A Tax On Million Dollar Home Owners

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio. Welcome back to the Canadian Real Estate Investor podcast.

[00:00:17] First things first though, I want to remind everyone that we have a large event coming up the multiplex event, actually called unpacking multiplexes.

[00:00:29] So, Jonas Fern, even where we dive into everything that you need to know, it's at the Johnny Daniel's faculty of architecture landscape and design on the great University of Toronto campus. Now, you're probably asking why would I attend something like that?

[00:00:44] Well, because you're going to hear from industry leaders in the multiplexing world, learn from the best, and their best practices on how to approach your project. And of course, connect with light-minded individuals in Toronto's real estate community. There'll be expert panels moderated by myself and Dan.

[00:01:02] First panel is all about contemplation. We've got an architect from Rehousing talking about what can I build on my lot? We've got a planner talking about how do you get permits for some type of build? And of course, financing what are your options?

[00:01:21] And then the second panel is execution when we talk about design contracting and how long it takes to build. And then of course, the real estate aspect, how to buy lease and even sell these multiplexes.

[00:01:34] Yeah, make sure you check out realists.ca as well because premium members get to go to that event and all of our events, I think, for free with their realist premium memberships. So today we're going to talk about four things. Number one, is your home an investment?

[00:01:52] The age-old question. Number two, some conspiracies or allegations, speculations. Maybe accusations that the federal government might be considering a tax on that primary residence On your home after just intrudeau did a podcast episode with Generation Squeeze, a group who has some interesting surtext proposals on their website.

[00:02:15] Number three, we're going to talk about the general primary residence tax advantage in Canada and how this is led to many people climbing the property ladder and health hacking as a wealth building tool.

[00:02:25] And what it might look like, finally, number four, what it might look like if we tax capital gains and countries who are doing it most notably the United States.

[00:02:33] Just a quick correction there, not health hacking, although we do recommend staying in good health. I think you meant house hacking there. Do I say, house hacking? I can say what building. Yeah, that's okay. We're healthy guys on this show.

[00:02:44] I'd also just like to sort of, if I say, and this is not a recommendation of any sort but our goal is to, as always, exhaustively explore this issue and to give you the most complete understanding of it. And then, of course, provide some honest criticism and insights.

[00:02:59] And, you know, we do like to play the devil's advocate on this.

[00:03:03] And I would also, I'm great to explain everybody by the way. I think that's necessary whenever we're diving into something political because we're going to explore, you kind of explore both extremes and you have to, you have to say, okay, like, you know, this is objective, our goal is to really just unpack it per se.

[00:03:18] I would also like to add that we want you to go to a meetup second Tuesday every month, link in the show notes. We are, we just finish up the Calgary meetup, which will be our record in size and the meetups are growing massively just hit over 3,000 members on meetup.com.

[00:03:33] So thank you for that 21 cities across Canada. Make sure you get out to one of those. Please leave a review and maybe also hit the share button and send this episode by a text to your boss.

[00:03:44] Love it. Yeah, let's get the boss involved in, of course, as is tradition well. I mean, a relatively new tradition. We're going to start the episode off with the review and the hopes that it inspires you. Yes, you listened to the show right now. I'm talking to you. I hope that you feel inspired to leave us a review.

[00:04:04] So here we go. Welcome back to the Canadian real estate podcast, which has been described as thumbs up five stars great podcast and Twitter comments or Twitter content and that is by Sammy DLF. That's it. What do you mean? That's that's a great review.

[00:04:25] Yeah, I mean, it is very good. I just also, it was also very short, so I didn't know if it was over or not. It's to inspire people to write reviews, even if they are short. You have to make it easy for listeners to write review here.

[00:04:37] Anything one sentence will do not everything needs to be long. Okay, to be good. I'm not going to touch that one. Yeah, don't don't make that joke.

[00:04:48] Well, then speaking of short reviews here a few more five stars. I love listening to you guys podcast especially the last one congratulations for the one million downloads and please keep it up. I'm from FRD North.

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[00:05:39] And finally great five stars. Great perspectives. Great great great great great great great great great great great great voice is. Why me by Apple podcast.

[00:05:46] I feel like we've read that one before. Oh, well, yeah, well anyways let this be a lesson for all of you on my not your views. I need to be long to be good. Keep them coming. We appreciate it and thank you so much for all the support over the last two years.

