Canadian real estate has been the ideal tax shelter, but that might change soon. Generation Squeeze, a Vancouver-led non-profit advocating for Millennials, released its Solutions Lab report. The CMHC-funded (but independent) study has four suggestions for improving housing affordability. Today we’re going to dive into its most controversial proposal stirring debate — a progressive tax on home equity.
A Progressive Surtax On Canadian Real Estate
A progressive (and deferrable) tax for housing is like income taxes, but with property. The higher the value of the home, the higher the rate of taxes are paid on the additional value. The idea is to add friction to growth, or have society share the wealth created. In this case, they’re suggesting the surtax applies to the home value over $1 million. Don’t have a $1 million home? Then you don’t pay a surtax.
Not clear? Let’s work through a quick example from the organization. In one scenario, they use a surtax of 0.2% on values from $1 to $1.5 million, 0.5% for $1.5 to $2 million, and 1.0% above $2 million. Remember, this is an example. The actual rate would require various impact models from the government first.
Using this example, a homeowner with a $1.2 million home would only pay a surtax on the top $200,000. At the 0.2% rate, that works out to $400 for that year. Pretty easy, right?
Progressive tax rates are lost on some people, though. Let’s do a $2 million example. The first $1 million gets no surtax, just the last half. The first $500,000 above $1 million is taxed at 0.2% ($1,000), and the remaining $500,000 at 0.5% ($3,500). In this case, the owner would owe $3,500 on the surtax. It gets more steep as the home gets more expensive.
The Surtax Is Just A Progressive Property Tax
The home equity surtax is just a progressive property tax, and acts that way. Think of property taxes like inflation. When inflation is too low, there’s little incentive to keep money flowing. As a result, this can create capital hoarding and inefficiency. If inflation is too high, it devalues money too fast, leading to a different kind of inefficiency. But when inflation is just right, it keeps capital moving at a fair rate without big penalties.
Municipalities should be tying carrying costs with incomes. That’s the goal of the surtax, or higher property taxes. If home prices become too cost-prohibitive to own, people no longer buy them. As a result, home prices slow in growth as more productive areas of the economy become more attractive to invest in.
Taxing housing too low can mean high home prices that absorb all investment capital. Take Vancouver for example. The City is one of the most expensive in the world, and happens to have one of the lowest tax rates. A million dollar home pays about $2,920 in taxes in the City of Vancouver. Compare that to Austin, a similar-sized city to Vancouver with a bigger GDP. A $150,000 home in Austin has a property tax bill of $3,415 per year. Obviously people find it more palatable to see home prices rise in Vancouver than Austin.
Regions with higher property taxes provide friction for fast home price growth. In Austin, they have to act quickly if speculators show up and send prices soaring. If they don’t, residents with a home will be priced out. In contrast, Vancouver encourages high home prices, since higher prices have a minimal cost. The only people who get screwed are young people, who don’t already own. Suckers.
Adopting a progressive surtax should provide the same sort of idea. It increases carrying costs, lowering the incentive to drive up home prices forever. As home prices rise, the profitability of allocating more towards housing is diminished. This only applies to homes over $1 million, so don’t expect it to make housing affordable. It should however slow down home prices from soaring too fast.
Very Few Households Would Pay The Surtax
The group chose $1,000,000 to start the surtax because they’re a part of the Illuminati, and it’s their lucky number. Kidding! Just trying to see if you’re paying attention. The real reason is this is high enough to only impact a small share of Canadians. Fewer than 9% of households have homes worth over $1 million. Most of those that do are located in BC and Ontario, largely in Vancouver or Toronto. It’s a good starting point, and unlikely to punish many.
The Ability To Defer The Surtax Is Risky
Sounds good, right? The study includes risks such as political fallout and jurisdictional tax risks. However, it misses out on behavioral risks that result in additional price inefficiencies. In particular, a deferral adds considerable risk to the policy.
A key part of the tax suggestion is a deferral component, so no one is unfairly punished. Unfortunately, this means there’s no immediate impact on carrying costs. Deferrals remove the motivation or connection of tying income to home prices. If it becomes popular, the cost will just be passed to the next buyer.
The deferral component also suggests charging a “fair” interest, citing BC’s deferral program. In BC, property tax deferrals have an interest rate capped at 2%. Suppose the interest paid is 2% (or less), while inflation is 4.5%. A million-dollar homeowner’s liability is devalued, and the stakeholder shares it.
Too wordy? It means taxpayers subsidize the deferrals of millionaire homeowners. If rates are anchored lower for stimulus, it becomes an extra driver of inequality.
Lastly, the liabilities can stack up. If home prices fail to increase while the costs of deferred taxes build-up, it can eat away at equity. It’s not an obvious problem when home prices rise by $20k per month. However, the Bank of Canada (BoC) ideally stops trying to drive record demand for housing. Failing that, their printer eventually runs out of ink.
