Yahoo Finance Another tax on properties isn't the answer to Canada's housing woes
What is a great solution to many of our country’s issues? Well, a tax, of course. After all, taxes solve everything, right?
Climate change is an issue? Implement a carbon tax. Foreigners are buying too much Canadian real estate? A speculation tax, a purchase ban and underused housing taxes. Short-term rentals are a community problem and causing housing challenges? A prohibition on the tax deduction of expenditures. Wealth disparity is a problem? Let’s think about a wealth tax or an estate tax.
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it,” former United States president Ronald Reagan once said.
That’s a brilliant summary of our current government’s approach. For example, one of the “tax solutions” proposed by the federal government in the 2024 budget was that it would consider introducing a new tax on residentially zoned vacant land and would launch consultations later this year. On Oct. 8, the government released details of such a consultation, which interested stakeholders will be able to provide their views until year-end.
The paper said the implementation of such a tax would be intended to encourage the development of land into housing (rather than leaving it unused), discourage speculative holding of land (by making it more costly to keep land undeveloped) and provide a source of revenue for various orders of government, which could be used to fund the construction of more new homes.
This policy rationale is so simplistic, it’s laughable. The paper goes on to ask basic questions that it wishes interested parties to address, the first one being whether a vacancy tax would be an effective policy response to entice more housing development. The next dozen or so questions assume that the answer to the first question is “yes,” and ask how the proposed tax could operate.
I have acted for many owners of real estate, including land developers, home builders, commercial landlords and others. The key asset for these organizations is land. Once land is acquired, it can take years to develop, rent and/or sell. There are numerous factors — many beyond the owner’s control — that influence quick development, including municipal zoning restrictions, rising costs (such as interest rates that may be applicable on borrowed funds), contamination clean-up requirements, financial downturns in the economy and partner disputes.
A proposed vacancy tax wrongly assumes that landowners are simply holding onto their properties until the time is right to maximize their profits. There is no doubt that most landowners wish to get proper returns on their investments, but to think they are simply hanging onto their properties at the expense of people who are lined up at the door to buy their finished product shows a complete misunderstanding of the risks and rewards of entrepreneurship.
We shouldn’t be surprised by this kind of simplistic thinking from our current government and its supporters, but I am. If a vacancy tax is implemented, does anyone honestly think land owners would be able to influence all the situations to dispose of or develop their properties to avoid the tax? If so, you should spend even a week or so shadowing an owner of a home-building company. It’s not easy dealing with all the issues involving land development.
Let’s assume, for the sake of argument, that there are indeed a large number of greedy landowners holding onto their land. Would the imposition of a vacancy tax move the needle to force them to sell or develop their land? Absolutely not.
Instead, the imposition of a vacancy tax could cause significant liquidity problems for many landowners. It may force them to sell their holdings at prices far below their original acquisition costs, thus incurring losses. Those who can afford to pay the tax would simply pass along those additional costs to the ultimate buyers, thus forcing housing prices up.
Want some research that shows government interference isn’t helpful? The NDP in British Columbia has introduced many housing initiatives ever since it came to power in 2017, including a speculation tax, housing targets for municipalities, short-term rental rules, historic zoning changes and a home-flipping tax (designed along the lines of the ridiculous federal flipping tax). Have those measures helped?
“Despite countless measures and additional paperwork and other requirements, we’re exactly where we started,” Andrey Pavlov, professor of finance at Simon Fraser University’s Beedie School of Business, said in a recent interview that discusses some of his research on the matter.
There is nothing more powerful than the market or, as Scottish economist and philosopher Adam Smith said in his 18th century writings, an “invisible hand,” a metaphor that describes the incentives that free markets sometimes create for self-interested people to accidentally act in the public interest, even if it was not intended.
Additional taxes are rarely the answer. Instead, governments should look in the mirror to see if any of their policies are contributing to an issue. For example, government immigration policy contributes greatly to housing challenges.
With respect to the consultation, I’ll answer the first question and dispense with the other dozen: a proposed vacancy tax will not be effective. It’s time to stop taxing everything that moves.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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