April 26, 2022
Real Estate News
RYPM
One thing that all real estate investors are painfully aware
of when they plan on owning a property is the capital
gains tax. With the rules currently in place, you must pay capital gains
taxes on the profits you make from the sale of a home or other real estate.
This is applicable mostly to investors because, notably, the tax makes an
exemption for a home that is the owner's primary residence. At least, it does
for now.
However, some have been worried that the Liberal government
may move to instate a capital gains tax on all home sales, regardless of
whether or not it’s a primary residence. Is this new tax on its way, and if so,
what would the impact be on Canadian homeowners?
Housing crisis a hot topic in politics
In recent years, there has been much discussion across all
sides of the political spectrum on how to help ease pressure in the real estate
market and address the housing affordability crisis. Most recently, the Liberal
government released their 2022 budget that laid out new programs and taxes that
would be used to help cool excessive price growth.
Newly proposed anti-flipping tax to close primary
residence loophole
One change aimed to close a loophole that allowed home
flippers to utilize the principal residence exemption in order to avoid capital
gains on a flipped property. Now, any gains may be made from selling a home
within 12 months of purchase will be taxable capital gains beginning early next
year. This change is designed to serve as an anti-flipping tax to reduce
speculative demand and discourage those who aim to make money only from price
growth without adding any value to the housing market, and in doing so, reduce
competition for homes.
However, some have noted that the Canada Revenue Agency
(CRA) has already been diligent in identifying individuals who mislabel their
flip homes as primary residences, meaning the actual impact of this new change
may be less than it seems.
Exemptions from the anti flipping tax for extraordinary
circumstances
This anti-flipping tax has been noted by some as a form of
capital gains tax for a primary residence. What would happen if a buyer
purchases a home and then, due to extenuating circumstances such as divorce or
death, is forced to sell the home before 12 months? Would they then be charged
a hefty tax on top of their already hard times?
Not quite. The government has also expressed plans to make
allowances for such circumstances. Though the law has not yet been fully
codified, it should help to clear any ambiguities about taxation for house
flipping and hopefully protect legitimate primary residence sales when it comes
into force.
As of yet, the principal residence exemption for capital
gains remains in place. This means homeowners who plan to sell their primary
residence in the near future will not be required to pay tax on the profits,
provided the home was the principal residence for the entirety of the ownership
period.
Why the government should want to avoid a tax on primary
residence sales
The logic behind taxing primary residences seems pretty
clear: by taxing the sales of homes you make it less appealing to those looking
to sell for an inflated amount, thus reducing some of the upward pressure on
homes sales. At the same time, the additional tax income could be put towards
more housing initiatives. The actual results of such a change would
not be so clear-cut.
First of all, the Liberal government, like most political
parties, is mostly concerned with taking action in ways that will make them
more popular with voters. Something like a ban on foreign purchases is a simple
way to appease Canadians and gain political favor. After all, foreigners make
up a very small percentage of voters due to the fact that they don't vote in
Canadian elections. So the idea is to make a tax that targets homeowners – one
of the largest and most active voting blocs in Canada? Not a very good idea for
your political prospects.
And, it wouldn't just be bad for the Liberal electoral
prospects – it would be bad for the millions of Canadians who are relying on
the value of their homes to fund part of, or all of, their retirement plans.
With inflation skyrocketing and an increasing number of Canadians reaching
retirement age, they need as much value as they can get from their savings.
But it doesn't end there. For those planning to sell under a
hypothetical tax, they could just as easily raise their asking price even
higher to accommodate, thus pushing prices up even more. Or, they could choose
to not sell at all, which wouldn’t help the already low housing stock across
the country.
Finally, there are simply other ways the government can help
to ease the housing market without targeting regular homeowners. Some other new
changes are already underway such as banning
blind bidding, creating a new tax-free homes savings account, and assisting
in affordable housing development.
Can I say for certain that a capital gains tax on primary residences will not be put in effect? Honestly, no. But hopefully, I have done well enough to explain why the change is unlikely based on the widespread unpopularity, potential damage to Canadians, and range of alternative options to ease the housing crisis.