[00:06:01] It's hard to properly express actually how much they do mean to us. And while I can't believe we've been doing this show for two years now, it sounds like it might be time for me to drop some knowledge before we get to sappy.

[00:06:15] Right. Yeah, let's what are we starting off here with Dan some definitions like a legal document legal documents actually always start with definitions just to ensure the clarity and precision.

[00:06:29] And they do it by clearly defining key terms at the beginning of documents. And this eliminates any ambiguity or potential misunderstandings also helps all parties involved have consistent understanding of the terms used through the document, which is crucial by enforcing the documents provisions and for resolving any disputes that may arise.

[00:06:51] Did you just define definitions?

[00:06:53] I kind of think of it. I think I might have. Would you say you haven't read it. Was that a pun maybe a great pun then so now for my definition a capital gains tax is a tax on the profit investor makes from the sale of an asset such as a property or stocks in this case a property real estate.

[00:07:15] The gain is calculated as the difference between the selling price and the original purchase price of the asset in many countries primary residences are often exempt from capital gains tax up to a certain threshold, which is kind of what we're going to be talking about.

[00:07:28] Yeah, let's talk about a sur tax that is an additional tax levied on top of an existing property tax.

[00:07:36] So it's usually applied to a specific income tax brackets or types of transactions in the context of the document a sur tax refers to an extra tax on a home value over a certain amount such as one million dollars.

[00:07:51] Which would be applied in addition to any standard property taxes. So first things first, let's get to the important question which will likely become the immortal heading of this show even though it might have a more click baiti headline given the news right now but.

[00:08:10] Whether your home is an investment or not depends on your perspective and your financial goal goals so is your home an investment.

[00:08:18] On one hand, a home can be seen as an investment because it typically appreciates in value over time allowing homeowners to build equity and potentially sell for profit in the future.

[00:08:29] Whether or not it outpaces inflation is you know kind of the the different factor, but it breaks in a lot of these components of inflation. So a home can provide tax benefits and is often seen as a hedge against inflation.

[00:08:41] That's a great point in however on the other hand some would argue that a home is not a true investment because.

[00:08:50] It is primarily a place to live and may not generate income like other investments such as stocks or rental properties now furthermore homes come with ongoing expenses ask any homeowner maintenance property taxes and of course mortgage interest which actually offset some of those financial gains.

[00:09:12] Yeah, and we've talked about this a couple of times on the show but I think like if you look at the data Canadians aren't exceptionally good at saving money compared to other countries and we're not exceptionally good at investing either so we're earning a return.

[00:09:26] And so you know the legal I suppose you would call it obligation of paying a mortgage regularly creates a really good savings vehicle for Canadians.

[00:09:36] You know you go listen to a guy like Dave Ramsey it's like buy or save a portion of your income and put it into hard assets right a mortgage forces you to do that.

[00:09:46] And so it's served as a good like personal finance thing maybe for people but I don't know if it's necessarily a great investment your home your primary residence.

[00:09:58] You know one of the big pieces around it in Canada is that it has a primary residence tax exemption it's a tax exempt thing we're going to talk a little bit about that today.

[00:10:09] To because a lot of people use this primary residence tax exemption to implement an investment strategy either climbing the property ladder or house hacking.

[00:10:19] Yeah exactly and I'm happy you brought up house hacking and not health hacking but for those unfamiliar with either we will tell you what house hacking is on this show.

[00:10:30] Not the not the other one house hacking is a real estate investment strategy where the homeowner rents have a portion of their primary residence to generate income that can be a room or an entire suite.

[00:10:43] And then the apartment or even a separate unit in a multifamily property and that rental income can help offset the homeowners mortgage payments and of course other housing expenses making home ownership more affordable. And potentially more of that actual investment because it actually becomes more profitable over time.

[00:11:00] Now it is worth noting that I think like based on what accountants in the CRA would expect the portion of your house that you use as a rental.

[00:11:09] Is technically supposed to be subject to capital gains so like as an example if you're in a duplex and you rent out half of your house then technically you would have to pay capital gains on the portion of your house that is not your primary residence to my understanding.

[00:11:22] Yeah I think that's correct in another example of when people use the tax free primary residences again by as you said climbing that property ladder.

[00:11:31] Now the process of gradually buying and selling properties to acquire increasingly valuable real estate in a lot of cases larger real estate as well the goal is to start with a more affordable property end.

