Why Canada Will NEVER Tax Your Home Profits

Why are Canadians allowed to sell their homes tax-free while profits from stocks and investments get taxed? And is that policy making Canada’s housing crisis even worse?

In this episode of Classonomics Sabrina Maddeaux and Mike Moffatt break down Canada’s capital gains exemption on primary residences, why it exists, why politicians are terrified to touch it, and whether it’s contributing to skyrocketing home prices and inequality between homeowners and renters.

They explore the history of the tax exemption, why attempts to change it spark political outrage, how other countries handle housing taxes, and whether taxing home profits would actually make housing more affordable. Plus, they discuss property taxes, downsizing, investor advantages, generational inequality, and why even “common sense” housing reforms have become politically impossible in Canada.

Topics covered:

• Canada’s capital gains exemption on homes
• Housing affordability and inequality
• Why homeowners are politically powerful
• How other countries tax housing wealth
• Property taxes and downsizing
• Investors vs families in the housing market
• The politics of housing reform in Canada
• Why fixing housing has become so difficult

#Canada #HousingCrisis #RealEstate #Taxes #HousingMarket #CanadianPolitics #Economics #TheMissingMiddle

Chapters:

00:00 Why Canada Doesn’t Tax Gains on Your Primary Home
01:17 Why Politicians Won’t Touch the Primary Residence Exemption
04:06 The History of Canada’s Capital Gains Exemption
05:28 How Other Countries Handle Housing Capital Gains
07:25 Does the Exemption Actually Worsen the Housing Crisis?
10:39 The Case Against Taxing Primary Residences
13:26 Better Alternatives: Tax Fairness Without Capital Gains Reform
16:06 Why Even Good Housing Policy Can Be Politically Impossible

Research:

Canada should look to Australia on eliminating barriers to downsizing for seniors

https://www.theglobeandmail.com/investing/personal-finance/article-housing-baby-boomers-suburban-homes-young-families/

CBC article from a few years ago: https://www.cbc.ca/news/politics/the-conservatives-misleading-claims-about-a-secret-liberal-housing-tax-1.5312873 

26 of 40:

https://view.asiae.co.kr/en/article/2022032109551988175 

History of cap gains taxes:

https://www.ctf.ca/EN/EN/Newsletters/Perspectives/2021/3/210304.aspx

Hosted by Mike Moffatt & Cara Stern & Sabrina Maddeaux

Produced by Meredith Martin

Funded by the Neptis Foundation https://neptis.org/

Transcript

SPEAKER_00 0:00

In Canada, the profits you earn from selling your home are exempt from income taxes, a policy costing the federal government billions and often cited as a contributor to the nation's housing crisis. Today we explore why this exemption exists, why any attempt to reform it sparks immediate political outrage, and what other developed countries do.

SPEAKER_01 0:18

Classonomics, hosted by Sabrina Mado and Mike Moffat.

SPEAKER_02 0:24

Hey everyone, we're recording a Missing Middle podcast episode in front of a live audience with all three hosts and special guest Ron Butler at the National Club in Toronto on Monday, June the 1st. Please visit Missing Middle Initiative.ca for more information.

SPEAKER_00 0:40

And now on with the show. In Canada, if you buy a stock or bond, it goes up in value, then you sell it, you have to pay capital gains taxes on the profits, unless it's an attack sheltered vehicle like a TFSA. However, the same isn't true of a home you use as a primary residence, which are exempt from capital gains taxes. This has led to concerns that the exemption has contributed to the housing crisis. The Canadian Tax Federation notes that the exemption creates an incentive for families to overinvest in housing. And the exemption isn't cheap either. It costs the federal government over $8 billion in lost tax revenue each year. So, Mike, why does it exist in the first place?

SPEAKER_03 1:17

Well, you're not the first person to ask that question. And in fact, there have been proposals to change these rules over the years, but even the mere suggestion of changes tends to cause an uproar. So if we go back all the way back to uh 2018, there were some liberal caucus members from Ontario who floated the idea of having capital gains taxes applied to homes that were owned for fewer than five years as a way to deter housing speculation. So this wasn't even all homes, this was just a small subset. But the conservatives naturally pounced on it. And Justin Trudeau, the prime minister of the day, you know, had to make it very clear that he or his government would never even consider such a move. And, you know, I know that any tax is bound to be unpopular, but why do you think a capital gains tax on housing is such a third rail, even one that's designed to be an anti-speculation measure that would only hit, you know, kind of a handful of people?

