Canada

The NDP Hitting Canadian Homes With A 75% Capital Gains Tax Wouldn’t Change Much

Canadian real estate and capital gains taxes are once again in the spotlight. This week the NDP’s Jagmeet Singh promised to crack down on “big money” house flippers. This strategy largely involves hitting them with a 75 percent capital gains rate. Owners feel this will unfairly target them. Supporters think this will encourage more productive investments, outside of real estate. They’re both wrong… at least the way the NDP has proposed implementation.

WTF Are Capital Gains Anyway?

First, let’s talk capital gains. Capital gains are the difference between the price you sell an asset for, and your cost basis. The cost basis is typically the price paid, minus eligible costs incurred. If your capital gains are positive, you’ve made a profit that can be taxed at the inclusion rate. When the gain is negative, you incurred a loss and can often use this to offset gains at the inclusion rate. Totally aware inclusion rate means nothing to most of you right now, so let’s quickly discuss.

The inclusion rate is the percent of capital gains (or loss) included for tax purposes. Most investments in Canada are taxed at a 50 percent inclusion rate. That means 50 percent of the income is taxed as though it were regular income. For example, if you made $100 on an investment made with an inclusion rate of 50 percent, you would pay taxes on $50.  This effectively cuts your tax rate in half for the item. This is important for Canadians to understand since all investments aren’t treated equally. 

Canadians Don’t Pay Capital Gains On Their Primary Residence

In Canada, unlike the US, the capital gains on a principal residence have an inclusion rate of 0 percent. According to the Canada Revenue Agency (CRA), this is generally true if: 

  • Your home was your principal residence for all years you owned it, or for all years except one year
  • You report the sale of the property and designate it as your principal residence on Schedule 3 and complete Form T2091(IND)
  • You or a member of your family did not designate any other property as a principal residence while you owned your home.

Not Your Primary Residence? You Have To Pay Taxes On The Gains

Not your primary residence? You generally have to pay taxes on the gains for that property. A non-primary residence typically falls into two major categories — personal and business. If you own a few properties over your life that aren’t your primary residence, it’s considered an investment. These folks are usually subject to the 50 percent inclusion rate.

Businesses, incorporated or not, that trade property have to pay a full rate. This includes flippers, and other folks generating regular “business income” from the sale. Companies pay their business rate, and people pay the income tax rate. At least in theory, but some people in practice get away with not paying it. Those agents boasting about making buttloads flipping and paying lower taxes? They might have got away without claiming the capital gains rate, but most likely paid the incorrect amount of taxes. It would likely be considered business income by the CRA, meaning it should have been taxed at a 100 percent inclusion. 

Home flippers will sometimes “move” into a project, and claim it as their primary residence. This used to be popular, but the CRA has explicitly said this can void a primary residence exemption. You may have gotten away with it a few times, but that doesn’t mean it’s how the taxes work. The more times it’s done, the more you increase your chances of being caught. When that happens, they can circle back and seek back taxes.

No, this isn’t just a rant. It’s important for understanding how the NDP plan actually works, and who will be targeted.

The NDP Plan Targets Owners of Multiple Homes and Flippers

The NDP plan is somewhat vague right now, but they aren’t targeting primary residences. Singh said they’ll be hitting home flippers with a 75 percent capital gains rate, up from 50 percent. The 50 percent part is really important because this only applies to certain people. Owners of multiple homes and occasional flippers would be the demographic targeted.

They aren’t targeting primary residence owners. They pay a 0 percent inclusion rate, not 50 percent. Increasing the rate of those that pay 50 percent, definitely has no impact on those who just regularly live in their home. Professional flippers also aren’t targeted by this, since they shouldn’t be paying capital gains. They currently should be paying business income.