[00:11:44] So for the time use the equity gain from that properties appreciation and the improvements to trade up to more expensive homes. The strategy is often used to build wealth and of course improve that individual's living situation over time.

[00:12:01] Yeah and that strategy of climbing the property ladder is is probably the most common again and what a lot of people consider to be like an investment even though it's you know maybe a mix between like a savings vehicle and investment personal find.

[00:12:13] And so you're able to do that well because it doesn't have a capital gains tax and to understand why we have no capital gains tax on the primary residence in Canada.

[00:12:23] We have to hop in a time machine and go all the way back to 1962 yeah it might be a hot tub time machine who knows.

[00:12:32] But it's a progressive conservative prime minister John G. Defend Baker appointed a royal commission on taxation in September 1962 in response to complaints about the high level of taxation in Canada.

[00:12:45] He chose Toronto account Kenneth Carter as chair and also appointed J Harvey Perry executive director of the Canadian tax foundation. And the same the very same Canadian tax foundation has recently or sorry has an excellent article on their website that explains the entire thing very well.

[00:13:08] So let's go into that article capital gains taxation in Canada history and potential reforms. The origin of capital gains taxation in Canada can be traced to the Carter commission appointed back in September of 1962 to thoroughly review the Canadian tax system.

[00:13:28] Of course an extensive debate and suit in a 1966 the commissioners report recommended among other things that the tax being posed on capital gains. The commission acknowledged the taxation of capital gains would be a radical reform of the Canadian tax system.

[00:13:45] It's rationale was that capital gains should be taxed in the same manner as other sources of income such as employment income rent dividends and interest. And the commission's views in this regard have often been summarized as a buck as a buck is a buck.

[00:14:01] I feel like I've heard that like maybe like in history class or something growing up my symbol boomer reporting that. Yeah, so to go to the CTF dot CA website they state that capital gains exemption was recommended in the Carter commission's report in 1969.

[00:14:21] The capital gains realized by individuals on the sale of principal residents were completely exempt from tax.

[00:14:27] The Carter commission justified the exemption partly on the basis of administrative ease so they did it because it was it was for simplicity say it would be too hard to enforce or administrative.

[00:14:38] The 1969 white white paper had rejected a full exemption proposing instead a limited exemption of $1,000 per year of occupancy can you imagine like that your home went up $1,000 or you could have tax free gains of $1,000 per year.

[00:14:53] I feel like houses go up like a thousand dollars a month and get it. And they did and they mentioned that on the on the side I'll get to it but so a thousand dollars per year of occupancy on the profit of the sale from the primary residents.

[00:15:07] The government backtracked in 1971 however, and the legislation implemented a full primary residence exemption. The rules for claiming the PRA were tightened somewhat in 2016 requiring taxpayers to report the disposition of a five of a principal residents but the PRA has survived largely intact for almost 50 years.

[00:15:26] And this last part here is worth reading the from the Canadian tax foundation right from the horses mouth with the recent dramatic appreciation of owner occupied housing in some urban markets.

[00:15:38] And the primary residents exemption stands to be permanent or stands to permanently exempt substantial capital gains from taxation. So yeah, so they kind of they they mentioned that it could they could be kind of up for debate still.

[00:15:54] I think I think I miscoded it. I didn't copy and paste it right from the site there but I'll fix it while you're adding your your color here.

[00:16:02] Yeah, so I mean this whole thing then whole political discussion comes from actually none of the then a podcast episode that prime minister drussian trudo did with generation squeeze which followed up.

[00:16:16] I mean, we should follow up by an article from Brian lily titled trudo won't give up on the idea of tax in your home with the sub title being trudo's liberals keep flirting with the idea can't see me give it up the liberals over there.

[00:16:29] And like yeah, we're not doing anything we're just flirting nothing happened.

[00:16:33] Yeah, I mean I feel like this administration they do kind of like leak stuff before they think about and then if it gets you to blow back they reconfigure but if it, you know, I feel like who leaked that I can't believe that.

[00:16:46] Yeah, I mean it's smart. I would probably do the same thing to be honest with you people just don't care enough about what we say to him for it to be.

[00:16:52] Yeah, so yeah, so so the article definitely does come out swinging as Brian lily tends to do when this is the topic I suppose and this being true to policies in the liberal party.

