For years, big cities have been under pressure because not all citizens who want to can rent or buy decent housing. Prices in the residential real estate market are soaring, leaving growing numbers of people looking to buy a home on the sidelines.
To reduce real estate pressure, governments must provide more support for the construction of affordable housing, but also calm speculation on the real estate market. To achieve this, governments currently preparing their budgets should seriously consider tax changes to reduce speculation.
The first change concerns the treatment of capital gains. When a person sells an asset, such as a home, for more than the price paid, only half of the capital gain (difference between the purchase price and the sale price) is included in taxable income. Initially, this measure was intended to recognize the impact of inflation in rising asset prices, which is relevant if a person holds their asset for many years.
However, half-taxation also applies if a person only holds an asset for six months, which is absurd! This way of doing things favors speculators.
In order to reduce speculation, governments should therefore modify the taxation of capital gains. This would help calm the real estate market. Applied uniformly to other types of assets such as securities, such a measure could also prevent listed companies from always feeling the pressure of having to perform in the short term. Finally, reducing the incentives for speculation can encourage people to work more, which would help reduce the labor shortage facing the Quebec economy in the context of the aging of the population.
Godbout Commission
In 2015, the Québec Taxation Review Commission (Godbout Commission) addressed the problem we are raising. The Commission proposed to eliminate partial taxation and instead tax the capital gain taking inflation into account. For example, since the Consumer Price Index increased by approximately 7% between 2016 and 2020, 93% of the capital gain of an asset held over this period would be considered taxable income. According to this commission, for assets held for less than a year, the capital gain should “be taxed like any other income”, as is already the case in the United States. Unlike Canada, many OECD member countries take into account the length of asset ownership or inflation to determine the portion of the taxable capital gain.
The second relevant measure concerns the non-taxation of capital gains on principal residences. The Godbout commission suggested in particular that the exemption on the cumulative amount of capital gain on the principal residence be limited to one million dollars throughout the life of the taxpayer, an amount indexed over the years. Any capital gain exceeding this amount would be fully taxed, as for a secondary residence.
We believe that these measures would help to reduce real estate speculation, such as that occurring during flips of main residences. These measures would also have the advantage of not harming individuals who see real estate investment as a means of building some long-term wealth, such as with the purchase of a plex.
One wonders if the governments really want to improve the situation, given the fact that the file has been dragging on for years. The changes we are proposing would reduce speculation, but would also have the benefit of helping to reduce inequality.
Without the proposed measures, it’s a safe bet that the housing crisis will not be resolved in the short or medium term.
* Other signatories: Louise Lavoie and Marie-Hélène Legault, economists and lecturers at ESG UQAM