The Federal Home Equity Capital Gains Tax

By Merovitz Potechin on Tuesday August 11, 2020.

As federal and provincial government deficits skyrocket due to COVID-19 support payouts such as the CERB, governments at all levels will be searching for new revenue sources in the not-so-distant future to try and balance budgets.

One way to accomplish this would be by taxing homeowners on the sale their homes.

Principal Residence Exemption

Homeowners have historically benefitted from the principal residence exemption – an income tax benefit that provides homeowners with an exemption from tax on the capital gain they would otherwise pay when they sell their principal residence. For example, if you purchased your home for $370,000.00 and sell it years later for $470,000.00, you are currently exempt from paying taxes on your $100,000.00 return on investment.  Similarly, if you refinance your home and draw out equity in the form of a mortgage loan, you receive that money tax-free. 

Federal Home Equity Tax

The Canadian Mortgage and Housing Corporation (CMHC) and The University of British Columbia’s School of Population are conducting research on the first-ever federal home equity tax. This tax would wipe out the principal residence exemption, and tax up to 20% of the capital gains on the sale of your home. If we look at the previous example, that means you would be paying the federal government $20,000 in taxes on the sale of your $470,000 home.

According to the CMHC, the objective of the tax would be to “level the playing field” between renters and homeowners. Many Canadians look at homeownership as a way to gain equity, independence and to secure their financial futures, in addition to the added benefits of enjoying a home of their own. However, if a capital gains tax is imposed on principal residences because of a perceived financial advantage, a federal home equity tax may make housing even less affordable for future generations looking to buy.

Absent a major market correction, real estate prices are anticipated to increase for the foreseeable future.  CMHC’s openness to this tax proposal is understandable in terms of fighting a whopping federal deficit and conservatively generating a revenue of at least $6 billion a year for the federal government. Yet, while the stated goal of a federal home equity tax would be to downplay a homeowner’s incentive to sell as a means of financial gain, human nature dictates that homeowners will simply charge more when selling their home to “make up” for this added cost and burden.  A federal home equity tax may also create a perverse incentive for homeowners to refrain from selling their housing until a government opposed to a federal home equity tax is elected – thereby lessening the amount of inventory in the market (which will inevitably increase prices when demand is already high).  Purchasers of residential real estate already pay land transfer tax, harmonized sales tax (on new builds) and other registration fees to purchase land in Ontario.  There is only one ultimate consumer and most costs of selling real estate are already factored into the purchase price that a consumer must pay to buy a home.  This is no different than other “products” that are subject to taxes and surcharges that are factored into their prices – such as automobiles. 

What does this mean for Homeowners?

Research on a federal home equity tax has just begun, but we can predict that some form of home equity tax will be implemented sooner than later to help the government recover from rising deficits.

If homeowners have to swallow the loss of 20% of their gain, they are going to look for other ways to save, including saving on commissions, legal fees and costs of doing business. We may see more and more homeowners selling privately in the future or using creative trust concepts and tax rollovers to avoid capital gains.

If a home equity tax is implemented, the incentive to sell or refinance your home for financial security may be a thing of the past. Canadians will not necessarily be able to rely on gains in housing wealth to feel secure.

As for homebuyers, the federal home equity tax may be the push the housing industry needs to help them realize their dreams of homeownership OR it may become a nightmare of unintended consequences, adding an additional burden as capital gains and other costs are passed on in unique methods to purchasers in a frothy real estate market. 

If you have any questions about buying or selling a residential property, or the proposed federal home equity tax, please contact the real estate lawyers at Merovitz Potechin LLP.