Tax in the News: Why a Home Equity Tax is Unfair and Ineffective

The recent discussions around a potential home equity tax have sparked significant debate and concern among Canadians. Reports indicate that Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland have been in talks with the government-funded think tank Generation Squeeze to explore the introduction of this tax as a means of addressing “generational fairness” in the housing market. However, this proposal seems more like another instance of the government scapegoating certain groups rather than implementing effective housing policies.

What is the Home Equity Tax?

The proposed home equity tax targets homeowners who have seen significant capital appreciation in their properties over the years. Generation Squeeze advocates for a surtax on homes valued at over $1 million, arguing that it would help make housing more affordable for younger generations. They claim that it is unfair for homeowners to gain wealth passively through rising property values while others struggle to enter the market.

As stated on their website, Generation Squeeze believes, “It’s time to protect real shelters, not tax shelters. It’s unfair to sustain a system in which the hard work Canadians do every day in their jobs is taxed more than the wealth homeowners gain from rising prices while they sleep and watch TV.”

Existing Tax Burdens on Homeowners

Canadian homeowners already face a multitude of taxes. These include municipal property taxes, carbon taxes, and GST/HST on new builds, renovations, and utilities. Additionally, if the sale of a property does not qualify for the principal residence exemption, capital gains taxes are also applicable. Introducing a home equity tax would only add to this burden, creating more financial strain on homeowners, particularly older Canadians who have worked hard to pay off their mortgages.

Why the Home Equity Tax is Unfair and a Bad Idea

The proposed home equity tax is fundamentally unfair for several reasons:

1. Penalizes Hard Work and Saving: Older Canadians who have diligently paid off their homes and have seen their property values appreciate are being unfairly targeted. These homeowners have often invested significant time, effort, and financial resources into their properties, and the tax penalizes them for their prudent financial planning.
2. Double Taxation: Homeowners already face numerous taxes related to their properties, including municipal property taxes, carbon taxes, and GST/HST. Adding a home equity tax effectively introduces double taxation, where the same asset is taxed multiple times.
3. Disrupts Retirement Plans: Many older Canadians rely on the equity in their homes as part of their retirement planning. A home equity tax could significantly disrupt these plans, reducing the financial security of retirees who may have planned to use the proceeds from the sale or reverse mortgages of their home to fund their retirement.
4. Inflationary Pressures: By increasing the tax burden on higher-value homes, the demand for homes priced under the $1 million threshold would likely increase. This could create inflationary pressures in the housing market, pushing up prices for more modest homes and making them less affordable for first-time buyers and renters.
5. Market Distortions: The tax would create distortions in the housing market, with potential sellers of higher-value homes possibly delaying sales to avoid the tax, thereby reducing the supply of available homes and exacerbating affordability issues.
6. Impact on Seniors: Many seniors are “home rich and cash poor,” relying on fixed incomes. This tax could force them to choose between maintaining their current housing and affording other necessities. Such a policy does not consider past tax incentives aimed at helping seniors stay in their homes longer, such as the Home Accessibility Tax Credit, the Multigenerational Home Renovation Tax Credit, or provincial programs like Alberta’s Senior Home Adaptation and Repair Program.

The Impact on Older Canadians

Kim Moody, writing for the Financial Post, highlighted the impact on older Canadians. “The target here seems to be older Canadians who have paid off their homes and have had the good fortune of capital appreciation. They are now being portrayed as part of the problem,” Moody noted. This sentiment is echoed by many who feel that the proposal unfairly penalizes those who have diligently saved and invested in their homes over the years.

A Pattern of Scapegoating

This home equity tax proposal is consistent with the government’s pattern of blaming various groups for housing issues. Previously, foreigners were targeted with bans on purchasing real estate and underused housing taxes. Real estate flippers faced a flipping tax, and short-term rental owners encountered new rules denying expense deductions. Now, it appears that older Canadians with appreciated home values are the latest bogeymen in the government’s approach to housing policy.

Professional Concerns and Criticisms

The proposal has faced significant criticism from tax professionals. John Oakey, Vice President of Taxation at the Chartered Professional Accountants of Canada, questioned the practicality and fairness of the proposed tax. “How a home equity tax will solve the problem of affordability is a mystery. Proposing new taxes is easy, but implementing them effectively and fairly is another matter,” Oakey told CBC News.

As a tax partner at an Alberta-based firm, I have seen firsthand the complexities involved in tax policy implementation. “Housing supply is a multi-faceted and complex societal issue. Continually introducing tax rules to go after people who are the perceived problem is simply politics — and poor politics at that — at the expense of good policy,” said Nizam Shajani, CPA, CA, TEP, LL.M (Tax), LL.B, MBA, BBA.

Moving Forward: A Need for Comprehensive Reform

Rather than introducing a home equity tax, it would be more effective to undertake a comprehensive review of existing tax policies, including the principal residence exemption. Although this exemption is highly valued and politically sensitive, it may be worth revisiting in the context of broader tax reform.

Sir Winston Churchill famously stated, “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” History has shown that wealth taxes, such as the proposed home equity tax, are often ineffective and unpopular.

Conclusion

The proposal for a home equity tax is fundamentally unfair and represents poor policy. It penalizes those who have worked hard to pay off their homes, introduces double taxation, and disrupts retirement plans. Moreover, it could inadvertently increase demand for homes just below the $1 million threshold, driving up prices and exacerbating affordability issues. Additionally, it fails to consider the financial realities of many seniors, who may be forced to choose between their homes and other necessities. This approach also undermines previous tax incentives designed to help seniors stay in their homes longer.

It is essential to approach housing policy with a holistic and fair perspective, considering the broader economic and social factors at play. By doing so, we can work towards a more equitable and effective housing market that benefits all Canadians without resorting to punitive tax measures.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

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