Achi news desk-
Some in cottage country have been singing the blues since Ottawa proposed changes to capital gains taxation as part of the recent federal budget. Their tears reveal that they do not yet recognize how class dynamics have changed as a result of the damage done to our housing system.
Owning a cottage or investment property is no longer a middle class reality. It is a sign of wealth in a country where rent and home ownership are so much more expensive for younger residents today than when babies were young.
Second property taxation needs more, not less, to protect younger Canadians in the housing market, filling the revenue hole left by governments that did not adequately plan for the retirement of boomersand stimulate productivity.
I truly sympathize when people struggle to ensure that a beloved cottage stays in the family, and I appreciate that taxation plays a role in complicating their planning.
But anyone struggling with that challenge has to sympathize even more with the many younger people and newcomers who are working hard and struggling to afford rent, let alone home ownership of any kind.
Paying taxes on a half million dollar capital gain from a cottage or investment property is a good problem to have. I could line up millions of younger Canadians who would jump at the chance to trade their housing woes for that privilege.
Also, mom-and-pop investors have been damaging housing affordability. They contribute to the offer of average home prices, and are linked to the increase in rents charged to younger people who are increasingly locked out of home ownership. Purpose-built rental construction is a more efficient way of increasing the supply of rental units.
Social Capital Partners, a non-profit focused on widening access to ownership, rightly raises this issue, and laments the role that small-scale domestic investors have played in crowding out first-time buyers first. They remind us that mom-and-pop investors in residential real estate now outnumber corporate and foreign investors combined.
Canada “could make up a million [homes] available over the next decade” for potential owners, SCP points out, if we reduce investor activity in the housing system to levels similar to their share of purchases 10 years ago – “all without any spades additional.”
To advance this goal, they recommend “taxing capital gains on investment property at the same rate as income.” In other words, they propose that 100 per cent of capital gains earned from property other than principal residences should be subject to income tax – not just the 50 to 66 per cent required by the 2024 budget.
I like this recommendation for three reasons.
First, it is difficult for younger Canadians to compete with mom-and-pop investors in the housing market. Although young people only bring their earnings to apply for a home, investors can also take advantage of the profits they have earned from their housing assets. Because that profit is sheltered from taxation compared to labor earnings, the SCP proposal would reduce the tax advantage that helps investors beat out first-time buyers.
Second, mom-and-pop investors tend to be older, which means they are especially likely to be in the generations where federal and provincial spending is growing the fastest in government budgets. The SCP proposal would raise additional revenue disproportionately from affluent members of the generations that benefit from new spending that drives government deficits.
Third, the SCP tax change would stimulate productivity. Real estate, renting and leasing have represented the largest share of Canada’s GDP for years, but relatively little employment. This pattern is at the root of the poor performance of the nations in terms of economic growth per capita.
When Canadians use their investments to bid up the price of existing homes (which is the vast majority of what is for sale), the investments do relatively little to increase productivity. Instead, they are looking for random sites of wealth at the expense of greatly inflating the cost of living for those who are not yet homeowners.
By discouraging speculation in housing that is not purpose-built rental housing, the SCP proposal would encourage investment in manufacturing, the green economy and other industries that have a better track record of improving productivity than investing in most real estate.
We might lament that owning a second property is no longer a sign of the middle class. But Ottawa needs to recalibrate the tax code for the present, not the past. Further taxation of second properties and mom-and-pop investors is needed to promote fairness for all generations.
Dr. Paul Kershaw is professor of policy at UBC and founder A Generation Crisis, Canada’s leading voice for generational equity. You can follow Gen Squeeze on X, Facebook a subscribe to Paul’s Hard Truths podcast.
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