Dear CPI Capital newsletter subscriber,
As house prices continue to surge across Canada, creating home shortages and challenges to affordability, government and concerned industry participants continue to look for ways to help bring some stability to the residential property market.
Finding a satisfactory solution(s) to this issue has become even more pressing as an RBC Economic report in December 2021 found that housing affordability in Canada is at its most challenging in 31 years.
Whilst there are many positive, pragmatic ways in which home prices can be reined in, a just issued report by Vancouver-based advocacy group Generation Squeeze (“GS”), an entity backed by the Canada Mortgage and Housing Corporation (“CMHC”), is suggesting a “surtax”—and this seems to be polarizing opinions across the board!
What does the surtax proposal involve?
The GS report suggests implementing an annual progressive surtax on homes valued at $1 million or more
Advocates claim that the majority of Canadians would not be liable for this tax and, therefore, pay nothing. Using a threshold for the tax of $1 million means it would apply to only 9% of households in Canada, including 13% in Ontario homes and 21% in BC.
Plus, it is suggested that the measures could help reduce housing inequality, raising $4.54-$5.83 billion (the higher figure if the tax rate started at 0.5% rather than 0.2%) for other housing projects such as housing co-ops and affordable purpose-built rental homes.
These funds could also help pay for a federal government funded program which would buy low-density housing units and redevelop them into affordable multi-family developments (sometimes known as “missing middle” housing).
The surtax would be capped at 1% and be deferred until the home is sold or inherited, in order to mitigate risks to homeowners with limited income. Any interest rate charged on the deferred tax payments would be comparable to market rates.
Currently, all home sales are exempt from capital gains taxes as long as the property is the seller’s principal residence, but the GS report argues that such taxation policies have essentially turned real estate into a huge tax shelter. By reducing benefits associated with such tax shelters, the expectation is that this will finally cool house prices.
What are some of the downsides of and some of the options to the surtax?
Opponents to the aforementioned proposals say that the Canadian Government’s answer to all housing issues is to levy more tax—but that this is not a real solution. Constantly levying taxes on home ownership can end up being inequitable as, fundamentally, the value of a person’s home does not correlate to their income level.
For example, for anyone who bought a home years ago and have seen it rise in value to over $1 million due to the effluxion of time and the natural inflationary pressures which help drive real estate values, then the tax is likely to be an unreasonable burden.
Furthermore, as the root cause of rising prices is a shortage of supply, coupled with high demand, imposing yet more taxes will not do anything to address the supply shortage.
Therefore, some more pragmatic, likely effective suggestions to curb prices may include:
- imposing taxes relating to property purchases directly on non-Canadian buyers;
- better supporting renters with some form of income supplement;
- taxing vacant homes, as this may bring some properties back into the rental pool and/or discourage speculation;
- reducing bureaucracy for builders and developers by shortening approval processes, thereby enabling and supplementing the National Housing Strategy to scale up affordable housing to appropriate levels;
- creating new infrastructure projects so that new areas are opened up for development.
This list can go on and on, but the goal has to be a focus on real solutions, not just on property taxation.
We at CPI Capital fully understand that there is no one single solution to what is a complex, often highly fraught, set of problems relating to housing. And there’s no doubt that a solution must embrace a full range of policy tools that shape Canada’s housing system.
But we don’t believe that the suggested surtax needs to be one of the tools.
Our firm, CPI Capital, a Canadian company, acquires and renovates multifamily properties only in the US, although we’d love to invest in Canada.
One reason for only investing in the US is that the real estate investment space in Canada for firms like ours is so business unfriendly and disadvantageous. As a result, we have been forced to take our business operations out of Canada into the US.
Just another example of the economic brain drain happening to Canada… and, sadly, Canada has lost us as investors in our home country!
We just hope the message finally gets through to housing policy makers before it’s too late and more Canadian investors vote with their feet!
– Ava Benesocky
CEO, Co-Founder CPI Capital
– August Biniaz
Chief Strategy Officer, Co-Founder CPI Capital