CMHC-Backed Report Calls for Annual Surtax on Homes Valued at M+

A new report backed by Canada’s national housing agency is calling for a home equity tax on houses valued at $1 million and more.

On Wednesday, advocacy group Generation Squeeze released a report entitled Housing Wealth and Generational Inequity, which explored policy incentives to solve Canada’s “housing unaffordability crisis.”

The report was authored by Dr. Paul Kershaw, founder of Generation Squeeze and a University of B.C. professor in the School of Population & Public Health, and was funded in part by the Canada Mortgage Housing Corporation (CMHC) and National Housing Strategy.

Among the recommendations was the call for a tax that would range from 0.2% for homes valued between $1 million to $1.5 million, and up to 1% on homes valued over $2 million.

The annual tax would be deferrable, meaning the accumulated total would not have to be paid until the home is sold or inherited. According to the report, a home valued at between $1-1.5 million would incur an average annual surtax of $408, while a home valued at over $2 million would average an annual tax payment of $14,710.

Such a tax would impact about 9% of Canadian homes, according to the report, and raise between $4.54 and $5.83 billion for government coffers, which the author says could be used to provide benefits to renters, such as “portable housing benefits” or investments in new green co-op and purpose-built rental units.

“The tax will apply only to the 9% of households living in the most valuable principal residences in the country—including 13% of Ontario households, and 21% of B.C. households,” the report reads.

The report added that the annual surtax would reduce the tax shelter in housing that it says is incentivizing Canadians to rely on rising home prices as a strategy for savings and wealth accumulation more so than they otherwise would.

“Reducing the tax shelter will disrupt feedback loops that fuel rising home prices,” the report reads. “This would slow the escalation of home prices and improve affordability; reduce inequalities, including between renters/owners and younger/older Canadians; and attract savings and credit towards economic activity outside of the housing sector, which may produce more jobs and innovation than is often found in real estate.

Housing affordability a growing concern

With average home prices in Canada up over 20% year-over-year to $720,850 as of November, housing affordability has become a key issue for both federal and provincial governments. During the election, all political parties proposed plans to address housing supply shortages and promised to make housing more affordable.

Late last year, the Ontario government created a Housing Affordability Task Force, which was given a mandate to examine the province’s deteriorating housing supply and affordability situation and advise on potential solutions.

Reaction to the Generation Squeeze report was swift, and not all of it positive.

“They’ve got it backwards. Higher taxes won’t make homes less expensive, higher taxes make everything more expensive,” the Canadian Taxpayers Federation said in a statement to the Financial Post. “If there’s a housing problem, then we need to build more homes, so governments should be reducing taxes and red tape on homes and the material that is needed to build more homes. We are not going to tax our way to more homes. You build more homes with hammers, not tax hikes.”

Gord McCallum, President and CEO of First Foundation, also takes issue with home equity taxation being floated as a solution to solving affordability.

“Some Canadians have worked hard, paid their taxes, invested wisely, and have benefitted—in some markets, not all—from the appreciation in the value of their home, which was paid for with after-tax dollars plus interest,” he told CMT. “And now some policymakers, “labs,” and influencers believe that those gains should be taken from them in the form of taxes and given to other Canadians. This is dangerous thinking.”

Mortgage expert Rob McLister believes it’s unlikely such a policy would see the light of day. “For one thing, it would make little lasting difference. For another, it’s political Russian Roulette to target Canadians’ home equity,” he told CMT. “The Liberals will likely focus on more politically palatable revenue measures, like taxing non-residents and an anti-flipping tax.”

He added that the answer to wealth inequality is better opportunity. “That comes from creating more and better paying jobs, improving education and job training, a naturally balanced housing market, a rising standard of living for the middle class, and so on,” he noted. “Taxation always has side effects (economic disincentives, loophole seeking, more tax avoidance, lost jobs, etc.). This tax would be no exception.”

Additional recommendations

The surtax wasn’t the only recommendation included in the Generation Squeeze report. Here’s what else they proposed:

  • Task Statistics Canada with reviewing the “owned accommodation” component of its Consumer Price Index (CPI) calculation, and report annually on the influence of monetary policy on the growing gap between home prices and earnings.
    • The review would require developing a “supplementary measure of housing affordability to capture changes to average home values relative to typical earnings,” the report said. 
  • Align the mandates of the Canada Infrastructure Bank and the CMHC to incentivize lending to scale up green co-op and affordable purpose-built rental.
    • The report suggests that better aligning the work of these two Crown corporations could leverage funds to supplement the Rental Construction Financing Initiative and the National Housing Co-Investment Fund, both of which are implemented by the CMHC.
  • Create a Permanent Housing Affordability Off-Ramp Program and Savings Plan.
    • This would involve the creation of two new mutually supporting initiatives: a federally guaranteed off-ramp program to transition low-density housing into a pool of permanently affordable rental units, and an off-ramp savings vehicle delivered through a Perpetual Affordable Housing Bond.

CMHC’s history on housing taxation

In 2020, the idea of introducing a capital gains tax on principal home price gains attracted headlines. While the government never addressed the speculation directly, observers suggested introducing such a tax could result in a windfall for the government and help control home price increases.

According to Department of Finance figures, the government misses out on an estimated $7.1 billion in potential revenue by not taxing capital gains on principal residences.

But in 2020, then-President and CEO of CMHC, Evan Siddall, adamantly explained that the agency was not exploring such taxation avenues when it first co-funded a Solution Lab on housing wealth and inequality.

“We are not spending any time on a home equity tax,” the then-President and CEO tweeted. “The suggestion that CMHC is funding a study on any tax measure is inaccurate and misleading reporting,” he wrote in another tweet.

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