SPEAKER_00 2:13

There's always the fear that once you implement any tax, it just keeps expanding, which is a lot of the public's experience in Canada. Uh, but the idea that you put money into a home in Canada and then you're entitled to its appreciation and it will be a retirement vehicle or something you can take out extra loans against in hard financial times, is so psychologically baked in to the Canadian idea of homeownership and financial planning that it's incredibly difficult, if not impossible, to convince homeowners to ever even consider forgoing that. And a huge swath of the public, and certainly the older population who votes and donates more and uh interacts more with politicians, are those homeowners who stand to benefit the most from the capital gains exemption. At the same time, even if you come down with more taxes on potential speculators or investors, so much of the Canadian public these days are investors in secondary residences because of the fact that we let housing skyrocket for years. And the psychology was that it'll always go up. And that psychology went from it'll always go up to I'm entitled to it always going up and making all the money associated with that.

SPEAKER_03 3:25

Yeah, that makes a lot of sense. You know, people are entitled to their entitlements, as uh one uh politician famously said about uh 25 years ago. And yeah, it does make sense when you look at who is more likely to vote than who, that homeowners are more likely to vote than renters, older people are more likely to vote than younger people, and so on. If you kind of pick, you know, the wrong group to pick a fight with, it would seem to be older uh homeowners who have uh generated a whole lot of uh capital gains in their houses.

SPEAKER_00 3:55

And that's been the demographic that's primarily freaked out when changes like this have been proposed over the years. But I'm curious why were uh primary residences exempt from capital gains in the first place?

SPEAKER_03 4:06

Okay, so it's time for uh Professor Mike to give a little bit of a history lesson here. So the modern capital gains tax system comes out of a 1966 uh Royal Commission. And there's this famous report, at least famous to econ nerds like me, called the Carter Report. And the Carter Report advocated this exemption. Now, their concern was just that it would be hard to enforce uh a capital gains tax on housing, because you have to sort of monitor a bunch of things that the federal government wasn't used to uh monitoring, you would have to sort of figure out how to deal with uh inflation and that kind of thing. So the Carter report basically said it's too much of a headache, don't bother. Uh, but back when the federal government, this would be the Trudeau government, the first Trudeau government, when they were designing the modern capital gains system, which went into effect uh the beginning of January 1972, they'd actually considered making primary residents subject to tax. Now they'd have a small exemption that you would be able to get like an additional thousand dollars a year in cap-free gains in your home. So which these days sounds so unbelievably quaint. But in the end, they just decided it was more trouble than it was worth. So they just made this blanket exemption for primary residences. They've tweaked it a couple times since then, but it's basically unchanged since 1972.

SPEAKER_00 5:28

That's a really interesting history, and that very much tracks that they decided it was more trouble than it's worth. As we know, there's still a lot of housing data that we don't track in Canada, and the CRA is often a mess. So I can only imagine the extra complications that would come with having to take into account reporting of home sales and values across Canada. But I'm wondering if other countries have exemptions similar to Canada or if we're some unique outlier.

SPEAKER_03 5:52

Yeah, well, it turns out a lot of countries have made similar uh recognition as Canada that this is just too much trouble uh to track. You know, countries in general aren't great at imposing any kind of wealth tax, which essentially this would be. So there was this report from the Korea Local Tax Research Institute, a group that you and I, I'm sure, follow uh closely, and uh they found that two-thirds of developed countries have no capital gains on primary residences. So basically they looked at 40 different countries, and two-thirds of them had systems very similar to Canada's. And of the remaining third, even those had a bunch of really broad exemptions, such as what some of those Ontario liberal MPs propose, that the capital gains only applies if you own a home for a few years, or a lot of them have a rollover position. So if you sell your home, but then you go and buy another one of equal or greater value, you don't have to pay cap gains on that. It basically just kind of rolls over. So of those 40 countries, there's really only four outliers: uh Japan, South Korea, Sweden, and the United States, where having to pay capital gains taxes on primary residences is pretty common, at least for high value properties. But even when you look at those, like you have countries like the United States where, yeah, they some people do have to pay capital gains on their homes, but they get to deduct uh mortgage interest on their taxes. So there it's like, okay, you know, we're gonna tax you on one end, but we'll give you this uh deduction over here.

SPEAKER_00 7:25

Okay, so we've covered how this impacts homeowners and sellers themselves. But what impact does the exemption have more broadly on housing and the nation's finances?

