The Canadian government hasn’t discussed a capital gains tax on real estate, but the industry is already fighting it. Toronto Regional Real Estate Board (TRREB) sent a memo to their members this week. In the memo, they explain why they’ve taken an aggressive position against the yet to be proposed tax. It also happens to mention they’re working with other industry associations like CREA to “shut this idea down before it goes any further.” Here’s what they said, and why the industry is secretly preparing to fight a capital gains tax on real estate.
A Capital Gains Tax On Real Estate?
Canada is one of the few countries that doesn’t have a capital gains tax on a household’s primary residence. The tax is usually applied to profit made on the sale of assets. Note, that’s profit — not the selling price. The cost of the asset, and typically the cost of selling it, is excluded from the tax. The gains on your stocks? Taxed at a capital gains rate, typically lower than income. The gains on a primary residence in Canada? Exempt from these taxes, assuming the CRA believes it was your primary residence.
Partially due to this, Canadians often think of their home as a retirement plan. TRREB highlights this point saying, “this makes sense for many reasons, not the least of which is the fact that homeownership is the cornerstone of retirement planning for many people.” Preferential tax treatment has always been one of the reasons many Canadians prefer property investment, over “productive investments.”
US Capital Gains Tax Is The Most Common Suggestion
One country many might not expect to have a capital gains tax on real estate, is the United States. Profits made on a primary residence above $250,000 ($500,000 for couples), is subject to a capital gains rate. Fair deductions can be made, such as selling costs and some renovation fees. If you’ve lived in a home as your primary home for more than two years, the exemption generally applies.
Let’s do a quick example for those that still don’t quite understand how it works. You’re a single person in America, who bought a condo for $400,000. Five years later, you sell it for $700,000, while making $100,000/income at work. We’ll say you incurred only 6% in selling costs. For the sake of simplicity, we won’t include your mortgage interest deduction.
The profit would be around $258,000. After your single-person exclusion, your taxable capital gains would be $8,000. At your income, the rate is 15%, so you would owe about $1,200 in taxes on that gain. Of course, you also deduct the cost of mortgage interest over the time you owned it, so you most likely paid nothing.
TRREB Doesn’t Like The US Model For Canada
TRREB argues a lack of discussion means they aren’t accounting for differences in the US. Mortgage interest rate deductions are the key argument, with the board stating “this important distinction has not been part of the discussion in Canada.”
They also argue Canada’s high home prices are another issue. “If we use a similar exemption threshold as the one used in the U.S., it wouldn’t even cover half the cost of an average priced property in the Greater Toronto Area.”
Mortgage interest deductions seem like a given, but they aren’t everywhere. New Zealand recently announced it would remove the deduction for some ownership segments. RBC also recently suggested Canada stop adding ownership incentives, finding New Zealand’s approach “interesting.”
How Much Would Canadians Have To Pay With US-Style Capital Gains Tax?
TRREB’s point on “half the cost” isn’t exactly clear for the GTA, but here’s some rough numbers. The average GTA price was $1,045,000 in February. If a couple bought it for $1, the taxable gains would be $545,000 — around half. Deduct 6% for selling costs, and use the US-style capital gains rate again. In this case, the couple would not pay any capital gains taxes on the average home, unless they bought before 2012. The average purchase price would have to be lower than 2012’s price to clear the exemption.
The average buyer 25 years ago, would pay between $0 and $56,800 using the exact US model. The effective maximum capital gains tax rate would be about 6.7% on pre-tax profit of $846,850 over 25 years. It doesn’t feel like much of a penalty for that much money. This also somewhat demonstrates it may not be all that effective to slow speculation.
If there’s any impact using US-style rates, it would be largely psychological. Other countries have more aggressive capital gains taxes, that may be more effective. For instance, some places lower the rate the longer you own it. South Korea recently announced a nosebleed rate if you sell in less than 2 years.
Regardless of how it’s implemented, TRREB told agents it would be ineffective, and they would stop it. “Some see a capital gains tax as a way to cool housing markets. There is little credible evidence this would be the case, nevertheless, this is a classic example of where the cure becomes worse than the disease.” They end the memo assuring agents, “you can rest assured that TRREB is watching this issue and taking action as needed.”
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Funny how it was the Liberals that were opposed to any capital gains taxes on a primary residence in the 60s and 70s, when the USA adopted them. Now they need a cash grab, so it’s a discussion once again.
No one said the liberals were looking at the tax.
