Scotiabank delivers verdict on capital gains tax

In its latest study, Scotiabank Economics moved against the implementation of a capital gains tax on primary residences, saying that this would not address the systemic issues plaguing the Canadian housing market.

“A more significant revision to capital gains on principal residences should not be considered. The tax-sheltered gains from owning a home confer a significant advantage to homeowners versus renters,” said Jean-François Perrault, chief economist at Scotiabank. “As tempting as it might be to reduce this advantage by taxing a portion of the capital gains on a principal residence, such a change in taxation would represent a significant financial blow to Canadians.”

Far from protecting home owners, any change in the current taxation set-up might end up amplifying market risks in the long run, Perrault warned.

“Policymakers could get around [changing taxation for current homeowners] by limiting the tax to those that purchase homes in the future, or by imposing a cap on these tax-sheltered gains,” Perrault explained, “but that would raise inter-generational equity issues: why would there be a differential tax treatment for new homeowners relative to existing ones?

Instead, policies should focus on supply-side solutions, although the fruits of these will certainly not become apparent in the near term, it suggested.

“Policymakers should respond by easing obstacles to new construction for all forms of housing – affordable housing, rentals and owned accommodations,” Perrault suggested. “The overwhelming challenge facing the Canadian housing market remains the chronic insufficiency of supply relative to demand owing to the high rates of population growth registered in recent years.”

Addressing speculation at its root would also prove effective, it was suggested.

“To reduce the incentive to own over renting, a better approach would be to allow a certain portion of rents to be deducted from income,” Perrault said.

MBN

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