Could a new tax on homes worth $1M and up help fix Canada’s housing crisis?

With home prices in Canada’s most expensive markets going up at a dizzying pace, a Vancouver-based think-tank is proposing a new tax on homes valued at over $1 million to help bridge the affordability gap.

Although Canada’s housing market went ice cold when the pandemic began in March 2020, it soon came roaring back and spent much of 2021 on fire. Average prices across the country rose to their highest level on record at more than $720,000 in November, and despite those high prices, the year smashed the annual sales record, too, with more than 630,000 homes changing hands.

The torrid pace has prompted fears of a painful comeuppance if the market goes off the rails, but so far none of the targeted solutions suggested so far — from taxes on vacant homes, flippers and foreign investors to an end to blind bidding — have managed to slow the runaway freight train where they’ve been tried.

New numbers this week from Canada’s two most expensive housing markets, Toronto and Vancouver, show those market pushing further into the stratosphere.

The benchmark price for all types of housing in the GTA hit $1,208,000 last month, up by 31 per cent compared to a year earlier. Vancouver’s pace of increase was less torrid at 17 per cent but the overall figure was higher, at $1,230,200, across the region. Both figures are getting close to double the national average.

In both markets, single family homes for under $1 million are becoming unheard of, which is why Vancouver based think-tank Generation Squeeze used that figure as a baseline for an eyebrow-raising proposal this week: a new tax on homes worth $1 million and up.

The group is pitching a progressive tax that would kick in on homes valued at more than $1 million, and get progressively larger on homes valued at  $3 million and above. The group proposing it runs out of the University of British Columbia, but received some funding from Canada’s federal housing agency the Canada Mortgage and Housing Corporation.

Though the tax would be calculated annually, it would be deferred until the home is sold, so it would function similar to a land transfer tax that many provinces and municipalities already levy.

Paul Kershaw, a professor at the University of British Columbia who is one of the group’s founders, says more than 90 per cent of Canadians wouldn’t pay a single penny to the tax since it would only apply to those on the very top of the real estate ladder, most of whom are sitting on massive windfalls of currently non-taxable gains.

While policy makers spend a lot of time talking about how they want to crack down on various offshore tax shelters, “we have a home ownership tax shelter that motivates us to bank on rising home prices to gain wealth,” he said in an interview. “It’s time to protect real shelters and not tax shelters.”

Starting at 0.2 per cent on homes valued at $1 million and sliding all the way to more than 1 per cent on homes worth more than $3 million, Kershaw estimates it could bring in roughly $5 billion a year — funds that could be used to support purpose-built rentals and other initiatives designed to discourage speculation. Only the portion of a home’s value above a threshold would be taxed at that level, so on a $1.2 million home the tax would apply to $200,000 of the value.

“If you have a $1.2 million home, we’re talking about an extra $400 per year, and you wouldn’t need to pay until the sale,” he said.  A $2 million home — enough to rank a homeowner among the top two per cent of the country, in terms of housing wealth, he notes — would accrue a tax of about $3,500 annually.

Even on the highest end, a home worth more than $3 million would see an annual tax of about $13,500. That’s roughly the same amount that someone earning $60,000 a year from their salary would pay in regular income taxes, Kershaw notes, which is why the proposed tax bill is “a very modest number but larger policy signal,” he said.

Not everyone is convinced the plan would be effective, or even workable, however. Ryerson University professor Murtaza Haider is among those who thinks Canada’s housing market is out of whack and in need of fixing, but he doesn’t think adding new taxes on existing owners is the way to do it.

“It’s one of those measures that we call demand-busting measures,” he said in an interview. He says the most effective way to address the imbalance in the market isn’t to try to suppress demand, but rather by building more housing to satisfy that need without encouraging bidding wars for what little housing is available.

“If we don’t address the real problem, that is construction of new housing, and we continue to build or under build, as we have done so in the last five decades, then the problem will remain,” he said.

That jibes with the view of those in the business of selling homes, who have long complained that Canada is not building enough housing to keep up with population growth.

“History has shown that demand-side policies, such as additional taxation on principal residences, foreign buyers, and small-scale investors, have not been sustainable long-term solutions to housing affordability or supply constraints,” chief market analyst Jason Mercer with the Toronto Real Estate Board said. “The only sustainable way to moderate price growth will be to bring on more supply.”

Jane Londerville, who taught real estate finance at the University of Guelph for years before retiring in 2018, is also skeptical of the idea. Instead of helping to fix the affordability problem, it could just encourage owners of single family homes to stay where they are, making the supply problem worse.

She imagines a theoretical empty nester considering selling their home once their children have grown up and moved out. When faced with this new tax five-figure tax bill, that person may say “I’ll just stay in this house — it’s got four bedrooms in it, even though I’m living here by myself,” she said in an interview. “There’s some impacts we need to think about before we say, ‘Oh, this is a great idea.'”

She also worries about what adding a surtax to owners of multiple-unit properties would do to the rental market in particular. “They’d have to charge more rent in order to break even,” she said in an interview. “Is that what we want to do?”

Toronto and Vancouver targeted

Haider notes that while the measure is clearly trying to target overheated markets in Toronto and Vancouver, it would do little to help fix affordability in parts of the country where $1 million homes are unheard of. “The unintended consequences of such taxes and measures could be significant,” he said.

During last year’s federal election, the governing Liberals floated a number of ideas aimed at housing affordability, but none of them amounted to anything similar to the tax that Kershaw’s group is proposing.

In a statement to the Canadian Press this week, the government made it clear that it still has no appetite for any new taxes on owners. “The federal government has clearly stated several times that we will not be introducing a tax on the equity of primary residences in Canada,” the government said.

CBC