time of sale or inheritance.
Adding a surtax to property taxation is simple to implement because it can rely on existing provincial infrastructure that already measures home values for the purpose of calculating annual property taxes.
The new study also reports on polling that reveals a majority of Canadians support the surtax.
Polling by Research Co. for Generation Squeeze shows that 62% of Canadians support “implementing a modest surtax paid by Canadians who own homes valued above $1 million.”
This includes a majority among voters for each of the big three political parties: Conservatives (55%); Liberals (63%); and NDP (64%).
Support for a modest surtax on home above $1 million is especially high in Atlantic Canada (73%), Saskatchewan and Manitoba (72%), Alberta (68%), and Quebec (66%) where typical home prices are below the national average, and relatively few households own million-dollar homes.
This higher support is unsurprising, because a majority of Canadians (55%) agree that “the rise in housing wealth inequality is unfair to retirees in the Prairies and Atlantic Canada. They pay taxes on their pension income just like the retiree does in Vancouver or Toronto, but don’t gain the large amounts of home equity that many retirees in Vancouver and Toronto do. By failing to tax the wealth gained by owners in Vancouver and Toronto, we expect retirees in the Prairies and Atlantic Canada to pay more than their fair share of taxes.”
In BC and Ontario, where roughly 25% of households own homes valued above $1 million, one in two respondents supports the surtax.
Most interesting is the finding that 57% of million-dollar home owners – the only people who would have to pay more – support the proposed levy if it is described as a “modest price on housing inequity.” Their support drops to 15% when it is described as a “surtax.”
A modest annual price on housing inequity would raise approximately $5 billion per year. Many poll respondents indicated their support for this proposal would increase if the tax change:
- Pays for income tax cuts for middle- and lower-earners (43%)
- Pays for more affordable housing (40%)
- Pays for more medical care, long-term care and pharmacare (39%) or child care (32%)
- Helps slow home price increases, so earnings have a chance to catch up (38%)
- Reduces wealth inequality (37%)
Raw poll data can be found here. The poll was conducted among 1,010 Canadian adults, and the margin of error for the results is +/- 3.1 percentage points, 19 times out of 20.
Dr. Paul Kershaw is Founder, Lead Researcher & Executive Chair of Generation Squeeze. He is a policy professor in the UBC School of Population and Public Health, and Director of the UBC Masters of Public Health program.