Time to axe the principal residence exemption?

Tax policy expert argues long-applied tax relief to primary homes offers little economic benefit

Time to axe the principal residence exemption?

Against a backdrop of hot housing markets and increasing fiscal pressure from pandemic-related stimulus measures, the question of whether the long-held exemption on taxing capital gains on principal residences should be lifted has become a point of controversy. While many critics balk at the suggestion, a tax policy expert thinks it’s an idea whose time has come.

“Of the 37 members of the Organisation for Economic Co-operation and Development (OECD) only a handful — Canada being one — fully exempt gains on a personal residence,” wrote Allan Lanthier, a former partner at an international accounting firm who has been an advisor to the Department of Finance and the CRA, wrote in a piece published by the Financial Post.

The exemption, Lanthier explained, was rooted in the backlash to a 1966 report by the Royal Commission on Taxation, which introduced capital gains taxation but proposed a lifetime exemption of $25,000 – just over $200,000 in today’s dollars – for gains on principal residences. As it stands today, the principal residence is the only asset that’s absolutely exempted from taxation in Canada.

“An entrepreneur with shares of a Canadian private corporation can claim a lifetime exemption for approximately $892,000 of capital gains,” he said. “The corporation has likely helped grow the economy and employ Canadian workers: still, the exemption is capped. The principal residence exemption, on the other hand, has no limit at all.”

While supporters of the exemption argue that tax-free gains are essential to fund retirement, Lanthier said that it in many cases just serves to increase the wealth that’s set to change hands between generations. Other retirement-planning vehicles such as RRSPs, TFSAs, and registered pension plans, he added, already get a light touch from the taxman.

“And the exemption is costly: in its present form, the combined federal-provincial cost is about $11 billion a year,” he said.

Canada could mimic the U.S. example, he suggested, with a lifetime cap of $500,000 – indexed to inflation – on exemptions for personal residences per individual or family unit. If the absolute exemption were to be lifted, he said homeowners who expect to gain more than $500,000 on the sale of their principal residence will likely have until at least the end of next year before the rules fully take effect. Sales motivated by efforts to get ahead of that change could ease housing prices in the near term as the supply of available housing units rises, he said, while longer-term prices are unlikely to be affected significantly.

And while some might say a tax on principal residences should come with some relief for mortgage interest payments, following the U.S. model, Lanthier said fewer than 25% of U.S. homeowners actually claim expenses such as mortgage interest as deductions.

“The few studies that exist suggest this type of tax assistance induces individuals to buy larger and more expensive homes but has no impact at all on the number of homeowners,” he added.


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