Not funny at all. Have you noticed that we’ve never seen home price appreciation quite like this before? Perhaps it is time to change an old policy that doesn’t fit in with the reality of today’s housing market.
If any government introduces capital gains tax on primary residences, then mortgage interest becomes deductible. In the USA, a certain amount if not taxable at all on the selling of a home which might also be adopted in Canada in order to get at the higher priced homes only. So… all in all…it might not bring in the revenue that some expect.
Is the case for a US capital gains tax being used because it’s not particularly effective? That’s how it sounds in this piece.
The capital gains report BD outlining how real estate is subject to capital gains around the world had strategies that sound like they would be much more effective.
>> There is little credible evidence this would be the case
I believe your report citing academic studies on the impact of capital gains as reducer of of demand more than supply, completely destroyed this argument too. BD might have to give the public a free-bee explainer on being exposed to capital gains risk, because it seems like not many people are capable of breaking down the risk-reward.
I have no doubt the realtors will succeed in quashing this.
When did we, collectively as Canadians, allow these abhorrent people to seize control of our country?
I also love the contradiction:
Realtors: “Capital gains tax on PR is ineffective and will do nothing to cool the market!”
Also realtors : “We will aggressively fight this ineffective measure that totally WON’T cool markets, to the death!”
Personally I don’t trust realtors as a group given they have a vested interest in these various policies (might be diff for individuals depending on temperament).
I don’t see why there shouldn’t be some form of capital gains tax implement, possibly with different rates for years of ownership (less then 2 years, between 2-5, etc). I also think they should look into number of properties owned. Maybe 2 or less is minimal taxes, but if you own 3+ then your subject to higher capital gains. Even more for 5+, and again at 10+, regardless how long you’ve held them.
What you are suggesting helps speculation not deters it.
I don’t see how taxing supplementary properties at a higher rate would help speculation, but have at it. I don’t see a downside to foreign money-launderers who hoard Canadian properties being required to pay more into the tax base of the country they are ruining.
This discussion wouldn’t even be necessary if the federal government allowed a free market in housing. No subsidies, no CMHC, no rigging of the bond market, and no government-mandated mortgage deferrals.
The reason we will fight it is because it will have the exact opposite effect on the intended outcome. By implementing capital gains on primary residences it will reduce peoples motivation/ability to sell, trade up, trade down etc, therefore reducing inventory further which will further heat the market!
Same song and dance when it comes to investment properties, capital gains tax is unavoidable, nothing like the 1031 exchange in the US, prices are up and inventory is nil and has been well before we started taking off for the moon!
Do you have the slightest bit of evidence to back up those statements? Canada is one of the very few countries with unlimited capital gains exemption on PR, so there should plenty of proof from other countries to draw from.
And if, as you claim, it will cause prices to increase, then why would you fight it? It is in your interest to see prices rise and the middle class forced to live on the streets.
As a general rule, if realtors dislike a policy, that policy must therefore be good for the country.
Yes, the evidence I used is called logic, this after all is a discussion forum for ideas.
If you have a gain of $100,000 and get taxed any amount of capital gains are you more likely or less likely to be a seller in the market? Logically your gain isn’t as great and you would be less likely to sell. If you’re less likely to sell, there is less inventory, if there is less inventory and demand stays the same prices increases.
This of course just logical thinking and there are no facts to back it up, so take it with a grain of salt.
Is it logical thinking or short-sighted thinking? Investment money flows to assets that are taxed less – i.e. housing. Start taxing capital gains from principle residences and people are less likely to look at real estate as the best investment, thus putting their money into other assets. Demand for real estate drops because it is less of a good deal from a tax perspective. Demand drops, supply increases and prices go down. How’s that for logic?
Your thinking (and in your case I use that term loosely) is flawed and actually not logical at all.
If a family needs to upsize to a larger home, the presence or absence of a capital gains tax is not going to prevent that, but rather the affordability of the prospective new home. Same for an older wanting to downsize. People do not make decisions on their primary residence based on how profitable it is, and if they do, then we can agree that it’s an investment that should be taxed just like any other.
As mentioned, Canada is an outlier in having unlimited tax-free gains and it also happens to be one of the most unaffordable countries in the developed. Your thesis is not borne out in any of the myriad of countries that tax PR or limit the tax-free gains.
Anyway, you really have nothing to back up your assertions and as mentioned, if taxing PR were a recipe for higher home prices then the realtor industry would be in favour of it rather than fighting it. THAT is logical thinking.
