It was recently announced that the Federal Government is spending $250,000 to look at the idea of taxing gains on a persons’ principal residence as a way to increase government coffers after the terrible financial handling of Covid.
That is right, PM Photo Op is looking at taxing the gains people make from their principal residence. Gains that have been tax free on the sale of a person’s residence since the advent of taxation back in 1917. Another idea that is also being discussed is from a study out of the University of British Columbia which recommends an additional one percent annual property tax on those residences with a value over $1 million dollars.
The government and this study believe by adding an additional tax onto properties, it will slow the housing market in places like Vancouver or Toronto. Again this is an example of our government and researchers looking at the low hanging fruit as the solution to all the ills of society as a big cash cow. They fail in my opinion to look at one of the key reasons we see massive increases in markets like Vancouver and Toronto, which is foreign ownership and the advantages they receive in the tax treatment of the sales proceeds.
Let me illustrate, suppose an investment property is sold today for $400,000 with an original cost base of $75,000, the gross gain is $325,000. With Capital gains treatment and filing a non-resident tax return the net tax a non-resident foreigner will pay is approximately $55,000, with a net gain of $270,000. If this investment property was sold by a Canadian resident the Canadian will pay in the area of $65,000 to $80,000 in taxes on the gains.
There is no law saying that a person has to be a Canadian to buy property. So a foreign national, (American, British, Russian, Chinese, or from any country globally) can buy property as an investment and will pay less tax than a Canadian who might own a similar property for investment when sold.
Further to this if a person is from one of these countries and is a resident living in the house they can then claim the principal residence exemption. Remember with Meng Wanzhao, the Huaweii executive who was under house arrest in Vancouver at request of the US and the Chinese retaliated by imprisoning two Canadians? She bought a house in Shaughnessy for her house arrest, which has now appreciated I am sure. She never had an intention of living here and as soon as she was released she left. However, she was a resident (not by choice) of Canada and so is able to claim Principal residence and pay no taxes on the sale of the Shaughnessy property. So if she bought it for $13 million and sold it for $16 million, that $3 million dollar gain is tax free.
In Vancouver it is somewhere between 8 and 10% of home sales are to Foreign nationals who either hold them as investments. Vancouver and Toronto are seen as safe jurisdictions for people to invest and to get money out from some areas in Asia and Europe.
Canada has created this favorable tax environment that has encouraged Foreigners to invest in Canadian real estate and to believe that it is not being taken advantage is the definition of naïve, so what should we do?
First I think that unless you are a Canadian Citizen anyone who disposes property will have to pay taxes in Canada based on the gain, and that gain is taxed fully at their top marginal rate. So in my example above, with the $325,000 gain, the entire amount would be taxable at the prescribed individual rates. That would mean a tax bill on the sale of roughly 50% or $162,000. This would make it less desirable for foreign interests to compete in the real estate market due to the reduced tax treatment, so that might help with housing affordability in Vancouver and Toronto.
It would also add significant revenues to government coffers overtime but not at the expense of Canadians citizens and they would still be entitled to claim the principal residence.
This seems to me to be a more surgical approach to bringing about policy that can address the home ownership issue in centers like Vancouver and Toronto while providing a tax revenue stream that protects Canadian property interests. I am fricking tired of PM Photo Op and his gang of yes people always looking at the Canadian tax payer as the solution to his fiscal inabilities.
www.AngryBob.ca 