[00:17:05] It says for Justin trudo and his liberal party taxing your primary residence is a bad idea they just can't quit. It's like a relationship the liberals know is bad for them, but they keep going back.

[00:17:17] I love it. I love the analogy. This is great. The latest romantic interlude between trudo and taxing your home came through a secret meeting just before Canada day.

[00:17:29] The prime minister was out in Vancouver for a public announcement. His posted itinerary which is supposed to detail his calendar only said he was making,

[00:17:39] he was making an ocean's conservative announcement. Ocean's conservation and that's been apologized later that day though trudo sat down for a secret conversation with Paul Kershaw, the founder of Generation squeeze.

[00:17:53] He's a real estate. It's not maybe not that secret now that it's in a podcast format, but anyway podcast or the best way to keep secrets. So the league goes on to say that Kershaw and his organization have been advocating for taxing the sale of your primary residence for years.

[00:18:10] He's written studies and academic papers on the subject appeared before Paul or metric committees and pushed the idea that exempting the sale of a primary residence from capital gains is an unfair advantage.

[00:18:22] It is interesting. I think it would be great if this government focused more on or less on trying to figure out how to come up with tax revenue and more on how to spend the existing tax revenue better that would be one of my takes on this matter, but the unfairness piece could be balanced.

[00:18:43] I'd propose this on Twitter a long time ago and it was like give renters like make rent tax exempt first, sorry, make rent tax deductible and then maybe tenants would have comparable tax advantage to the primary residence exemption.

[00:18:57] But then they won't because they need less tax exemptions, so it's always a more tax not a less tax. Because you could balance it far more easily by removing than adding anyway.

[00:19:06] Generation squeeze in he literally mentions the article uses the same language as true to dozen talking about fairness for every generation tax fairness for every generation and her fairness for every generation.

[00:19:16] I think that's what you would assume there's probably been some sort of political consultation or it seems to be like that's what the articles intending to imply having true to go sit with Kershaw for a private town hall with true to where they discussed.

[00:19:29] And policy in front of a live audience should make Canadian sit up and wonder what was said. We only know this meeting took place because generation squeeze posted part of the conversation in the form of podcasts.

[00:19:38] We're going to go through by the way some of the takeaways and then also the policy in question or like they have a full thing on their website talking about this sur tax on the primary residence.

[00:19:51] So I'm trying to explore both sides here. So one side is hey what's the most public criticism of this which is the thing from Lily here and then two is what's the actual source.

[00:20:04] So he goes on to say don't believe the denials that will ultimately come from the liberal saying they aren't looking to and never would tax the sale of primary residences because they did come out and say that and we're going to get to that in a minute.

[00:20:16] But they did say we're never going to tax the primary residence, but he you know he goes on to say they've been back and forth on the issue for years and shows a little bit of history.

[00:20:25] Now it's time to get back in our hot tub time machine here because the article gives a bit of a history lesson back in the fall of 2018 a policy proposal came forth came forth through part of a party consultation that called for a massive tax hike on the sale of homes.

[00:20:44] Not investment properties, but your primary residences proposal called for a 50% tax on any profits from a home sale after one year of ownership 25% after two years 15% after three 10% after four years and 5% after five years.

[00:21:06] Now we have never applied a couple of gains tax on the sale of a primary residence for investment properties and colleges this taxes have been applied but again not on your own home.

[00:21:16] Now what are the liberals discuss this policy proposal they ultimately rejected it politically such a policy would have been suicide for any party trying to push the idea any homeowner would ultimately want to reject that idea.

[00:21:31] Yeah, and it's interesting and one of my favorite accounts on Twitter right now table salt did an interesting analysis on it which we're going to get to in a minute but like that's why I think they're trying to push to and you'll see what you'll see what kind of where it lands on on the generation squeeze website but you know they're trying to push it towards like that wealth tax thing so they can be like.

[00:21:53] How do we make homeowners or 66% of the population and tenants both happy you know and I think this kind of like tax enrichmentality has been it has seemed to be kind of working for them like in in winning favor with certain groups of voters and so I think they're going to continue with it and double down on it.

[00:22:13] So the article goes on to say that what you mentioned doesn't mean that they walked away from the idea the CMHC has engaged with Kershoth several times including on studies of homeownership as it relates to tax policy.

