I have seen the picture of this letter from Andrew Scheer shared multiple times on my Facebook feed. In the last week, I have had several mortgage brokers, real estate agents and simply homeowners messaging me for comments. Is this true? What's going on? How is it going affect my clients? What do you think?
Frankly, I am not a Liberal Party insider and I do not have answers to all these questions. I will, however, share a partial answer on what I think is going on and what I think about it as a tax lawyer.
I think the alleged sliding scale principal residence tax proposal which targets speculators makes no sense because we already have tax rules that target speculators. I do not think this is a viable policy proposal (if it was ever a policy proposal).
We may see a proposal to increase capital gains tax from the Liberal Party, but we tax professionals currently do not have enough details to say which taxpayers would be affected by the potential tax increase.
What's Going On?
The Conservatives claim that they uncovered a 'secret' Liberal policy proposal to significantly raise capital gains taxes and put serious limitations on principal residence exemption. The document titled "Policy Proposal II: Housing Affordability" dated November 27, 2018 was leaked last week. The document was linked to Adam Vaughan, a Liberal MP. Here is a picture of the document I copied from Conservative Party's tweet (hence the red sticker in the top right corner).
Today, Mr. Vaughan reached out to CBC by email and vigorously denied that there was ever a proposal to change tax policy on principal residence. Even though the leaked document is titled "Policy Proposal", it was not really a policy proposal, Mr. Vaughan says. It was just what people suggested during town hall meetings. Mr. Vaughan's team noted the ideas as submissions and included them in the report to Caucus, but he himself never supported them or made them into a policy proposal.
Then both parties accused each other of lying to Canadians and this is where we stand today.
For the purpose of this post, I will refer to the measures discussed in the document as the "alleged proposals". There are several measures, but I will only address some of them.
The Alleged Principal Residence Tax Proposal
I will first address the principal residence tax proposal. Under the heading "Campaign Platform 2019 - ON Caucus Submissions - 2018-12-12", the document reads:
"Another idea that has emerged from housing town halls is a sliding scale of Capital Gains Tax on the sale of principal residence. A 50% tax after one year of ownership, 25% after two years, 15% after three years, 10% after four years, 5% after five. The idea would be to hit speculators who quickly flip houses in hot markets. The funds could be invested back into enhanced savings programmes for first buyers."
With respect, I think the alleged proposal is redundant in the context of the rules we already have in place. It appears so raw, I question whether it was complete or whether it was a proposal to begin with.
The main idea of the alleged proposal is "to hit speculators who quickly flip houses in hot markets." The idea is excellent but, unfortunately, not that novel. Our tax system already has rules in place to target real estate speculators. We have had the rules for years and the CRA has been quite successful in implementing them, especially in the last few years. For more information about the tax rules that govern the sale of real estate in Canada, please see my recent blog post on 8 Common Tax Misconceptions about Selling Real Estate.
Who are the "speculators" that are caught under the current rules? They are the people who are in business of buying and selling real estate. They buy and sell income properties (and not capital properties) with an intention to make a profit, and not to hold the property for long term. Under the current tax laws, speculators get no principal residence exemption. They pay tax on business income, where the highest marginal rate is already over 50%. That's right, tax speculators already pay over 50% in taxes, regardless of how many years they held the property.
The alleged proposal includes a sliding scale for capital gains tax on the sale of principal residence based on the number of years a taxpayer held the property. The measure has nothing to do with speculators, the alleged target of the proposal (speculators were never entitled to the principal residence exemption anyways).
The alleged proposal, and Andrew Scheer is absolutely right in his letter above, targets people who purchased their houses with an intention to live in them long term, but then had to sell them sooner for the reasons they usually could not foresee, for example, illness, job relocation, divorce, job loss, etc. Punishing these people with an additional tax is absurd and makes no policy sense.
In short, I tell my clients not to worry too much about changes to the principal residence exemption as stated in this leaked document.
What About Other Capital Gains Measures Included in the Alleged Proposal?
The principal residence tax was not the only tax measure mentioned in the alleged proposal. Under the general heading "Approach and Impact", the document reads:
"TAX: Increasing the capital gains of speculations to remove multiple buyers from the market, restricting foreign investment to new construction, and restricting the capacity of offshore capital to enter the re-sell market could reduce inflation. This might be achieved by significantly increasing Capital Gains Tax on the 2nd, 3rd and 4th properties."
We have already seen an announcement from the Liberal Party on the proposed foreign speculation tax and on the measures directed to help first-time homebuyers. We have not seen announcements on any of the other tax proposals from the Policy Proposal document.
There are two statements calling for an "increase" (or even a "significant increase") of the capital gains tax in just one paragraph, so the general direction of the proposals we may see from the Liberal party or the Liberal government (if re-elected) is quite obvious.
The wording of the paragraph is too vague for tax professionals to speculate on which aspects of capital gains tax the Liberals may propose to change. Would people who own more than one real estate property as capital property be subject to a higher capital gains tax? Would the rate for capital gains tax increase every time a person sells a real property? Would the general capital gains inclusion rate (currently 50% of the gain) stay the same? Would the rules only work for real estate or extend to all capital property (shares etc.)?
As the election date is approaching, we may soon find out what the proposals really meant.