Understanding Home Equity Tax in Canada

Posted on March 1, 2021

Did you know that, according to Statistics Canada, there were 268,660 multiple-property owners in British Columbia in 2018? This same year, there were 835,175 multiple-property owners in Ontario and 359,475 in Toronto.

These homeowners have bought their properties to make a lot of money. For this reason, the Canadian government seems to be thinking of introducing a home equity tax in Canada. 

The problem? This affects all Canadians, not only wealthy Canadians. If you’re planning on buying a home, you may be concerned about this tax.

Even though it hasn’t been officially announced that this home equity tax is going to be made official, there are many reasons to be concerned.

This tax could negatively impact your finances. It could also mean that you’d be limited when it comes to new home options as your family grows.

When it comes to the home equity tax, you need to be as informed as possible about it.

How it Began

If you’re concerned about your Ontario home tax or home tax in another province or territory, it helps to understand how this whole situation with the potential home equity tax began. It began in 2020 when worries arose as a result of research being done at the University of British Columbia.

Why were so many people worried? This is for two reasons.

One, the research was being backed by Canada Mortgage and Housing Corp. They gave the University of BC a $250,000 grant to be used for the study of housing inequality and housing wealth. Even though CMHC says that the research isn’t going to be used for a home equity tax, many people are concerned that it actually is.

Reason for Concern

The reason for concern when it comes to the potential home equity tax in Canada is that, politically, the CMHC seems to want to get in the way of homeownership. In fact, their chief executive, Evan Siddall, has called homeownership “regressive.”

Additionally, the advocacy group Generation Squeeze, which is involved in the UBC study, is against the financialization of housing.

Considering the interests of this advocacy group, and Siddall’s comment about homeownership, it would not be surprising if the study at UBC was being used to bolster the creation of a home equity tax.

Of course, this all comes from a place of hoping to equalize the housing market. There’s nothing wrong with that in theory.

Unfortunately, if you’re selling a house in Ontario, taxes can have a disastrous effect on you.

For example, if you want to move into a new home as your family grows, you might not be able to afford it if you have to pay a significant amount of tax when selling your old home.

Understanding the Potential Home Equity Tax in Canada

In this section, we’ll cover the history of taxes on selling a house in Ontario and other provinces and territories of Canada. This way, you can understand what the tax situation is now, why the government taxes homes, and why this history might lead to the creation of the home equity tax.

In 1972, taxes on capital gains became part of life in Canada. Before 1972, you didn’t have to pay taxes on capital gains.

This meant that if you sold your principal residence, you wouldn’t have to pay taxes on the capital gain made from the sale.

However, the government didn’t want to discourage people from buying homes. So, even though taxes on capital gains were introduced in 1972, an exemption was made for the sale of your principal residence.

In 1972, this was the case for every individual. For this reason, the rules were changed to be more restrictive in 1981.

These rules made it so that, instead of the exemption for the sale of the principal residence being available for each individual adult in a family, it would only be available to each family unit. Since 1981, not much has been different.

The Problem

Unfortunately, it’s been easy for many people to follow the rules while taking advantage of them. For example, many people flip homes. They’ll buy a home, live in it a brief amount of time, and then sell it quickly.

Because they lived in the home for a brief amount of time, they can get away with selling it without paying any taxes on the capital gains made from the sale.

That’s not the point of these rules, of course. As a result, in 2016, the Canadian government began requiring people to report the sale of their homes on their tax returns.

This wasn’t the case before when you only had to report if you owed taxes on a property sale.

Considering how the rules have tightened throughout the years, it wouldn’t be surprising if the government was to introduce more rules, regulations, and taxes—for example, the home equity tax.

What Might Happen

In addition to having a history of tightening the rules when it comes to taxes on selling a house in Ontario and other parts of Canada, the Canadian government also has a penchant for taxing the wealthy to spread the wealth to other people in Canada.

While there’s nothing wrong with this in theory, it can be a problem if you’re perceived to be wealthy when, actually, you aren’t.

Even though you may seem rich, once you pay your Ontario income tax or income tax elsewhere, you’re just able to make your mortgage payments, payments for your kids’ schools, and payments for living costs.