[00:22:27] In 2019 and 2020 Kershoth worked with the CMHC on how intergenerational inequality is supported by tax policy that privileges homeowner ship and shelters housing wealth especially.

[00:22:38] In principle, residences from taxation by comparison with other assets and we actually covered this on the especially in the inheritance culture piece we covered this on.

[00:22:50] The I can't remember what episode it was but it was a little bit of a while ago actually some of it's in here some of that episode is in here we're talking about modern monetary theory, but anyway.

[00:23:00] The article says translation tax your home when you sell it when you pass on or when you die then there was a 2022 study paid for by CMHC which called the federal government to tax your home due to your wealth while you were still living in it.

[00:23:12] And I think the report called verse lighting scale tax on homes over one million dollar which may sound like a lot but in many parts of Canada won't get you much lily says and specifically that is what we're going to be talking about and that's what a lot of social media attention around this meeting between true to in generation squeeze has been about the idea of a sur tax member next definition here at the beginning.

[00:23:36] On properties over one million dollars and why true to is doing podcasts with the hosts of that generation squeeze and people who wrote the report. Why we need a tax on million dollar homeowners which we're going to dive into now.

[00:23:51] So it goes on to say that we propose a modest annual sur tax on homes valid by more than a million dollars as one of the many strategies to tackle the housing crisis. The sur tax could generate five billion dollars a year to fund affordable non profit housing.

[00:24:12] It would also disrupt a cultural problem that fuels the crisis which is that many everyday Canadians have benefited from the skyrocketing home values creating wealth when falls that are largely sheltered from taxation.

[00:24:27] Meanwhile those same rising values erode housing affordability for younger generations whose earnings from work are fully taxed. Public opinions supports asking the countries at well these homeowners to chip in and help chip away at the housing affordability according to new polling data now.

[00:24:49] In that episode of the podcast we mentioned Paul Kersha and Umar Mahamed chat about Paul's article on the housing sur tax in McLean's magazine from earlier this month.

[00:25:03] So obviously you know it's in McLean's they've had prime minister Churto on on their show this obviously getting a lot of attention right around these political ideas that they have so that their website goes on to say that Canadian CL harmful this growing gap between home price and earnings has become for society.

[00:25:20] And I would agree with this but I think of it a more economically like I think you know and there's some stats on how Canadians are feeling disenfranchised by you know the the disparity that we're seeing I'll try and pull it up but there was there was an article I posted recently about how.

[00:25:37] And I think that's the biggest part of the question is it has can it become the land of extreme inequality some believe it more than others are whopping 38% now see Canada as with the most extreme level of inequality.

[00:25:47] And 19 percentage point increase in five years I was from financial post on and it's it doesn't say what the survey source was but I'll find it I just have an issue getting passed the ad blocker here so he go to Paul Kersha goes on to say.

[00:26:02] Public opinion is changing over 60% of Canadians from coast to coast are actually supportive of the idea of putting a modest price on housing inequality I would say that's probably not false like I think that most.

[00:26:15] Most Canadians well I guess anybody who wouldn't be impacted by it might be in support right because a lot of people want to see a balancing take place.

[00:26:24] Yeah exactly Dan and that table salt tweet that you mentioned from one of your favorite followers or followers earlier provides a good opinion on it the true to hillmarious coming in 2025 or principal.

[00:26:39] Principal home equity surtex on homes valid over a million the numbers have already been drawn up by see ma c backed organizations and then he follows up strategically it's quite brilliant really kill the speculators target the top 10% get zenzi back on board raise five billion dollars a year and no one can hide their house in a corporation anymore because of the cap gains changes.

[00:27:04] And put peer polio in a aqua position if he decides to put back on this so all in one fell swoop. Yeah I think it's like the table I've got up here if you're following along visually.

[00:27:19] Yeah I think it's an interesting take like I don't know I don't I don't think that they'll do it to be honest they might propose it maybe on their next election.

[00:27:30] But like it would have already been included in the budget to if they were going to do it this year I mean maybe they could try and do it next year but.

[00:27:37] I would I don't know I would be surprised it was funny though there was some dialogue around like whether or not peer would just get rid of this tax and I think it's very comparable to the capital gains thing where if if they could treat a government did do it prior to his election.

[00:27:50] I think that he would probably keep it because there he's going to be forced into like a pretty austere environment or like to like force and austerity by the economy and by the budget and.

