Why tinkering with the capital gains exemption is the nuclear option for intervention in the housing market

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Why tinkering with the capital gains exemption is the nuclear option for intervention in the housing market


“You think it’s hard to get a house now, imagine if they introduce a new home equity tax. People will just stay at home longer, maybe until the last part of their lives ”

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The housing market in Canada has finally gotten so crazy that it prompts talk of something almost sacred to homeowners: the tax-free profits they make when they sell their primary residence.

To be clear: the federal government has not said it is about to start tinkering with the capital gains tax exemption for principal residence. However, the housing market in Canada has become so hot that it is once again at least a topic of conversation, showing just how intense the demand for residential real estate has become.

This wave of buying and selling has been driven by factors such as lower interest rates and a desire for more space linked to COVID-19, which are also prompting some buyers to act faster for fear of miss a chance to own. a house. Soaring house prices increase speculation that policymakers will step in at some point to try to calm things down, as they have done in the past.

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“You are seeing an invigorated debate about some of these kinds of options on the demand side,” said Jason Mercer, chief market analyst at the Toronto Regional Real Estate Board.

The path favored by TRREB and other players in the real estate sector that policymakers would like to take is to tackle the other side of the equation, trying to stimulate the limited supply of housing which has also contributed to the rise in prices. It will take time, however, and the recent surge in house prices could put increased pressure on governments or regulators to intervene.

Royal Bank of Canada economist Robert Hogue wrote this week that policymakers should do something about “overheating” housing markets as they pose a risk to the economy, divert capital for more purposes. productive and can worsen inequalities. One thing Hogue suggested was that governments should reconsider their support for home ownership.

“Policymakers should put everything on the table, including sacred cows like the capital gains tax exemption for primary residence,” Hogue wrote. “These considerations will be complex, controversial, and no doubt full of unintended side effects. Yet much of this support was designed at a time when interest rates were much higher, and in some cases to counter the effect of high rates. ”

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A recent International Monetary Fund staff report on Canada did not mention the principal residence exemption by name, but reiterated the importance of policies that aim to “eliminate the distortions” in housing markets.

“Even well-intentioned measures – like direct subsidies and tax deductions – can have perverse effects on housing affordability by favoring those who can already afford a home to the long-term detriment of those who cannot. can not, thus exacerbating existing inequalities, ”IMF report said.

In the United States, a couple can have capital gains of up to US $ 500,000 from the sale of their home excluded from their taxable income. Yet for Canadian policymakers, even thinking about touching the capital gains tax exemption could leave them with few allies in the real estate sector.

“This will be an atomic bomb on the retirement savings of Canada’s vast middle class,” said Tim Hudak, CEO of the Ontario Real Estate Association. “Second, you think it’s hard to get a house now, imagine if they introduce a new home equity tax. People will just be staying in their homes longer, maybe until the last part of their lives, and that means starter homes and mobile homes won’t hit the market.

Even well-intentioned measures can have perverse effects on housing affordability

Exemption is one of the modern drivers of home ownership and retirement planning in Canada, which can prevent policy makers from getting involved in any way.

“Everyone says that at the end of the day, if I don’t stay home, I can realize the full fair market value tax-free and then use that money to fund or supplement my retirement,” said Jamie Golombek, Financial Post Editor and Managing Director, Tax and Estate Planning at CIBC Private Wealth Management in Toronto.

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Many people also rely on this egg to keep growing.

Consumer expectations for rising home prices have recently risen to the highest level ever seen in the history of a survey conducted for Mortgage Professionals Canada, an association of the industry representing brokers, lenders and others.

“Even after growing 15 percent year over year, more people than ever have told us they expect prices to rise,” said Paul Taylor, President and CEO of Mortgage Professionals from Canada. “And that’s a bit of a speculative warning sign, if you like. ”

Taylor also said that measures to curb housing demand are “really blunt instruments,” which he and MPC do not advocate for.

If measures such as the capital gains tax on primary residences are contemplated, there must be a “compromise” with this, he said, such as perhaps a tax exemption on primary residences. capital gains for other types of investments.

“Because in and of itself, you won’t be encouraging people to put their money elsewhere,” Taylor said. “People will always want to buy a house.”

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