This can be a problem, especially given that taxes are likely to rise. In large part, this is because of the COVID-19 Pandemic.

During this difficult time, many Canadians have lost a lot of money. Additionally, many people who actually are wealthy have used this time to flip homes.

Because many Canadians needed to sell their homes to make money (after a job loss, for example), it was easy for wealthy home-flippers to take advantage of the situation.

They were already doing this before, making money from home sales without having to pay tax.

But now, they are taking advantage even more. This, combined with how many Canadians are now financially struggling as a result of the pandemic, will make the government more likely to introduce a home equity tax.

Introducing the Home Equity Tax

After all, introducing the home equity tax is an easy way for the government to make money. Homes have a lot of value, so even a small home equity tax would bring in a lot of revenue for the government that they could then give to Canadians in need.

Already, UBC researchers referred to homeowners in Canada as “lottery winners” who had an unfair tax advantage. This comment was made in a 2019 report.

Even though it might seem politically disadvantageous for the government to introduce this new tax—that hardworking homeowners would have to pay—this might not actually matter to the government.

This is because the Canadian government is becoming more interested in supporting people in need than the wealthy.

Even though this seems like a good stance to have, if their definition of “wealthy” is too broad, which may wind up forcing folks into more difficult financial circumstances.

You might fall into this category if you’ve gained some wealth from owning a home.

The Problems With the Home Equity Tax

There are two problems you’ll have to face as a homeowner if you have to pay a home equity tax. The first is that, if you sell your home so that you can move into a new one, then your Ontario taxes or taxes in another province or territory might limit you financially.

You’ll make less money from the sale of your home. As a result, even though you are hoping to move into a new home that’s better (and probably bigger), you won’t be able to.

Instead, you will probably have to move into a smaller home or a home that’s in a cheaper area.

What’s the point of moving “up” when you actually end up moving “down” as a result of the home equity tax? This is a huge problem for any homeowner who wants to improve their lives when they move.

There’s an additional problem. Many Canadians see their homes as giving them the financial security they’ll need once they retire.

Even though the government may see you as “wealthy” now, you might not have that same amount of wealth when you retire.

After all, many Canadians might not have enough money to put it into a pension plan or retirement savings plan. They do, however, have enough money to pay for their mortgage.

So, many Canadians are planning to fund their retirement with their home’s equity.

If you have this plan, then the home equity tax could completely ruin your plans for retirement. This is a scary thought, that a sudden tax change could put your financial future in jeopardy.

Additional Problems

An additional problem that would occur as a result of the home equity tax is that the price of houses in Canada would go down. It would work like this. Because people would be less motivated to sell their homes, they would, as a result, be less motivated to buy new homes.

Even though this might make homes more accessible for a little while, it could end up having negative economic effects. Right now, two-thirds of Canadians own homes.

If that number decreased, it could cause the economy to falter, causing job losses and other problems.

Considering that the COVID-19 Pandemic has already had disastrous effects on the Canadian economy, this might not be the wisest way to go for the Canadian government.

Instead of introducing a home equity tax, it might be a better idea to introduce this type of tax on homes that are worth a certain amount.

That way, those who actually are wealthy or flip houses without paying taxes will be taxed.

Additionally, the average Canadian homeowner wouldn’t be negatively impacted. This is a clear solution to this problem that the government should be considering.

Another problem is that, even though this tax would be created to lessen disparity, it might actually make it greater.

This is because many middle-class Canadians would lose money when they sell a home.

Wealthy Canadians, who would be able to pay the tax easily, wouldn’t struggle financially. But any other homeowners would end up having less money than the wealthy Canadians.

Need More Information?

Suffice it to say that the possibility of a home equity tax in Canada is unsettling for many.  So much so that we are finding more and more people looking to sell their homes now then ever before.  Interestingly enough, even throughout the pandemic, people have been looking into personal loans to finance down payments for a new home, and subsequently searching for the best possible mortgage rates on the market.  

That's where Insurdinary comes in.  As a leading financial comparison platform we are able to provide you with the best and most affordable quotes on the market, whether it's for a loan, mortgage, credit card or any type of insurance.  Visit us today, select your product, and allow one of our expert advisors do the heavy lifting for you.  It's that easy!  We look forward to working with you.

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