The home ownership tax shelter is unfair to the Prairies and Atlantic Canada

APolicy professor at the University of British Columbia and founder of Generation Squeeze, Canada’s leading voice for generational fairness. You can follow Gen Squeeze on Twitter, Facebook, Instagram, and subscribe to Paul’s Hard Truths podcast. five-decades-old federal tax shelter gives an unfair boost to homeowners in hot markets while shafting residents of the Prairies and Atlantic Canada.

Retired homeowners in these provinces pay taxes on their pension income just like retirees do in British Columbia or Ontario. But they generally haven’t gained the large amounts of home equity benefiting many retirees in B.C. and Ontario, especially in Metro Vancouver and the Greater Toronto Area.

By failing to tax wealth windfalls enjoyed by owners like me in regions where average prices have soared, Canadian tax policy deviates from the principle by which we expect people who have more to contribute more. As a result, residents in the rest of Canada pay more than their fair share of taxes. Fixing this inequity requires a surcharge on highvalue homes. The revenue could be used to solve big problems such as affordable housing, or pay for tax cuts for middle and lower earners.

The problem originated a halfcentury ago when the federal government made its most significant tax-policy decision about housing. In 1972, it created the home ownership tax shelter, which excluded principal residences from the taxation of capital gains.

Research by Generation Squeeze shows that average home prices increased from around $230,000 to more than $680,000 in the decades since the loophole was created (after adjusting for inflation). As a result, many owners have enjoyed substantial gains in the value of their principal residences, largely tax-free. Homes do not need to be sold to access the tax-sheltered wealth gains, because home equity lines of credit are now common in the finance industry.

Residents of Atlantic Canada and the Prairies should be angry, because the home ownership tax shelter creates inequities across regions. It’s no secret that home values skyrocketed in B.C. and Ontario from approximately $250,000 in 1976 to around $900,000 today – and higher still in Vancouver and Toronto. By contrast, average home prices in Saskatchewan, Manitoba, Nova Scotia and New Brunswick started around $140,000 and remain under $360,000.

The result is that tax policy whacks the retired homeowner in Fredericton. She must manage her money in the absence of any dramatic escalation in the value of her home. A retired homeowner in Vancouver or Toronto may have an identical fixed income, but be much more financially secure because her principal residence has gone up in value by hundreds of thousands, if not millions, of dollars compared with when she bought it. She can use that gain in property value to borrow against a line of credit and will benefit from it when she sells the house. Since housing wealth windfalls are almost entirely sheltered from taxation, whereas our incomes are not, these two retirees will be expected to pay similar levels of taxation when they absolutely do not enjoy similar levels of affluence.

Residents of regions where average home prices have soared often lament that their property taxes rise in proportion to the wealth they are gaining. But that’s not true. The owner of a quarter-million-dollar home in New Brunswick pays more in property taxes than the owner of a million-dollar home in Vancouver. Plus, buyers pay the land-transfer taxes collected by provinces – not sellers who may have gained wealth while living in the homes they now exchange.

Online polling of 1,010 Canadians conducted by Research Co. on behalf of Generation Squeeze showed that Canadians recognize this unfairness. Fifty-eight per cent judge that a retiree who owns a home that is fully paid and worth $2-million is either “very” or “moderately wealthy” even if they have a low income of just $22,000 a year.

Accordingly, a majority of Canadians agree that “by failing to tax the wealth gained by owners in Vancouver and Toronto, we expect retirees in the Prairies and Atlantic Canada to pay more than their fair share of taxes.” This includes two-thirds of respondents in Alberta and Atlantic Canada.

Given this public agreement, it’s time to soften the sharpest edges of the home ownership tax shelter by implementing a modest surcharge on housing inequity.

Colleagues and I propose adapting annual property tax bills by adding a surcharge of between 0.2 per cent and 1 per cent on a home’s value above $1-million. This threshold would exempt about 90 per cent of Canadian households, including all rentals and almost everyone outside B.C. and Ontario. In the latter provinces, 75 per cent of households would be exempted. Anyone incurring the charge could defer payment until the home is sold or inherited – just as seniors are allowed to defer property taxation now.

The poll shows that a majority of Canadians support this sort of surcharge. Support grows if revenue would pay for tax cuts for middle and lower earners, or reduce wealth inequality between homeowners in markets where prices have soared compared with markets where prices remain relatively affordable.

The problem originated a half-century ago when the federal government made its most significant tax-policy decision about housing. In 1972, it created the home ownership tax shelter, which excluded principal residences from the taxation of capital gains.