Yahoo Finance Opinion: The taxman is coming for our homes
By Lawrence Solomon
Canadian governments, which need ever more revenue to finance their spending, have been targeting what they traditionally viewed as Canadians’ most undertaxed assets: their homes. The upshot: Governments have been filling their coffers at the expense of homeowners, relieving them of their cash and sometimes their homes.
The federal government’s recent increase of the capital gains inclusion rate to 67 per cent of gains above $250,000 may be the best known, and most painful, of the new levies besieging homeowners. A modest family cottage that might have cost $20,000 when purchased in the 1960s might have a value today over $2 million, representing a capital gain of $2 million or more, with roughly $1.3 million of that now taxable. If the children who inherit it pay tax at the top marginal rate, they’ll owe roughly half that amount — almost $650,000. If they can’t come up with the money needed to satisfy the tax man, the family cottage will need to be sold, ending traditions and a bedrock of family cohesion that had spanned generations.
Airbnb and similar renting platforms, which enable homeowners to rent out some or all of their homes for short stays, have also become a money machine for municipalities, which are forcing renters to obtain licenses and pay annual fees that can amount to $2,000 or more. Some municipalities also impose an occupancy tax on renters that homeowners are required to collect. In Toronto, the occupancy tax boosts the rental fee by six per cent. And Ottawa and Queen’s Park take their cut, too, as HST is levied on both the occupancy tax and rental fee.
Governments clearly benefit by forcing homeowners into the formal rental economy, but homeowners don’t. Even owners who only rented their homes or cottages informally a few times a year to help with property taxes and upkeep find themselves subject to rafts of government regulations, third-party expenses for audits and inspections and detailed record-keeping, often making rentals unprofitable. The loss of supplementary rental income forces many owners to sell their homes.
Governments say short-term rentals squeeze out long-term renters, worsening the housing crisis. But homeowners who switch from short- to long-term rentals face a Catch-22. Under CRA’s new “Change-in-Use Rules,” they’re deemed to have sold their home to themselves and must pay HST on the full market value. In Ontario, where the HST rate is 13 per cent, a $1-million home yields a $130,000 windfall for CRA. To make matters worse, if the homeowner later decides to stop renting and go back to living in his home, it’s deemed to have been sold at fair market value, making any appreciation a taxable capital gain. Because the change-in-use rules are new, ill-defined and untested, homeowners are bound to get trapped in their contradictions, which are “talmudic in nature,” says accountant and tax lawyer David Rotfleisch.
These new tax policies compound longer-standing measures governments have introduced to claw back what they view as their original sin — the 1972 decision to exempt primary residences from the capital gains taxes introduced at that time. The clawbacks soon followed. In 1974, Ontario levied Canada’s first land-transfer tax — whose original top rate of 0.6 per cent was up to two per cent by 1989. Toronto then piled on in 2008 with an additional one per cent land transfer tax on the upper tranche, which it increased to 2.5 per cent in 2017.
In another clawback, in 1982 CRA eliminated the practice of allowing spouses to each claim an exemption on the sale of a home by adopting a one-property-per-family rule. In 2016, CRA began to require detailed reporting regarding principal residences that led to penalties when, for example, people moved from one principal residence to another and failed to inform CRA on a timely basis.
Last year, CRA adopted the concept of “house-flipping” to deny people who own their home for less than a year the right to sell it without paying tax on its capital gain. CRA also began to challenge the status of the homeowner. If a Canadian works abroad, CRA can deem him a non-resident and claw back his residence’s tax-exempt status for his years away. The change-in-use rules also capture homeowners who rent their homes while they’re away. They too are deemed to have sold their house, which means an HST hit on its market value and then capital gains tax on any appreciated value when they return from abroad.
In another Catch-22, if the homeowner decides against renting his home to a stranger when he’s living abroad, he will be subject to the vacant home tax. A Vancouverite who does not qualify for an exemption faces municipal, provincial and federal vacant home taxes totalling six per cent of a property’s value. Vancouver’s median home price is $1.6 million, so that’s $96,000 per year.
Governments’ extraction of value from our homes has accelerated in recent years as they have became more desperate, both to raise revenue and to find scapegoats to deflect blame for their own starring role Canada’s housing shortage. As the byzantine extractions multiplied, our homes, once considered our main assets, have morphed for many into our main liabilities. Once upon a time, “safe as houses” was a no-brainer investment strategy. Anyone who now sees a house as a safe investment needs his head examined.
Lawrence Solomon is a founding columnist of FP Comment. LawrenceSolomon@nextcity.com
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