[00:28:00] And I would be surprised if they start carving away at these new tax things if they don't have to because they're going to need the revenue to.

[00:28:08] Anyway back to this generation squeeze thing so they did an episode with Trudeau in June 28 on the generation squeeze hard truce podcast the episode description says Prime Minister Justin Trudeau sat down with Jen squeeze founder Paul Kirsha for a live show with our supporters and allies in Vancouver.

[00:28:26] They delve into the 2024 budgets focus on fairness for every generation as well as housing childcare climate change deficits and the challenge of protecting healthy retirements without sacrificing the well being of younger and future Canadians.

[00:28:41] Yeah I mean it's kind of funny when you read that out loud like does he know that they've basically been in power for the last decade. Yeah that it is funny how this has become so important all of a sudden.

[00:28:56] All of a sudden indeed anyways, a summary of their podcast gen squeezes hard truth brings you the untold stories about why basic life milestones for like on in home reason to family and living in a habitable planet are slipping out of reach for younger Canadians and explorers.

[00:29:16] We can make this country work more fairly for all generations. That's pretty good. Yeah just gotta carry us a where these guys on the charitable rankings it's not a contest okay then but the number forty in the business category.

[00:29:30] Yeah you memorized like the entire top list where are we like in the twenties maybe on the business category right now. Yeah we're usually anywhere from like 15 to 30 in the business category and usually top 10 in investing I think nine right now just above all lots.

[00:29:45] You would put in the odd lots part. But that remember it's not a contest.

[00:29:49] It's not but it is making me hopeful that if prime ministers are going on shows ranked in the forties maybe we could actually host the true to versus Paul you have housing debate before the election next year.

[00:30:00] That would be pretty cool. I mean we did get housing minister Sean Fraser shadow minister of housing Scott each is in on the show so you know maybe.

[00:30:11] So anyway that would be nice it'd be cool I think and make sure you check out that episode by the way we talked about Canada's housing plan.

[00:30:18] And what it might look like after the election as well at the beginning of the episode with true to engense queez they talk about allies asking questions and sort of they mentioned that in the show description as well that Nick read.

[00:30:32] What about enemies asking questions though honestly I mean isn't that kind of like the bedrock of democracy not the randomies of the show but I think investors are often thought of as enemies to affordability do we get the chance to discuss this or participate in the discussion.

[00:30:46] Yeah it's a great that's a great point there is such a demonization of investors right now. But let's look at what's happening Toronto.

[00:30:54] Now that investors are not lining up to buy the pre construction condos housing starts are falling off of a cliff in the entire constructed industry is at risk of being pulled down with it.

[00:31:08] Yeah not to mention the suffering we're already seeing in realtors and mortgage professionals come on there no one cares about realtors and mortgage professionals.

[00:31:18] I mean you joke but honestly it does feel like nobody seems to care that two of the largest professions in the country are in a deep recession like down 75% on earnings for the better part of two years now.

[00:31:31] Very true, but let's get back to the investors can help create housing. They do this through renovations and redevelopments investors purchase older or dilapidated properties and renovate them and they make them more habitable and attractive.

[00:31:49] And this process is often referred to as flipping when done quickly of course improving housing quality can also help revitalize whole neighborhoods over time like for example all of those multiplexes that the federal government is now telling me.

[00:32:05] municipalities they have to up zone to if they want infrastructure spending who is going to pay for those without investors to build them in own them and shout out to our multiplex event that Nick mentioned at the very beginning of the episode make sure you get tickets for that it's going to be awesome.

[00:32:22] We haven't decided if we're going to do a live stream or recorded version of it yet for people but so if you want that if you can't make it to Toronto send us a message and if we have enough demand we will likely do it.

[00:32:33] Yeah, good call, Dan and those multiplexes that you were just mentioning when those are built what happens and who is going to own them they become rental properties by purchasing managing rental properties investors then provide housing options for people who either cannot or in some cases don't want to actually go and buy a home and this includes a wide range of properties from affordable housing units all the way to luxury apartments.

[00:33:00] It's funny because I've always wondered do people who hate landlords also hate tenants like in order you can't have one like one without the other right so it's like oh and then you'll see people they're always like oh well everyone would choose to own if they could it's like I don't know if that's true right like not a lot like a lot of people don't want to the burden of owning property like they're you know maybe they can do better things with their money or maybe they just don't want it like it's you know they.

