Should the principal residence exemption be eliminated?

The principal residence exemption has been a major contributor to the housing crisis, but eliminating it is easier said than done. A progressive surtax on high-valued homes may be more practical.

Should the principal residence exemption be eliminated?

The principal residence exemption has been a major contributor to the housing crisis, but eliminating it is easier said than done. A progressive surtax on high-valued homes may be more practical.

On Tuesday we published a new study that, in part, highlights the impacts of the Principal Residence Exemption (PRE), a tax provision that allows individuals to avoid paying capital gains tax upon the sale of their primary residence.

We pointed out that the PRE costs the federal government an estimated $10 billion in lost revenue annually. Moreover, the PRE incentivizes Canadians to organize their wealth accumulation plans around the idea of capitalizing on rising housing prices. This not only has consequences for housing affordability, but it also leads to the neglect of more productive sectors of the economy.

So, does this mean Gen Squeeze is advocating for the elimination of the PRE? Not quite!

Eliminating or reducing the capital gains tax exemption on principal residences would be challenging, for a number of reasons. To begin with, it would be very difficult to apply the change retroactively—questions would no doubt be raised about the fairness of retroactive elimination and the administrative task of calculating historic capital gains would be enormous.

And if the elimination was not applied retroactively, it would fail to tax the vast sums of housing wealth—more than $3 trillion—that have been accumulated since the 1970s.

There is also the issue of political viability. The PRE is a third rail in our politics. No major party is willing to stick out its neck to highlight the negative impacts it has had, much less propose that it be eliminated.

Rather than the elimination of the PRE, we propose a modest price on housing inequity by adding a small, progressive surtax that would apply only to the value of homes above $1 million or more. This surtax would start at 0.2% and peak at 1%. Payment of the surtax could be deferred until the home is sold, to ensure high-value homeowners with lower incomes aren’t put at risk.

Such a surtax would capture wealth generated from previous purchases and be simpler to implement using existing infrastructure.

Our surtax proposal has generated some strong reactions. Here’s an email we received earlier this week:

F**k you and your property tax. Now you’re attacking Canadians how [sic] who work hard to improve their homes. 

The above is the entire content of the email. No “hello” or “hi,” just straight to dropping an f-bomb. Emails of this sort are common, and while it’s great that they are short and to-the-point, they unfortunately misunderstand our intent.

We’re not interested in targeting wealth accumulated through hard work. Precisely the opposite is the case. Most housing wealth isn’t gained from the improvements that people make to their homes, but from the simple act of ownership.

The PRE has, in effect, created a tax shelter. The surtax we are proposing would help us start to close the Home Ownership Tax Shelter.

What do you think? Does our understanding of the negative effects of the PRE, and difficulty involved in eliminating it, make sense? Is our surtax proposal a good idea? Let us know in the comments below.

Also, if you’re interested in diving into the details of our analysis and proposal, be sure to read the full report: https://www.gensqueeze.ca/home_ownership_tax_shelter