Middle to class to live on the streets? Really? Did a realtor touch you inappropriately? Education for you, based on a logic, steady transaction volume and long term clients are the business, not a one time pump and dump. If you were from Canada you might understand this.
Kath. The amount of people looking at real estate as an investment are few and far between, yes they would love to see gains, and when they do have an opportunity to capitalize on them, being taxed and hindered in their next move in life is the last thing they need, downsizing, upsizing etc, it restricts the flow of an already restricted free market! I get your point on the demand side of things though, but any taxation reduces what free market we have left further.
There’s capital gains tax in numerous other countries – Canada is one of the exceptions, not the norm. And if you read what I wrote, for the average person this likely wouldn’t impact them as most people live in the same home for 5+ years before moving, and don’t have 3+ properties. So I don’t exactly buy what you’re pandering.
I also think what Gotti wrote below is worthwhile looking into too.
You do realize doing nothing and letting prices get even more out of hand will hurt us more in the long run, right?
Municipal governments have a stake in ever rising home prices. Without any effort at all, more property tax money rolls in now that market value assessment is common. Can you imagine the hue and cry that would be raised by municipal governments if the property values plummeted by 50 per cent or even less?
That’s not how property tax works though.
In simple terms, a budget is struck, then divided by the aggregate assessed value of all properties to determine the mil rate. Subject of course, to the different weightings and mil rates accorded to different property types – residential; commercial; industrial; etc.
If the overall market goes up 10%, the mil rate sees a corresponding reduction. If your home/neighbourhood goes up 20% though, you will see an increase, while someone who’s home value only increased 5% will see a decrease.
Here are some sensible measures.
– Fix the supply side of the issue and stop trying to plug holes with more taxes and government interference.
– Stop propping up down payments of 5% from unworthy buyers where 95% of the mortgage amount is guaranteed by the government with our tax dollars.
– Lower the CG rate to USA rates (earnings scale; max 20%) and not the 50% that Canada currently has if you really want to get rid of the principal residence exemption. And implement USA style mortgage deductions – which will encourage Canadians to always carry a mortgage with “permanent debt.”
– Break the realtor monopoly on the market by allowing free, unhindered competition and full access to the MLS system for all.
-Cap realtor commission rates or tie them to gains and not simply sales prices. They haven’t changed their MO yet are making double the amount of absolute $.
You forgot having open bidding systems and banning closed
I think that should be on top! This closed bidding system is unethical
I totally agree, have a open bidding system and it will a more transparent HONEST system then a closed bidding one!!!!!!!
People are over paying on these homes and more open system may not stop huge profits but may stop 10’s of thousands in over bidding if they were to see the open bids. If anyone should be pushing for open bidding on homes should be the banks. Realtors say there working for the buyers/sellers but are they really is the big question,it’s all about profit in the end.
Sure – but my mortgage interest is tax-deductible then, right?
Canada is a magical place where investors simultaneously discuss how mortgages costs are irrelevant, and then worry about the ability to deduct it.
No. The government artificially propping up your property with taxpayer-funded backstops and bailouts more than offsets your mortgage interest.
Canada is a global housing superpower!!!
😂
I am pretty sure TRREB/CREA will be able to win the matter:
Govt: we want to implement capital gains tax on primary residence.
CREA: how about DONATION of 5% of commissions to your party.
Govt: No way, we care about Canada and it’s residents, they elected us.
CREA: ok, how about 10%.
Govt: ok, done. Let us know how can we help.
We’re from Europe (Budapest), moved to Toronto in 2019. One of the first impressions of the city was that around 90% of billboards and citylight posters have realtors on them. In our home town, billboards would advertise stars giving concerts in town, popular TV anchors, maybe politicians when there are elections. Here, it’s realtors with plastic surgeries. When real estate agents become the “stars”, it is a clear sign that these people have WAY too much money and clout.
Why on earth would you move from Budapest (gorgeous city) to Toronto? Seems like a significant step down in quality of life. Even though Toronto would generally pay more than Budapest, surely the increased cost of living eliminate any salary gains.
I suppose one benefit for you would be the strengthening CAD $ (due to rising oil prices) versus the Forint.
Just because you’re poor in Canada it doesn’t mean everyone is at all. There’s a reason it’s rated a top country in the world even with it’s problems. I see you constantly bashing Canada all because you can’t afford a house.
