The Canadian government hasn’t discussed a capital gains tax on real estate, but the industry is already fighting it. Toronto Regional Real Estate Board (TRREB) sent a memo to their members this week. In the memo, they explain why they’ve taken an aggressive position against the yet to be proposed tax. It also happens to mention they’re working with other industry associations like CREA to “shut this idea down before it goes any further.” Here’s what they said, and why the industry is secretly preparing to fight a capital gains tax on real estate.
A Capital Gains Tax On Real Estate?
Canada is one of the few countries that doesn’t have a capital gains tax on a household’s primary residence. The tax is usually applied to profit made on the sale of assets. Note, that’s profit — not the selling price. The cost of the asset, and typically the cost of selling it, is excluded from the tax. The gains on your stocks? Taxed at a capital gains rate, typically lower than income. The gains on a primary residence in Canada? Exempt from these taxes, assuming the CRA believes it was your primary residence.
Partially due to this, Canadians often think of their home as a retirement plan. TRREB highlights this point saying, “this makes sense for many reasons, not the least of which is the fact that homeownership is the cornerstone of retirement planning for many people.” Preferential tax treatment has always been one of the reasons many Canadians prefer property investment, over “productive investments.”
US Capital Gains Tax Is The Most Common Suggestion
One country many might not expect to have a capital gains tax on real estate, is the United States. Profits made on a primary residence above $250,000 ($500,000 for couples), is subject to a capital gains rate. Fair deductions can be made, such as selling costs and some renovation fees. If you’ve lived in a home as your primary home for more than two years, the exemption generally applies.
Let’s do a quick example for those that still don’t quite understand how it works. You’re a single person in America, who bought a condo for $400,000. Five years later, you sell it for $700,000, while making $100,000/income at work. We’ll say you incurred only 6% in selling costs. For the sake of simplicity, we won’t include your mortgage interest deduction.
The profit would be around $258,000. After your single-person exclusion, your taxable capital gains would be $8,000. At your income, the rate is 15%, so you would owe about $1,200 in taxes on that gain. Of course, you also deduct the cost of mortgage interest over the time you owned it, so you most likely paid nothing.
TRREB Doesn’t Like The US Model For Canada
TRREB argues a lack of discussion means they aren’t accounting for differences in the US. Mortgage interest rate deductions are the key argument, with the board stating “this important distinction has not been part of the discussion in Canada.”
They also argue Canada’s high home prices are another issue. “If we use a similar exemption threshold as the one used in the U.S., it wouldn’t even cover half the cost of an average priced property in the Greater Toronto Area.”
Mortgage interest deductions seem like a given, but they aren’t everywhere. New Zealand recently announced it would remove the deduction for some ownership segments. RBC also recently suggested Canada stop adding ownership incentives, finding New Zealand’s approach “interesting.”
How Much Would Canadians Have To Pay With US-Style Capital Gains Tax?
TRREB’s point on “half the cost” isn’t exactly clear for the GTA, but here’s some rough numbers. The average GTA price was $1,045,000 in February. If a couple bought it for $1, the taxable gains would be $545,000 — around half. Deduct 6% for selling costs, and use the US-style capital gains rate again. In this case, the couple would not pay any capital gains taxes on the average home, unless they bought before 2012. The average purchase price would have to be lower than 2012’s price to clear the exemption.
The average buyer 25 years ago, would pay between $0 and $56,800 using the exact US model. The effective maximum capital gains tax rate would be about 6.7% on pre-tax profit of $846,850 over 25 years. It doesn’t feel like much of a penalty for that much money. This also somewhat demonstrates it may not be all that effective to slow speculation.
If there’s any impact using US-style rates, it would be largely psychological. Other countries have more aggressive capital gains taxes, that may be more effective. For instance, some places lower the rate the longer you own it. South Korea recently announced a nosebleed rate if you sell in less than 2 years.
Regardless of how it’s implemented, TRREB told agents it would be ineffective, and they would stop it. “Some see a capital gains tax as a way to cool housing markets. There is little credible evidence this would be the case, nevertheless, this is a classic example of where the cure becomes worse than the disease.” They end the memo assuring agents, “you can rest assured that TRREB is watching this issue and taking action as needed.”
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