Updated: Oct 24, 2020
Another day. Another couple hundred million out the cottage doors.
COVID-19 spending has resulted in a historic deficit. And an all-time record debt balance. Can we blame the Liberal government? Depends.
Was the spending necessary? Most would agree, yes.
Has the money been spent effectively? Most would agree, no.
What now? Does the spending end abruptly? Well no, we are still facing a pandemic. Many industries are still sheltered.
So if the spending must continue, what are the Liberals to do about the ever growing debt balance? In traditional Liberal fashion, bring on the taxes!
By now you've likely heard of the CMHC study re: federal home equity tax.
While the organization and many Liberal MPs have denied this, can these Liberals be trusted?
I'll let you be the judge of that.
So what would a "home equity tax" even look like?
Let's look at a couple of scenarios. You can be the judge on the validity of this proposed tax.
Analysis below is based on info from The Star article dated Oct 15/19. This references Liberal MP Adam Vaughan's November 2018 policy proposal re: capital gains tax on principal residences (1).
Let's presume for all scenarios:
- The house is owned by a couple
- Both individuals have yearly income to the top of the 1st tax bracket (2020 - $48,535)
- Presume that you will be able to claim certain capital costs (major reno's, etc.)
Scenario #1 - Retiring Couple
For this scenario, we will presume that the couple purchased their home in Edmonton, AB in the early 80's for $85,000 (2).
Flash forward to 2020, the average single family house price in Edmonton is now $423,000 (3). The couple spent $30,000 on reno's over the past 40 years.
As a result, the gain from selling the house would be $308,000 ($423,000 - $85,000 - $30,000). This would be split equally between the couple, or $154,000 each. Currently, capital gains are included in income at 50% of the total, or $77,000 each.
From MP Vaughan's proposal, a 5% tax would apply to a gain realized by this couple as they held the property longer than 5 years. As such, each would be responsible for tax of $3,850 ($77,000 x 5%).
So now you're thinking, what's the big deal?
The total tax is only $7,700 and the couple likely retains the full proceeds of $423,000.
As the couple was in the 1st tax bracket, their retirement savings are likely meager. $7,700 will go a long way for this couple in retirement.
Now we'll look at a young couple who purchased their home 4 years ago for $378,000 (4). They sell for the same price as scenario #1, resulting in a gain of $45,000.
We'll presume the Liberal house tax in year 4 is equal to 10%. This results in combined tax of $2,250 ($423,000 - $378,000), split 50/50 x 50% inclusion x 10% tax.
If the couple made mortgage payments on the $378,000 for 4 years, with a 2.5% interest rate, they would owe approximately $332,000 on sale.
Mortgage payments required cash outflows of $20,300/year or $81,200 total.
Net cash flow on sale is equal to $88,750 ($423,000 - $332,000 - $2,250).
Add property taxes, house insurance and repairs and the couple is in a net negative cash flow position from this investment.
Doesn't seem to be very enticing. Does it?
Lastly, let's look at a recently married couple considering whether to purchase a house or rent.
Let's presume the couple is looking at a house with a cost of $423,000. A deposit requirement of 5% would mean $21,150 is needed up front.
As both earn income in the 1st tax bracket, saving $21,150 could be difficult. They also know the couple from scenario #2 and have concerns with long-term cash flow implications.
Seeing as the COVID-19 pandemic will continue for a while, they decide that the risk of home ownership is not worth the trouble.
The objective of the CMHC study is to level the playing field for renters and owners (5).
It is safe to say that potential tax on principal residences would further stymie investment.
While the tax, as proposed by MP Vaughan, isn't overly punitive for those owning a home for 5+ years, it is another detriment.
The arguments supporting this potential tax in relation to house flipping are off base. CRA currently collects data and reviews these transactions.
If an individual is flipping houses, he/she would be subject to tax on the full proceeds received, not capital gains tax.
In a time where the government should be promoting private investment, a principal residence tax does the opposite.
How to Level the Playing Field?
Recent policy changes to increase foreign-buyers tax have helped. Other forces are at play here however.
Low interest rates are the main culprit. With the economy in a poor state, rates cannot be bumped at this time or many owners would default.
Government crackdown on money laundering and fraudulent house flips would have an impact as well.
Local development permits need to re-focus to promote more family size condo projects. The stockpile of more population dense residential homes would alleviate demand issues.
Most importantly, macro-economic policies that promote free market job growth are required in order to increase consumer buying power.
With the majority of Liberal votes/seats coming from large metropolitan areas, one would presume that a home equity tax would be "political suicide".
Just because this is a dud, don't think the Liberal tax man isn't coming.
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