Nah, it’s really just that Canada just isn’t that great. You should travel more and find out for yourself.
It’s funny how insecure Canadians can be, eh JWD?
Dude-bro who probably has never travelled outside of Toronto or Florida and spends 60% of his take-home pay on a condo mortgage is upset that I burst his bubble.
For the record, I don’t live in Canada. I’ve spent extended periods in Europe and a move from Budapest to Toronto seems like a major downgrade.
Our policy makers need serious re-education for their repeated failure to understand the very basic idea that a mismatch between supply and demand is dealt with by increasing supply and not killing demand. They are children who won’t make the tough decisions needed to increase supply. Why do that when it’s so much easier to incite the lowest rung of the ladder against everyone else? Only problem is that they won’t out-left the NDP but they’ll destroy our society and economy trying
Yes, and that’s why in St. John’s, where the population growth is negative, or Ontario, where they’re completing two homes person the population grows by, is seeing rapid price growth.
Once we have 5 homes per person, prices should fall. Or you know, people should take the econ classes after 101, if they’re going to constrantly refer to economic principles.
Exactly. Supply of new housing isn’t the problem.
So you think supply isn’t the problem and that housing affordability will be achieved by demand stifling measures? That line of thinking hasn’t worked in a decade. With 9 million square km, we should be the last country on earth to have a housing affordability crisis. The only answer is we have too many policy makers who keep getting it wrong. It takes 4 years to bring product to market in low rise and 10 years in high rise. We have so many conflicting priorities from mass immigration to environment to public transit to housing affordability. We need to learn that every such decision has a cost attached to it and we’re seeing the cost of making increased housing supply a low priority. Your argument is that a bogeyman group of speculative investors buys second, third and fourth homes which they pump and dump. Here is a more advanced Econ class for you ; markets with depth and liquidity such as the stock market, currency, previous metals, etc do not respond well to a few speculative investors but will enjoy a secular uptrend if that’s what the entire market suggests. When you erect so many barriers to supply you break the mechanisms that make a free market “smart”. The problem today is that decisions are made based on lefty ideology as opposed to the good old fashioned economics and free markets that made the west what it is today. It’s always haves vs have nots, cars vs public transit, speculators vs good people who can’t afford houses, business people vs unions, developers vs environmentalists…….it’s all very black and white and annoying things like facts are just countered with charges talking points
Literally works for every country that doesn’t have the Canada/New Zealand/UK/Australia model. Gee, I wonder why that is.
For someone who mentions facts, your comment was notably fact-free.
And it’s hysterical that you believe real estate is a free market in Canada.
Let’s make it a true free market, shall we?
– abolish the CMHC; no more taxpayer backstop
– end the bond market rigging so that rates can rise to their market equilibrium
– no mortgage deferrals (forced on the banks by the government) the next time there’s an economic downturn
– abolish the shared-equity FTHB scheme
– abolish preferential treatment for housing versus other investments
– apply the same anti-fraud standards to realtors as currently applied to financial advisors
– ban foreigners from purchasing property in Canada if the foreigners’ country of origin does not allow Canadians to do the same (free markets are not one-sided)
– democratize the house-purchase process by mandating freedom of access to all sales data, nationwide, as far back as records go
– abolish blind auctions so that house purchasers can compete in a transparent and open way
– abolish the immoral and discriminatory (ageist) property tax deferrals granted to people over 55 in BC; if old people can’t afford to maintain their properties, the free market demands that they sell and move to a more affordable location
Will you agree to supprot all of the above (and more) in the interest of creating a true free market for RE in Canada?
100% supported
Precisely. Home prices are driven primarily by the supply of credit, not the supply of homes.
Mass immigration and TFWs under the Liberal government (50%+ rise versus Harper-era intake) and preferential tax treatment compared to other types of investment contribute too.
Right. In other words it is a demand problem (real estate demand), not a supply problem.
Thank you Jessica
The narrative of a shortage of housing seems false based on population growth and completion statistics.
Everyone should stop repeating this narrative.
Also I think we should just let market flame out at this point.
Let’s not give the industry a esacape goat when the market turns.
No politician in their right mind would act at this point and be blamed when things fall apart.
Given Canada’s extreme population density in major markets, demand will always be robust relative to supply. Pricing will stay inflated if speculators keep gobbling up inventory and treating housing like a capital market. I live in a newer development and 50% of homes built were unoccupied the first 6-8 months and then resold at premiums. This is happening on a massive scale and government must stop looking the other way.