[00:33:30] And and economies work well when you specialize right so if there's a specialization in division of labor why not specialize the ownership of property as an example so let's get back to this.

[00:33:41] CERTAX proposal why might a CERTAX be a good idea or about idea you know it's it's funny because it's easy mention even like a sliver of support.

[00:33:52] People sort of calling you a call me on Twitter yeah that does happen to me the odd time I mean it's especially funny because in the US like and it's just happened to Ben Rabbe to actually so because Ben was like oh yeah like we know well it's not unreasonable to tax the primary residents and.

[00:34:07] It's especially funny because the US a place most people would consider probably the most capitalist country owners.

[00:34:14] The primary residents of the capital gains tax there's an exemption up to a certain amount which is different than a certain tax by the way which Nick explained but a capital gains tax on the primary residents has been proposed.

[00:34:26] And seems it seems to be working out fine in America which again I would call probably one of the least call me places on earth. Thank you for the clear pronunciation of America.

[00:34:37] Yes we're going to get to that but don't jump the gun first let's actually explore exhaustively as we do. Can you read me this list of communist countries here Dan yeah so with the dissolution of the Soviet Union in 1991 several previously communist governments are repudiated or abolished.

[00:34:55] Communished rule altogether afterwards only a small number of nominally communist governments remains such as China Cuba, Laos, North Korea and Vietnam with the exception of North Korea all of these states have started allowing more economic competition while maintaining one party rule.

[00:35:13] Now I'm going to read the list of the highest home ownership rates in the world now they all have home ownership rates over 90% for context. Canada's home ownership rate is 66.5% and the USA is 65.95%.

[00:35:32] But then you go all the way over to the blissful country of North Korea that has a 99.8 home ownership rate China 96% home ownership rate and Laos which is also coming is 95.9% home ownership rate.

[00:35:50] It's almost like home ownership could be like an opiate for the masses and as long as you help people fulfill their biological need for shelter right like I mean we're still animals at the end of the day we need our little shelters then an ownership of our shelter like a dog owner you know you take a dog for walk it goes and peace on everything humans need the same thing right.

[00:36:09] We need to be able to claim our territory so if I go pee on a house I get it.

[00:36:13] Yeah, I don't like you know I don't try to give it a shot I suppose but I mean it's like you know there's this weird correlation between I home ownership and communism and and so the whole obsession around home ownership is always fascinated me with the Western world where you know we seem to have a pretty good balance around that 60% range and

[00:36:33] It like even if you look at you know a couple of other examples here for me former communist countries

[00:36:39] Romania was under communist rule until the 90s I think under Chachesco 95.3% home ownership rate Kazakhstan the last Soviet Republic to declare independence during the breakup of the USSR in the 1990s

[00:36:50] Forming it former communist 95% even if you go down the list here to find the next communist countries Cuba 90% home ownership rate Vietnam 88.1% home ownership rate So communism equals home ownership I mean

[00:37:06] I mean it's like the data kind of makes it seem that way right so that's why I find it funny when you see like the one thing the left and the right seemed to

[00:37:14] Agreed on even though they have completely different perspectives the far left and the far right. Let's call it is that they hate corporate landlords But yet one of them

[00:37:24] It would be kind of a capitalistic thing I mean to be fair turning a basic human need into a financial transaction is probably the most capitalist thing you can possibly do So I guess a rental economy would be the capitalistic version

[00:37:36] So then why are people calling you economy if you're advocating for a high-rendрorship economy? I guess because they don't know What they're talking about look I'm actually like trying making an effort to write a book about this

[00:37:50] So I will let everyone know when that's close to being done and it does include almost an entire chapter on the dog being stuff So love it you also would be casually writing a book. Okay, so

[00:38:01] Now let's look at this Gen squeeze article on the website that everyone is fired up about It's called a price on housing and inequality in equity So just like governments have introduced a price on pollution to lower our emissions and tackle climate change

[00:38:15] This report recommends putting a modest price on housing in equity to apply downward pressures on the skyrocketing Housing prices that have landed Canada in it's affordability crisis. We can start down this path by adding a small

[00:38:32] Sir tax starting at 0.2 and peaking at 1% and that's on home values over one million dollars It is kind of funny because like if this existed like if there was a tax an annual Sir tax on homes worth over one million dollars people would have an extreme

