The opportunity

Care to start a riot?

Just suggest to someone who has saved nothing but paid their house off that real estate capital gains should be taxed. Blood and guts everywhere.

But, we need to talk. The tax system exempts only one asset, the home. Because of that Canadians have $2.2 trillion in mortgage debt, achieved a 70% ownership rate, pushed crappy houses to well above $1 million in most cities, require the bulk of their income just to afford accommodation and massively over-invest in property while the economy staggers along with an under-funded productivity deficit.

In short when you decide not to tax something, and yet tax everything else, people flock to that something. Demand raises values. Houses quickly become unaffordable. They attract speculators and investors, especially when state-backed mortgage insurance allows 20x leverage and ridiculously-low downpayments. Oh yes, and tax-free profits.

So either we keep the principal residence capital gains tax exemption, or we find a way out of this trap which has helped give Canada a housing crisis, fostering the most insane prices on the planet. Now that the nine-year-old Lib dynasty is poised to fall to a majority Conservative government, the climate is right in Ottawa for a brave leader to do the right thing for generations to come – and level the playing field.

But can that be done and still have a modicum of fairness for all those who have played by the rules and sunk their souls into their homes?

Of course. And it must happen – or this current, costly political charade of ‘fixing’ real estate will go on.

But wait. How did we get here, anyway?

Well, kids, it all started in 1962 when the Carter Commission on taxation was struck. In those days capital gains on anything – stocks, houses, gold – were untaxed. To compensate taxes on income were insane – up to 80% in this country. Even higher in the US. So wealthy people invested in stuff, instead of things that created income.

The commission resulted in a 1969 report which said cap gains sould be treated as income, and taxed. It also suggested unrealized gains (like on shares in publicly-traded companies) be reassessed every five years and profits taxed – even when not yet paid out. And it suggested a valuation day, after which capital gains would be levied so prior ones would be left untouched.

In 1972 it came to be. The government then elected to tax gains at 50% (not 100% as Carter suggested), by adding them to taxable income. Included would be actual profits, not on a marked-to-market basis. Money made selling residential real estate would be exempt – since it was deemed too difficult to track (the Internet was not yet a thing).

The inclusion rate was raised by the Mulroney gang to 75% until ultimately chopped back down to 50% by the Chretien Liberals. Recently the Trudeau regime has started upping it again. But for 50 years, houses have been excluded – and in the last 15 years Canada has seen a real estate eruption.

What now?

Actually the original Carter Commission suggested house profits be taxed above an annual exempted amount, but politicians balked. At the time the average Toronto home cost just over $55,000. Now it’s $1,200,000. They’re still balking.

Since Covid, as we all know, real estate has gone ballistic. Even ten interest rate increases failed to bring valuations down. Now that rates are easing, prices are swelling again. If the PR cap gains exemption stands unchanged, all of these gains will be permanently shielded from tax.

Those against levelling the playing field says houses are special because they provide accommodation. They argue that owners who played by the rules and turned their houses into financial strategies should not now be whacked. People who live in cities, like godless Toronto or flaky Vancouver, say they should not be penalized because of demand they cannot control.

Others say if gains are taxed then losses should, be deductible. And how about carrying costs?

As you know, for the last eight years the CRA has been collecting real estate buy-sell data. We now have a property registry that can track flips, absentee ownership and other key ownership facts. It’s no coincidence this project was embarked upon, since it helps frame the end of the PR exemption. We only lack leaders with guts.

As in 1972, a V-day could be established for residential real estate. Past gains would be grandfathered. Nobody’s retirement nest egg would be squished. Nobody would have an excuse not to sell. But gains going forward would be 50% included in income, taxed at a person’s marginal rate – yielding a max tax of about 25% (and an average of half that).

The gains would be net – with an ACB (adjusted cost base) reflecting the difference between purchase and sale price, less commissions, fees and improvements. But not included would ownership costs (property taxes, maintenance, insurance, monthly fees or mortgage payments).

Alternatively we could have a lifetime capital gains exemption again, but this time available to everyone – incuding renters – on any asset, including a house. It would be capped (perhaps at $100,000), not unlimited as at present wth real estate.

Would people squawk? Loudly. So the Cons would have to do this early in their four-year mandate, Then, by 2029, the definancialization of residential real estate might be taking hold. Houses reverting to homes, not investment assets. Speculation, bidding wars, offer dates, assignment sales, misdirected tax subsidies and the words ‘housing crisis’ becoming relics. Prices declining. Common sense regained. This is an opportunity.

All we need? Courage.

About the picture: “Thank you Garth. Just, thank you. You are a gem. The world is a little better thanks to you,” writes Charles. “Finnigan, though looking particularly intimidating in his “crouching tiger” posture, is the dog who puts everyone and everything at ease just by showing up. Appreciate you.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/12/22/the-opportunity-2/