No, This Plan Doesn’t Encourage More Productive Investment

The theory behind a capital gains tax on homes is to encourage productive investment. It ideally discourages non-productive housing investment and puts it into more productive uses. This benefits an economy in three major ways:

  • Housing becomes less expensive, since fewer dollars are chasing the same asset for returns; 
  • Fewer dollars spent on shelter means more money for other areas of the economy. Spending 10 percent more on rents or mortgage payments mean 10 percent less in the rest of the economy. This becomes a drag on the economy, which lowers the return on homes anyway;
  • Investors are encouraged to seek more productive investments. These tend to produce higher velocity capital growth, leading to long-term prosperity.

The NDP plan doesn’t do any of this, since it’s an extension of a general move to increase all capital gain inclusions. Previously the NPD promises to hike the inclusion rate to 75 percent for all investments. This would have hit the same class of housing investors he’s “targeting.” Even before he explicitly said he would be targeting them.

Targeting all investments fails to distinguish which are productive and which aren’t. The goal is to encourage speculators to invest in other areas. If the incentive, or disincentive, is the same for all types, you’ll just keep doing what you do. In other words, it would have little to no impact on housing. It just straight up taxes all investments at a higher rate.

Implementing a capital gains tax on a primary residence is a totally different story. When experts like BMO suggest considering a primary residence capital gains tax, it’s not about revenue. It’s also not about making sure people make less money either. It’s about discouraging households from over-allocating to housing. If households are encouraged to invest in housing, that’s where all of their money goes. If they are discouraged, they diversify their holdings.

Ironically, this NDP plan would negatively target Millennials more than it would change anything for speculators. Middle-class Millennials that aren’t homeowners only have the stock market to preserve wealth. By taxing them at a higher rate, and leaving a homeowner’s primary residence untouched, Millennials would be at a disadvantage. The investor class? No one is incentivized to do things differently. They just have to pay higher taxes.

Photo: NDP Canada.

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27 Comments

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  • Shruti Srinivasan 2 weeks ago

    Thanks for this analysis! Have they been clear about targeting all investments? I suppose the question is whether there is a mechanism to only raise the capital gains tax (and inclusion rates) on real estate investments?

  • Omar 2 weeks ago

    Punitary taxes work, but if you hit all segments you’re effectively just reducing all investment activity.

    Which people like Singh might encourage, since they prefer state-controlled enterprise, but generally if you live in a society with businesses operating freely you’re really painting yourself into a corner. The government is basically running a planned economy, just helping their friends.

    • Trader Jim 2 weeks ago

      This is always the problem with people that don’t understand the theory behind certain behavioral shaping moves from the government. They combined “tax the rich” with “tax housing,” and removed the reason you would do either of those things, and produced “tax all investors richly.”

  • Gerald Haw 2 weeks ago

    All polticians should have to show their homework. The solutions sound catchy, but ultimately do nothing to improve housing. They’re just schadenfreude for people that hate anyone with money.

    • David Chan 2 weeks ago

      Holding politicians to the same standards as kids in Grade 3? It would never happen in Canada.

    • John Miller 2 weeks ago

      Paying capital gains is not a schadenfreude. I m an engineer and pay huge taxes on my income. I forded to flip houses. I buy several live in one, rent others after couple of years sell my primary, without paying capital gains and move into non primary, couple of years later I would find another fair deal.
      I never payed capital gains .
      I m teaching my older son now to use the same business approach.

      • Money Coach 2 weeks ago

        Am I reading this correctly?

        Are you saying that you own multiple houses simultaneously, but before you sell them you move into the one you are going to sell for a couple of years before you sell it? You then claim the Principle Residence Exemption on the entire capital gains?

        Or are you saying that you are just flipping principle residences that have never been rented and have not sold any of your non principle (that you sometimes live in and sometimes rent) and that you will pay capital gains tax on the non principle when you do decide to sell?

        • Kaliucla 2 weeks ago

          I can clarify. He’s saying that he commits tax fraud and he will soon teach his son how to also commit said tax fraud.

    • Dave 2 weeks ago

      Dude. What are you talking about. Tax the rich, it’s simple… Unless you are for the rich getting richer. Tax the flippers! Vote NDP!