Taxing home equity sounds like a radical idea. Paying your property taxes? Not so much. In Canada, nearly every tax policy around housing is designed to inflate its value. The property surtax might provide price growth friction, but it also risks making the market more inefficient.
A more perplexing issue here is why have a property surtax, anyway? The BoC’s easy monetary policy has been driving record home sales, but they say low rates are needed. Its research shows low rates drive home prices higher, but they publicly state it improves affordability. Their research shows low rates increase inequality, but the BoC says “low for long” might help. Let’s keep driving record home sales, home prices, and create more inequality. But we might be able to improve it with a few more policy layers? It seems like like just raising interest rates would fix a lot of the issues around housing affordability.
The solution is like asking someone to punch you in the face, to stop someone else from punching you in the stomach. It might work. After all, it’s more difficult to reach your stomach if you fall over. But why not just directly address the person punching you in the gut?
Everyone knows home prices are going to go up because of MMT.
What they don’t realize is MMT taxes out the inefficiency, so the gains are really going to be a windfall for the government. You’re essentially borrowing their future revenues.
Normalize rates and normalize property tax — cities need the money. The infrastructure of Toronto was essentially designed for half the people we now have.
The patchwork of band-aid policies is exhausting.
It seems straightforward, yet hard for the average person to understand raising revenues at the municipal level means you won’t need so much at the federal and provincial level.
Central banks want the flexibility to adjust interest rates without causing asset bubbles in real estate.
Property taxes are a targeted way to achieve. This idea needs to be combined with an income tax reduction so that affordability is not impacted by people who actually pay taxes in Canada.
A home owner has their idea of the home’s present value but the purchaser has the final say on current value. It’s probably more efficient and fair to include additional taxes at the time of purchase. Trying to collect on an estimation of the property value changes is probably beyond governments’ abilities. Let alone the challenges of calculating a fair tax rebate if property prices decline.
It would be easier to close the Bank of Canada and out source the work to the U.S Federal Reserve
They should puta tax on eggs too, to bring price down I used to buy it for $1.67 from no frill s now is $3.07
“political” risk is the only one politicians care about. Get 20% of the vote to get in office, the rest of the country be damned.
Seems like a super minor tax to me. So a homeowner with a 1.2 million dollar home pays $400 in tax ($33 per month), and that is supposed to cool the market? A 1.2 million dollar house in Vancouver appreciated approximately $400,000 last year ($33,000 per month). So you think an investor is going to think “hmmm, I would only gain $399,966 now… I’m not going to invest” LMAO
don’t we already have property taxes? and aren’t they tied to “current value”? just an excuse by progressives to tax more, utilizing envy.
No, property taxes are not really tied to current value – one’s property taxes do NOT go up specifically with increasing assessed value.
One’s prop taxes go up if 1. that property’s assessed value increases more than other properties in the municipality or 2. because the municipality needs more revenue and so increases the mill rate fo everyone.
If everyone’s assessed went up say 20% but the municipality didn’t need extra revenue compared to prior year, the property taxes on an individual property would remain same as prior year (mill rate would be set lower for everyone).
Think total revenue needs of muni / total assessed value of properties in muni = mill rate for the year.
And your prop taxes = your assessed * muni mill rate.
This is ridiculous. “Only impacting 9% of homes in cities like Vancouver/Toronto. News flash 1 million dollar homes are the minimum in almost every part of BC up up Hope which like 2+ hours away. This would be stupid and penalize people who just barely got into the housing market. Instead focus on the corruption and money laundering plus raise interest rates in general.
It’s all the government costs that have added to cost of housing especially in Toronto all in the name of taking from hard working Canadians and give to the ones that don’t. Socialism does not work and Canada has embraced it hook line and sinker. A day of reckoning is coming and the only way to reduce the cost of housing is to increase interest rate to normal levels, but all politicians are to weak to say this.
It really doesn’t matter how its calculated, but if a tax is payable at the time of the sale of a property, it is a land-transfer tax, pure and simple. You can try to camouflage it whichever way you like, but if it walks like a duck…
Here in Toronto, we already have two land-transfer taxes, one to the province and one to the city. Far from reducing property prices, it has caused them to go up. The greater the tax on the sale/purchase transaction, the less likely it becomes that people are going to want to sell their homes. That’s what’s happening right now. People are staying put, and the few homes that do come up for sale, become priced much higher than they otherwise would have been. This kind of tax will only have the opposite of the intended effect.
What I really want to know is why the CMHC paid taxpayer’s money to these people for such idiotic work, and also why the Liberal government seems to think that raising taxes is the solution to every problem.