Rumors of a Home Equity Surtax Resurface Ahead of the Elections

A proposed surtax on home equity for properties valued over $1 million has recently gained renewed attention, sparking widespread discussion and controversy. This proposal, initially put forward by Generation Squeeze and backed by the Canada Mortgage and Housing Corporation (CMHC), aims to address the mounting housing affordability crisis in Canada.

Generation Squeeze, a Vancouver-based advocacy group, suggested in a 2022 report the implementation of an annual progressive surtax on homes valued at $1 million or more. The proposal includes a surtax that would be capped at one percent and can be deferred until the home is sold or inherited, easing the financial burden on homeowners with limited incomes. The report emphasizes that any interest charged on deferred payments should align with market rates.

“The proposed annual surtax will reduce the tax shelter that incentivizes Canadians to rely more on rising home prices as a strategy for savings and wealth accumulation than they otherwise would,” the report stated. “Reducing the tax shelter will disrupt feedback loops that fuel rising home prices.”

According to the report, the surtax could generate between $4.54 billion to nearly $6 billion in annual revenue, depending on how the rates are structured. This revenue could be redirected to various housing initiatives aimed at improving affordability, particularly for renters.

The surtax would affect approximately 8.9% of Canadian households, including 13% in Ontario and 21% in British Columbia. Based on 2020 adjusted home price data, the surtax rates and potential revenue are outlined as follows:

In an alternative scenario, adjusting the surtax rates to 0.5% for homes valued at $1 to $1.5 million would supposedly increase the annual revenue to $5.83 billion. However, it also erroneously calculated the annual surtax payment for the higher-valued homes despite having the same surtax rate.

The renewed focus on this surtax proposal has garnered a range of reactions. Supporters argue that it strategically targets wealthier homeowners, curbs speculative investment, and provides much-needed funding for housing initiatives.

Tablesalt, a social media commentator, highlighted the strategic aspects of the proposal: “Kill the speculators, target the top 10%, get Gen Z back on board, raise $5B per year AND no one can hide their house in Corp anymore because of the cap gains changes.”

However, critics, including some policymakers, have expressed concerns about the potential impact on homeowners and the broader housing market. The federal government has consistently denied plans to tax capital gains on primary residences.

In its latest fiscal update, the federal government indicated that new housing measures would be introduced in the upcoming spring budget. However, the Generation Squeeze report emphasized that existing initiatives have been insufficient to restore housing affordability.

The affordability crisis in Canada has intensified during the pandemic, with RBC Economics describing the outlook for homebuyers as “grim” due to rising interest rates and diminished buying power.

The Generation Squeeze report also recommended aligning the Canada Infrastructure Bank (CIB) with CMHC to encourage lending for purpose-built rental construction. This alignment could help scale up affordable housing and meet investment targets under the National Housing Strategy.

“There is no ‘silver bullet’ to restore housing affordability. Rather, we need a ‘silver buckshot’ approach that addresses the full range of policy tools that shape Canada’s housing system,” the report concluded.

Information for this story was found via Bloomberg and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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