Proposed housing tax would do more harm than good

The campaign that began last week opened with a Liberal housing plan that includes a proposal to impose a new vacancy and speculation tax on housing. This little-noticed Liberal proposal should, however, get much more attention than it received, especially from provincial leaders.

The federal tax would be a one per cent annual property tax on residential property held by non-Canadians not living in Canada. The details as to how the tax would be imposed are unclear but an existing tax of a similar type operates in British Columbia as explained below.

I’m not sure where this idea came from, but perhaps the seeds are in the leaked Nov. 27, 2018, caucus memo from Adam Vaughan that included a proposal to levy special capital gains tax rates on second, third and fourth properties to curb “speculation.” This proposal obviously got rejected because it would hit Canadians owning summer cottages. Even for a tax-happy government, the uproar would have hurt re-election. Instead, it is much easier to hit foreigners with a tax because they don’t vote here. Even still, for quite different reasons, the idea is a bad one.

Provincial property tax initiatives of the same ilk have been implemented recently. In the wake of high housing prices, especially in Toronto and Vancouver, new provincial property and land transfer taxes have been imposed to curb foreign demand for housing in Ontario and British Columbia.

B.C.’s general property transfer tax varies from one per cent on $200,000 to up to five per cent over $3 million of the purchase price. B.C. also imposes a 20 per cent tax on residential property purchases by foreigners in specified areas (Vancouver and certain other urban centres) to depress housing demand.

Not happy with just two new property transfer taxes, B.C. has also imposed an annual tax on vacant property, which ranges from 0.5 per cent to two per cent. In 2019, B.C. residents and Canadians with a majority of their income in Canada pay a tax of 0.5 per cent while foreign owners and satellite families pay a two per cent annual tax on their B.C. property. Exemptions are provided for most principal residences and rental housing.

In Toronto, purchasers pay both Ontario and Toronto municipal general land transfer taxes up to five per cent of homes worth more than $2 million. Nonresidents are hit by a 15 per cent transfer tax in Ontario’s Golden Horseshoe area (though I’m not sure “golden” is the right descriptor for this area anymore). Unlike B.C., Ontario does not have a vacancy property tax.

On the face of it, the Liberal policy seems innocuous. It adds to the B.C. existing vacancy tax (for a total rate of three per cent) while imposing a new one per cent tax on the rest of the country. However, it suffers from two flaws: it will have negative consequences with little benefit for most parts of Canada; and it’s an intrusion by the federal government in a tax field left to provincial and municipal governments since the beginning of the 20th century.

Pr o p e r t y held by non-Canadians is already subject to general municipal annual property taxes and land transfer taxes. As Toronto and Vancouver areas grappled with spiralling housing prices (which soon could be an issue in Montreal, as well), proposals were adopted to take the wind out of the market. Given that foreigners could choose to invest anywhere in the world, certainly the special taxes would be expected to be shifted back onto homeowners who would sell their homes at a lower price to compete with prices in other markets. This seems to have happened in both Vancouver and Toronto.

It’s less clear is why the federal government needs to apply this tax for all of Canada. Housing price pressures do not exist in the Atlantic, in the Prairie provinces or in most smaller urban and rural areas of Canada where prices are much softer and in some areas declining. To the extent that housing demand is not buoyant, the tax will do more harm than good by discouraging housing supply. It is much better to leave these taxes at the local level, where housing market conditions are best understood, rather than apply a one-sizefit-all solution across Canada.

More problematic in my view is that this federal tax, should it ever be implemented, would result in the federal government intruding in a provincial/municipal tax field. The property tax has been used to fund municipal services and education. Policies directed at different classes of property have enabled local governments to use an important economic tool. As the tax generally falls on real estate values, the property tax has smaller competitiveness effects than would the corporate tax, for example, that should be left in the hands of the federal government. In other words, property taxation is best left to the provinces and municipalities with the federal government keeping its nose out of it.

Moreover, the federal government would have to use provincial and municipal valuations of property that are not harmonized across the country. This can create unfairness.

Besides, non-residents already pay taxes to federal coffers. Any personal, business and property income paid to non-residents is subject to federal withholding taxes. The provinces don’t get a dime of withholding taxes paid by non-residents since the tax can act like a tariff and interfere with international trade. On the other hand, the federal government should not usurp a tax field that by custom is left to the sole use of provinces and municipalities.

Provincial premiers should be alarmed by this campaign promise. It will hurt some provinces unnecessarily and result in federal intrusion in a tax field that has been a significant source of revenue for lower governments in Canada.

PROVINCIAL PREMIERS SHOULD BE ALARMED BY THIS CAMPAIGN PROMISE.