If we approached housing affordability like environmental challenges, would it help Canada’s housing crisis? Just as the government of Canada has implemented numerous measures to combat climate change, such as the highly disputed carbon tax policy, the government has proposed a controversial home equity tax policy to help push home prices down.
Let’s break down this proposed policy and see who will be affected, and more importantly, whether it will actually make housing more affordable in Canada.
What Is The Proposed Home Equity Tax?
The Prime Minister of Canada and Finance Minister met with the government-funded think tank ‘Generational Squeeze’ to address concerns related to “generational fairness”. Generational Squeeze highlights that younger Canadians are facing financial issues, time pressures and limited access to services, all while inheriting financial and environmental burdens created by older generations.
Generational Squeeze suggests a home equity tax to make housing affordable to young Canadians, renters, and others locked out of the market due to rising house prices. The proposed home equity tax would charge a small surtax (starting at 0.2% and peaking at 1%) on homes valued over 1 million.
| What is “Generational Fairness”? Generational fairness involves creating a nation that allows all Canadians, both young and old, to have the opportunity to flourish while passing on these same opportunities to subsequent generations. More specifically, generational fairness ensures that all Canadians now and in the future will have the advantage of affordable housing, lower cost of living, accessible health care, and a healthy climate. Canadians are counting on our leaders to ensure these benefits are available today and to future generations through sound policies and decision-making. |
Who Will Be Affected?
The home equity tax would only apply to homes valued over 1 million dollars. As such, only the top 10% to 12% of the most valuable homes will be subject to the new tax policy. The other 90% of Canadians won’t pay anything.
What Is The Goal Of The Home Equity Tax?
The home equity tax policy is meant to put downward pressure on the rising house prices in Canada. It’s meant to stall home prices so that earnings can catch up. Generational Squeeze explains that the home equity tax “would help disrupt the tax shelter that protects the trillions in added housing wealth homeowners have gained since 1977.”
They further argue that the current system is making housing unaffordable for future generations by turning homeownership into an investment strategy. With the surtax, it would not only be easy to implement within the current tax structure in Canada but help stall home prices.
Is This A Fair Policy? Will It Work?
Let’s look at both sides of the argument:
For The Home Equity Tax
According to Generation Squeeze, the home equity tax policy is an important step required to help make housing affordable in Canada. Since 1997, tax shelters in Canada have allowed homeowners to gain trillions in housing wealth. It seems unfair that hard-working Canadians are taxed more than homeowners who profit from increasing home prices.
Against The Home Equity Tax
Several arguments can be made against implementing the home equity tax:
Property Ownership Is Already Expensive
There are already several housing-related taxes and expenses that Canadians must pay, including property taxes, carbon taxes, taxes on new home construction, and utilities. Plus, investment property owners must pay capital gains taxes when they sell at a profit. Adding a home equity tax to the mix will make property ownership even more unaffordable.
Previous Taxing Policies Haven’t Helped
The government has already implemented previous taxes to curb issues with housing supply and affordable, which have not worked to alleviate the issue:
- Vacant Homes Tax. Cities like Vancouver and Toronto implemented “vacant homes taxes“, which owners of properties that leave their homes empty for a certain amount of time are subject to as a way to address the housing crisis.
- Underused Housing Tax. The federal government also implemented its own 1% federal tax on the ownership of underused or vacant property, which took effect at the beginning of 2022.
- Foreign Purchasing Ban. The federal government recently extended this ban to the end of 2026, which is meant to deter foreigners from buying real estate for two years.
- Residential Property Flipping Rule. The federal government’s flipping tax rule took effect in 2023 and was meant to ensure that profits earned from fixing and flipping properties are taxed as business income.
Alleviating the housing crisis involves much more than simply taxing property owners in multiple ways. Had these taxing policies worked, the housing crisis should have seen some signs of improvement by now, but such is not the case.
Housing Prices Rely On The Demand And Supply Concept
Ultimately, housing prices are largely determined by the simple concept of supply versus demand. As the demand for housing increases and supply is unable to keep up, home prices typically increase. We’ve seen this happen over recent years, as housing prices have soared 318% in Canada since 2000.
While there may be several culprits, the demand/supply concept plays a role. According to TD Economics, Canada could be short by more than 300,000 housing units from 2024-2026 as a result of population growth and the sluggish pace of new home builds. The country needs to see a significant increase in new housing to keep up with rising demand.
Canada Can’t Fix Its Economy Through Incessant Taxation
Understanding history is worthwhile, including how taxation has affected economies passed. In 1904, Winston Churchill was quoted as saying, “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.” He was arguing against tariffs in this speech and accurately predicted how such tariffs would be detrimental to economies across the globe.
Taxing the wealthy, for example, has already been attempted in the past, but with poor results. While such a tax is said to help bridge the income inequality gap, evidence suggests that the wealthy are negatively affected. Such a tax deters them from investing and can ultimately hurt others and the economy as a whole.
Perhaps our leaders need to revisit what has and has not worked in the past to fix economic issues, and piling on tax after tax might not be it.
Final Thoughts
Historically, wealth tax policies have been argued as a solution to income inequality in Canada. However, history has shown that these antiquated policies are not the most effective. In fact, only a few countries have them in place. For example, only three countries have a wealth tax in Europe, the rest don’t levy a wealth tax.
Knowing this, the government of Canada should consider alternative tax policies and strategies to help make housing affordable.