I see the realtors are out in force here with the evidence-free “more supply” propaganda!
Realtors would love more supply because it just feeds into the insane demand, thus more money for the realtors. Steps taken to lower demand (eliminating capital gains exemption, raising interest rates, etc) mean less money for realtors, regardless of prices.
And if a capital gains tax won’t cool down the housing market as TRREB suggests, why is TRREB so keen on shutting the idea down before it is even a reality? Is it because they have their clients’ best interests at heart? Or because they are afraid it might actually do what they claim it won’t – i.e. cool down the market?
TREB offences fall under RICO predicate laws and they should be shut down immediately!!! What happened to freedom of information that allowed Zillow into Canada?? They are here but cannot , or do not publish pricing info. Why?? TREB is a criminal organization by definition!
We are too stupid in Canada to question this egregious control of our society! This is serious people!! This organization is criminal on so many levels, but we turn a blind eye! Please…..DO NOT LISTEN TO ANY REALTOR FROM TREB!!!!!
trebb = crime
IF ANYONE LISTENS TO TREBB, YOU GET WHAT YOU DESERVE!!!!!!!!!!
trebb = crime
crime= trebb
Folks. If a third lockdown happens then house prices will SURGE even higher.
It’s basic economics. High unemployment means huge house price gains.
I keep reading this false narrative here. We’re seen all the numbers and statistics and even clearly with our own eyes by now. The unemployment cases were people who were not going to be buying real estate… it hit the rental market hard. The majority of people who were looking at buying real estate have absolutely no problems with employment as they’re working at home.
Prices went higher when people lost their jobs. They are correlated.
Residential RE in Canada should be banned from speculators and investors. They can go into commercial RE or Stocks to speculate. House is not a commodity but in Canada it’s been used like one. That’s the reason prices are so high. Most of the inventory is been grabbed by investors leaving nothing for FTHB. Unless nee people can come in this can’t last long. We say we got demand. And less supply. Supply is enough if People buy a house for what it built for. That is to live in grow a family make memories not money. Money should be made on things that if they rise in price won’t effect others. But Canadian Residential RE is the feeding ground for all money launderers foreigners rich investors. Govt should make a policy to limit house ownership to 1 per person. They can sell and move up or down and overlap for 60 days but shouldn’t be allowed to buy multiple houses. Secondly , big fraud in mortgage approval process. Fake incomes fake T4s are manufactured to get the income needed. Banks should be mandated to verify income internally and directly from CRA killing all paper trail. Hence most mortgages will only be approved for 600-800k. This will reduce demand and hence prices will correct in balance with incomes.
Agree, mortgage fraud is a big problem. If it was not of fake T4s or tax assessments most people’s incomes would not support such steep prices
I don’t buy the supply argument, there continues to be new builds on every piece of vacant land in Ontario. IMO the real problem has been the pump and dump scheme run by investors and speculators for years which has artificially driven up prices for the average Joe.
Pricing has not been dictated by what buyers who have an actual intention to reside in the home for an extended period of time want to pay, but instead what they are forced to pay because of people/ entities who treat housing like a capital market due to loose government regulation and tax policy that allows them to.
Agreed. Demand is the problem, not supply due to factors such as FOMO, low interest rates, and no capital gains tax as compared to other investment assets.
I agree with Joe B it’s all being driven up by greedy Realtors and speculators. Look at all the houses bought then listed a few months later for 100 to 150k more without any work done to it. People should really be checking what the previous person paid. And stop using Realtors they dont do enough for how much they get paid. All you need is a contract and a laywer.
Absolutely realtors are complicit in all of this because their comp is at record highs.
Until strict regulations are put in place to curb price manipulation by speculators who gobble up supply of new homes and unload them 6 months later tax free, this mess will continue.
The people need to take back our country from Lobbyists/Special Interest Groups.
Had some hopes for this and Trudeau in 2015, but those have long-since evaporated, after he started following private investment firm Blackrock’s advice like a lapdog (and actually paying them for it), and I realized his intellect is far less-than-stellar. Didn’t expect much of him from the start, didn’t want him as leader of the Liberals.. Now realize he’s still just a pot-smoking Trustafarian who’s wrecking our contries long-term future.
Realtors and their boards/associations associated with their game are one of these lobby-groups, obviously. A huge one. In no other profession does one need next to zero education to bring home a million-dollar income. Needs much higher regulation. They’re a large part of the problem driving up prices.