  • Ahmed 2 weeks ago

    No chance of the NDP winning and implementing this, so it’s not really a concern tbh.

  • Robert Michael Angus 2 weeks ago

    A liberal minority might be forced to accept some NDP policies. So, it is a concern.

  • D 2 weeks ago

    In my opinion there should be no capital gains tax at all below $1 million in a month long time frame for stocks, bonds, houses, collectibles etc…

    For homes, capital gains of 100% for people with more than 2 homes that are loooking to sell their third or fourth home.

  • Fbb 2 weeks ago

    Just tax people who own multiple residential properties and we will solve this problem.

  • Jaywed 2 weeks ago

    Stephen, could you post an article outlining on what you would do to curb current housing prices? This would help educate the general public and could use as a quick counter argument to our politicians and other RE influencers.

  • kal 2 weeks ago

    Why is the NDP a serious topic of discussion? We may as well analyze the Green Party too then. Frankly, the NDP is an outlier whereas the two major parties are Libs and Cons. Outlandish comments that Jagmeet makes are hardly worth serious consideration

  • Mark Bayly 2 weeks ago

    Federal politicians are vote importing with millions of immigrants endlessly which is causing many of these problems God luck lowering pollution levels when you are vote importing half a million people.a year to pollute up the place

  • J 2 weeks ago

    Sooo right…..unrealistic socialist crap! Can’t do math either. In article author says cap gains costs are price paid MINUS eligible costs should be PLUS. Just plain DUMB!

  • HJ 2 weeks ago

    Stephen, what do you propose? I think it would be a great to write an article summaries the best option to tackle over inflated house prices. This would be a great tool to educate the public and use as a counter arguments to the typical RE talking points.

  • JT 2 weeks ago

    I would love to have seen a withholding tax on non-principal residence be proposed. 10% of selling price held at sale, can be adjusted by ministry of finance depending on housing market conditions. If no capital gain tax paid can be refunded on your tax filing.

    Would removed capital from the residential real estate market for investors and flippers.

  • Corey Ernest Anderson 2 weeks ago

    So if I have to pay capital gains on the selling of my primary residencey, why can’t I claim the interest I pay on the mortgage annually. You compare us to the states, not right, they do claim interest paid from a mortgage on their taxes annually, which give them a tax break. So don’t compare Canada to the USA. Taking out home if we sell is crazy, after all. Most people pay almost three times the value of their home over a 25 year period. So to tax the capital gains on primary residence is their. NDP can go jump of a bridge with brick feet.

  • Jonathan Kan 2 weeks ago

    Er… If you put capital gains tax on primary residences… How does a millennial couple upgrade from a studio to a 2 bedroom or townhouse as they get married and start a growing family? They will have to demand a higher selling price to be able to cover for the capital gains tax imposed that was supposed to help lower the housing costs in the first place. Nice how the author left that detail out. It’s also nice that the author says money would be put to better use, but he or she is forgetting about the portion of money collected from said tax increases will be wasted on things like paying WE charity family members for speaking engagements. The author is either forgetting or deliberately not mentioning that government ranks at the very bottom when it comes to “better investments”

  • Larry Kazdan 2 weeks ago

    Put the full tax on all passive investments and switch the reduced tax rates to employment income. Wouldn’t that incentivize all passive investors to go out, get a job, and contribute to society?

  • Janhalcion 2 weeks ago

    Big surprise, a bunch of real estate wonks don’t like anything that comes anywhere near damping down the insane Canadian real estate market.

  • Marion Ewasiuk 1 week ago

    I have owned my rental property since before my mother moved into a senior facility. It was the family home for nearly 80 years Built in 1944. I maintained it for all those years, mostly having family, caretaker and minimal rentals at times, helping friends in dire straights and only have them paying utilities, at times.
    Now if the capital gains become 75%, I will lose enormous monies on the sale of it.
    is there any leniency on this.

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