Real Estate Talk:
CMHC proposed surtax
The possible effect of a surtax on primary residence homes selling over $1M
By Joseph Marovitch
January 19, 2022
Up to now, one of the biggest perks Canadians have is our ability to sell our primary residence tax-free and retire with the funds. Of course, as there are the lowest interest rates in history, causing tremendous demand and rising property values, the government wants a piece of the action.
Note that the government already taxes residential property on the front end with a “welcome tax.” Upon purchase of a home, a buyer receives a tax bill two to three months later, called a welcome tax, in which the buyer pays 1% to 1.5% of the total purchase price to the government.
Basically, the plan is to take from the “rich” and give to the “poor,” alleviating the problem of housing inequality.
A group called Generation Squeeze, funded by the Canadian Mortgage and Housing Corporation (CMHC), which is responsible and reports to the Federal Government, has come up with the idea that if primary residence property is taxed, the funds can go to building more affordable homes. Generation Squeeze proposed to tax the sale of primary residence homes that are over $1 million, which in today’s market is a substantial amount of properties. The tax does not need to be paid until the house is sold or inherited.
Basically, the plan is to take from the “rich” and give to the “poor,” alleviating the problem of housing inequality.
There are a few issues in this thinking that create a problem. Rising prices are due to low supply and high demand. While there may or may not be inexpensive homes built in a timely manner, many sellers do not want to pay tax and commissions on the home they lived in for the past 10, 20, or 30 years. Therefore, should a tax on a primary residence be applied, sellers would simply raise their price. I do not know how many times I have heard from the seller, “I don’t care what it sells for; I want this much after the commission.” The new phrase will be, “I don’t care what it sells for; I want this much after the commission and taxes.” In effect, a tax on your home will cause prices to rise further.
‘A better idea might be to reduce taxes on the purchase of goods and services to build new homes, raise interest rates and reduce incentives for real estate investors who make up a good proportion of the buyers in today’s market.’
The government does play a part in unaffordable real estate property by maintaining low-interest rates, which cannot be helped during a pandemic when businesses are closed and people are out of work.
A better idea might be to reduce taxes on the purchase of goods and services to build new homes, raise interest rates and reduce incentives for real estate investors who make up a good proportion of the buyers in today’s market. Corporations both in Canada and abroad are purchasing homes on speculation and as a place to put funds for safekeeping.
Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.
Next article – Purchasing a home vs. buying land and building a home
STATE OF THE MARKET
The question is asked constantly; will prices drop in the real estate market? Chances are very high that prices will not drop even if interest rates rise. There are still too few properties for sale and this will not change as long as there is a pandemic to battle. Higher interest rates may reduce the competition but not the values. Even if there are more properties available, prices will not drop.
Prices in Montreal were rising quickly before the pandemic arrived. Investors were searching out new locations in the suburbs to develop as space both near and in the city was diminishing. As far as both nationals and foreigners are concerned, Canada is one of the safest places to keep capital. As such, investors and speculators are taking advantage of low-interest rates and purchasing a good chunk of the market. According to the Bank of Canada, foreign and national investors account for 20% of buyers.
‘There are still too few properties for sale and this will not change as long as there is a pandemic to battle. Higher interest rates may reduce the competition but not the values. Even if there are more properties available, prices will not drop.’
As a note, there are indications that interest rates will rise shortly, several times over the year. For those planning to buy, get a pre-approval asap. It will permit the buyer to have a low-interest rate when rates do rise and with rising interest rates, there should gradually be a little less competition.
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Other articles by Joseph Marovitch
Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible for, Joseph applies this to his present real estate broker career. Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or josephmarovitch@gmail.com
Why not change to a progressive property tax, like for income tax? Given that the top 1% earners have increased their wealth by 30% over the past couple of decades, while the rest have stagnated or even decreased, doesn’t this make sense? Gross inequalities are wearing the system down more than ever…
Hi Tony,
Thank you for reading my column. I agree with you that those with money should pay their fair share however, I a fear that should the government implement a tax on primary residence, this will cause prices to rise further. Prices on the island will not decreases as Montreal is finite in space. Affluent residents know this and will simply raise the price of their properties and will get those prices. There are other ways to redistribute wealth that cannot be stopped by loopholes, such as increasing corporate tax and raise income tax on those making one million or more per year. Monies received by the govermnent can be redirected to building affordable houseing and tax incentives can be put in place to provide contractors and developers a break on materials and transport costs.
Excellent article about an issue we have been hearing about lately. I live in TMR where this trend has been noticeable for quite some time. Although a house is a good investment it is also a home. Average income people often skimp over the years in order to maintain their home so a surtax on top of everything else seems unfair.
What about a little prevention? Take speculation out of the equation. Speculators, flippers and developers are now heavily involved in the real estate scene. They outbid potential home buyers then they demolish or gut, rebuild and then put the house on the market for an unreasonable price. There will be no happy ending to this behaviour.
Hi Anne,
Thank you for reading my column. I agree with you that corporations and investors, both foreign and nationals, have been buying as much property as possible, especially in the past two years as interest rates have been so low, as a shelter for cash and on speculation that prices will keep rising. As corporations and investors tend to have more fluid cash than the average homebuyer, they are driving prices further. The problem with this, is the average resident who requires a property must pay sums much higher than normal and due to large demand and competition, forgo conditions such as inspection and financing to beat out these other buyers. The bright side of this is when interest rates rise, competition will reduce, investors will not have as much incentive to borrow and buyers will have more leverage to allow inspection and financing without losing on their offer bid.