SPEAKER_03 7:34

Well, the big one is at $8 billion in lost revenue each year that you mentioned. You know, the government could certainly use that for other things or to, you know, uh cut uh uh the taxes of young middle class people, you know, something that you advocate uh quite a bit. So they could tax, they could tax me more and you less. And I'm sure you'd be all uh for that. But if we go beyond just what this means for the federal government, the capital gains system does create some lock-in for older residents. And I can refer to a Globe piece that I wrote a few weeks ago. We'll we'll link to it in the show notes. But what can happen for an older person, let's say you've got you know that this house is appreciated to two to three million and you're 65 or 70. One of the things people suggest to do is okay, I'm gonna downsize that home, go into something smaller, and then put the remaining million or two, put it into stocks and bonds and things like that. Well, if you do that, any of the capital gains that you get on the stocks and bonds over over time, like the dividends, the interest, you're gonna have to pay capital gains tax on. So it does kind of discourage older people from downsizing their homes. But overall, like it does have all of these distortions, but there's not a lot of evidence that it's a major driver to our housing crisis. And you just look like the countries that people point to as having affordable housing systems, like France and other countries, they all have Canadian-style exemptions. Where on the other hand, the United States, which we point to as like the poster child for housing dysfunction, has one of the more stringent uh rules when it comes to capital gains taxations for housing. So if you do this kind of cross-country comparison, it's hard to say that, well, you know, these uh countries that have this capital gains taxes, you know, they've been able to avoid a housing crisis, and we should follow suit.

SPEAKER_00 9:24

Yeah, that lock-in factor is interesting. I'm curious though, I would think that would come behind, you know, other factors preventing seniors from downsizing, like the lack of appropriate downsizing options in their communities, affordable downsizing options, and just also the psychological toll and the difficulty that comes with moving.

SPEAKER_03 9:44

Yeah, so I agree. So the psychological side of it, you you know, that's never going to go away, no matter what policy. I would say that there is a bit of a chicken and egg thing here, that that part of the reason why we don't have those downsizing options is just that it's not tax efficient, right? So uh, but but I agree, uh, it's not the only thing that prevents older people from downsizing. There are countries who have tried to deal with this. So Australia has a rule for older people that if you downsize, you can take some of those profits and put it into like a TFSA type vehicle. Uh so then, you know, your future stocks and bonds or or whatever, you can accumulate uh capital gains tax-free. So there are some countries that have tried to deal with this distortion, but you're right. I don't think we can point to it and say, okay, that's the reason that seniors don't downsize. It's, you know, there's a lot of complex factors.

SPEAKER_00 10:39

Yeah, that's an interesting solution coming from Australia too, especially as people start to live longer, right? I mean, in years past, you might have downsized and then, you know, not expected to necessarily be around for another two decades or something. But now people are looking for ways to ensure their financial future and security for much longer. But beyond the politics of it, would there be any downside to treating primary residences like any other asset for the purposes of capital gains?

SPEAKER_03 11:08

Well, one big problem is it would give investors uh a leg up. Uh, because right now, investors, like if it's a secondary residence, you do have to pay capital gains on it, right? So this system that we have now with the exemption for uh primary residences uh makes it easier for families to compete uh with investors. But now, if you kind of level the playing field that way of treating single families as investors, it actually advantages investors because investors, if you buy a single family residence, you're able to deduct a mortgage interest against your rental income. But if you own the home as a primary residence, you can't. So that's actually one of the reasons why the US has those rules to make mortgage interest tax deductible. Uh, because if you don't do that, you create a system where investors are advantaged over families. And I think most people uh don't want that. If we did in Canada change those cap gains rules, we would probably have to change a bunch of other rules too, or else we would be advantaging investors over single family.

SPEAKER_00 12:14

Yeah, I do think we have to be wary of that with any tax changes. Uh both you and I have been big proponents of the HST removal for new builds in Ontario that came through recently. But what we've seen is a lot of investors are now planning to buy up large amounts of units and they're going to get massive tax breaks because of this, where the question is, how much is this actually going to benefit families who are buying homes and will it bring new supply online that isn't just existing supply that's empty? I don't know if you have any perspective on how this is rolling out.

