Capital Gains Tax on Home Sales: A Possibility or a Pipedream?

Part 1 of 2

There’s been a growing chorus of experts calling on the Canadian government to do something about runaway home prices.

The benchmark selling price for a home in the Greater Toronto Area was $1,097,565 in March, a 21.6% increase from a year earlier. But rapid price growth hasn’t just been limited to Toronto or the other metro areas. Prices are soaring across the country, from the big cities to cottage country.

In February, the Canadian Real Estate Association reported a 25% jump in the national average selling price to $678,091.

One of the most controversial measures being floated by some to help cool the markets is the introduction of a capital gains tax on the sale of principal residences. The idea has long been extremely unpopular among the public, which is why no government has dared try to implement it, and why selling one’s primary residence is practically the last transaction today that isn’t taxable.

But would it be an effective tool in slowing today’s double-digit home price growth? Here’s a look at the two camps of thought…

Pro-Capital Gains Tax

Economists from RBC and BMO have been two vocal proponents of introducing a capital gains tax on the sale of primary residences.

“Overheated markets threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments,” wrote Robert Hogue, an economist with RBC. “The threat is particularly potent because excessively high price expectations are widespread.”

Hogue touched on a number of different policy options that can be used to cool house price growth, but noted, “Policymakers should put everything on the table, including sacred cows like the principal residence exemption from capital gains tax.”

He added that such considerations will be “complex, controversial and no doubt fraught with unintended side-effects. Yet this support was largely designed during times when interest rates were much higher, and in some cases to counter the effect of high rates.”

BMO economists Robert Kavcic and Benjamin Reitzes took a more tempered approach, suggesting a special capital gains tax on the sale of residential real estate purchased “from today forward, with the rate falling to zero over five years of holding the asset.” They also suggested a maximum capital gains tax on non-principal residences in Ontario of 26%, which they say “could easily crowd out speculation and alter market psychology.”

Anti-Capital Gains Tax

On the other side of the issue are two economists from Scotiabank, Jean-Francois Perrault and Derek Holt, who each penned reports arguing against introducing a principal residence capital gains tax.

"The key factor driving the recent acceleration in home prices is the divergence between sales and new listings," Perrault wrote. "We expect listings to rise as a result of the combined impact of the spring market and higher prices. Policymakers should wait to see how listings evolve relative to sales in the next few weeks before taking action."

Holt argued that such a tax would likely not come into effect until next year, meaning those most impacted would be younger generations.

"Why would there be a differential tax treatment for new homeowners relative to existing ones?" Holt wrote.

John DiMichele, CEO of the Toronto Regional Real Estate Board, also pushed back again the idea, saying it’s “fraught with unintended consequences.”

Some have pointed out that a capital gains tax won’t necessarily slow home price gains, while others have suggested the market might naturally cool before such a tax could even be implemented.

To be clear, the possibility of the government adopting such a tax is extremely low, according to observers. But it’s clear there’s an appetite for some kind of government response.

In our next post, we’ll examine some of the many options that are available to the government to help stabilize the country’s housing market.