SPEAKER_03 12:47

Yeah, the HSC side, I think it's too early to tell. I'm a little bit less worried around um investors buying condos. I kind of view it as like one corporation buying a bunch of homes from another corporation. And if they're gonna rent out those homes, I would prefer that to being um vacant. Yeah, I think it is still is an open question around how much the HST changes are going to, you know, just help the already built homes uh get into other people's hands versus how much it's going to create new supply. I think it will create new supply, but it's an experiment. So, you know, we'll have to revisit this uh in a year when we have a little bit more data.

SPEAKER_00 13:26

Follow-up episode.

SPEAKER_03 13:27

Absolutely. Well, we always uh we always love those. Let's leave the HST aside for a second, but let's go back to the uh personal uh residence exemption on capital gains tax. Would you support changes there? Or do you think any changes would be kind of worse than the status quo?

SPEAKER_00 13:46

I think in theory, I'd support it, but I think it's so politically untenable and would take so much time and be implemented and then maybe rolled back that it's just not worth it. I think there's other ways that we can get there quicker. And for me, I've talked a lot about if we're going to have massive tax advantages that largely benefit older Canadians and homeowners, then we need to look at tax vehicles that benefit younger Canadians and renters, right? So maybe it's more expanding capital gains exemptions to be a universal capital gains exemption up to a certain amount for any type of investments, right? Or maybe it's um allowing renters to write off a portion of their rent on their taxes. There's multiple options here. I do think there have to be changes, though, to uh bring some fairness back into the tax system. What are your thoughts?

SPEAKER_03 14:36

Yeah, and that's that's essentially where I am as well. So I'm saying, okay, uh, you know, what when when people suggest to put capital gains on primary residences, they they are trying to solve a very real problem. There is a lot of inequality that that's going on here. But I don't think it's the right vehicle. It's just it's administratively complex. It's a political third rail. So I think there's other other things you can do. Uh, you know, you you you uh you kind of went to the carrot side. I'll go to the stick side a little bit. It's never made sense to me that a home valued at $300,000 pays the same property tax rate as one that's $3 million, right? We don't do that with with income taxes and so on. So I would love to see the property tax system made more progressive. That if you have a less expensive home, you should pay a lower property tax rate than somebody who owns a $3 million or $5 million or a $10 million home, right? So everybody's going to be paid tax, but you know, the the folks with the less expensive home, maybe their tax rate is, I don't know, like one quarter of one percent of the home's value. And then you can, you know, go into tax brackets, and then once you get into you know above five million dollars, maybe it's you know a two percent tax uh on top of that. You know, so I think you can make the system, the existing system more progressive without having to introduce a measure that would be hard to enforce and very politically unpopular.

SPEAKER_00 16:06

You see, that's another one I agree in theory with, but I think our housing system is so broken that you couldn't do that right now without a ton of add-on consequences and pushback. And the reason for that is that home values have become so inflated that you have people who bought in much earlier who don't have super high incomes, but their home might now be valued at 1 million, 2 million, or even more, and they wouldn't be able to afford the property tax increases. And I think that's actually one of the reasons why, um, for example, in Ontario, they actually haven't re-evaluated homes for the purposes of property taxes since what, like 2016? And they should be doing that, but simply because people would riot if suddenly their home was valued at 1 million, although they'd like to sell their home for 1 million or $2 million, but then they had to pay the associated property taxes as they exist today, let alone higher rates on that.

SPEAKER_03 16:58

Yeah, I think all of that makes sense. First of all, we would have to have accurate property values. And at least here in Ontario, that's not the case. Uh, you also have a lot of seniors who bought their homes in the 1970s or 1980s for next to nothing, uh, now have you know multi-million dollar homes on paper, but they've never earned the incomes kind of appropriate uh for those homes. So yeah, they would be, they would be burdened by that. And yeah, you you also kind of run into the same kind of political challenges as you know, the the people who would have to pay higher property taxes are the same people who uh fought against and won having to put uh capital gains taxes on on primary residences. So yeah, it's one of those things like a like an econ nerd like me on paper goes, okay, well, this might be an elegant solution, but it runs into all the kind of political barriers that uh a capital gains tax on primary residences run runs into.

SPEAKER_00 17:56

And I think that's the headline here that our housing affordability has become so out of whack and so screwed up that even common sense, elegant solutions uh might not be tenable right now. So we need to get things back in order. Thank you everyone for watching and listening. Into our producer, Meredith Martin, and our editor, Sean Foreman.

SPEAKER_03 18:14

And if you have any thoughts or questions about how common sense is no longer tenable, please send us an email to missing middle podcast at gmail.com.

SPEAKER_00 18:22

And we'll see you next time.