[00:38:49] Accentive incentive to keep their house under one million dollars like you know But they what you know if you were to run like a time value of money in a 1% per year tax

[00:38:59] People are going to start like demolishing rooms or like off of their houses like making their houses look Crapier so they don't Anyway, I'm just trying like I'm really trying to figure this one out because it does seem difficult to execute

[00:39:10] They say it's easy to execute but we're gonna get to that they have some infographics in here I'm just gonna read them because I think they're kind of relevant. It says did you know only 10% You have Canadians living homes over one million dollar

[00:39:21] It's time to have a real conversations about housing privileges the Sir tax that generation squeezes proposing would only apply to the top 10% most valuable homes and won't cost 90% of Canadians a penny more they claim now

[00:39:34] They claim that these Sir tax would help to disrupt Canada's addiction to high and Rising home values by signaling that earnings from hard work shouldn't be taxed more than the wealth home owners gain

[00:39:50] From the rising prices well they sleep and watch TV and less that house is worth a million dollars I guess Then sleep and watch TV all you want and get rich, baby or just get like 999 $999 rich yeah exactly There's there's the hack not a penny more

[00:40:12] Not an opening less either now And they claim that the Sir tax would help disrupt the tax shelter that protects the trillions of dollars added in housing wealth homeowners of

[00:40:25] gained since 1997 just like the offshore tax shelters motivate money moving out of Canada to preserve assets the home ownership tax shelter motivates us to Bank on rising home prices and stay here to gain wealth

[00:40:40] So by turning home ownership into an investment strategy the system is crushing affordability in harming the younger and future generations It's time to protect real shelters Not tax shelters a good little like

[00:40:56] Buzz line I guess they finish it off with I will give them some yeah, I will give them secret it here our tax free Capulagan system has made Canadians use their primary residence as an investment like we mentioned earlier But I don't see it

[00:41:08] I don't see the problem being the same one that they do like I think that the wealth disparity is probably more of monetary policy. It's probably more of the lack of supply and they they see a creating unfairness and I see the huge problem with Canada's economy

[00:41:25] Is that we very much become one where people take on as much debt as they can and By the biggest primary residence they can to maximize tax recapital gains and That takes money out of other productive places of the economy because everybody's putting everything they can not

[00:41:42] Negrowing a business but into growing their nest egg of their house. So they go on to say that taxing home value over one million dollars is New or scary yeah good luck convincing

[00:41:53] regular homeowners of that when they go into say that it's not a blanket home equity tax It's not a capital gains tax and it doesn't require a big new government program to implement putting a price on housing and

[00:42:07] equity requires only small adjustments to property taxation practices that are already in place across Canada So to say and look we can we can do this easily Yeah, I think I'm gonna have to call BS on that one. It's so idealistic as if our existing

[00:42:23] Assessment system works well and like they have this infographic stating how we already have this assessment system in Canada Which they're referring to like assessments like BC assessment which is relatively accurate around the value of a house

[00:42:36] But like you couldn't use Ontario's impact assessments and I would imagine impact is probably listening looking at this conversation and saying No, please do not bring us into this because like Impact assessments are routinely off by 50 to 60 percent in Ontario. They're they're revenue neutral

[00:42:51] They have nothing to do with the properties actual value Yeah, just just to inject their Dan Impact for reminder for everybody that's the municipal property assessment corporation their job are

[00:43:04] Assessment they're revenue neutral because they propose the purpose of the assessment is to determine the value of the properties to ensure that the property taxes Our distributed fairly among those property owners and the total amount of property tax

[00:43:19] Revenue that immunospoly immunospoly needs to collect does not change based on property values when property values increase or decrease That tax rate is adjusted according to ensure that the total tax revenue remains consistent

[00:43:37] maintaining revenue neutrality so the assessment basically decides how the pie is being cut up and the pie is the total tax revenue Which is a percentage of the value of all properties in that municipality? Yeah, so if you and I like started our own town

[00:43:55] Okay, yep. I like where this is going so the town is just two houses my house and your house and the town's budget is a thousand dollars per year

[00:44:03] Okay, dude. I don't like where this is going this town sounds like it sucks. Yeah, so my house is bigger than yours So MX has Dan has to pay six hundred dollars and Nick has to pay

[00:44:16] $400 well why can't I have the bigger house well wait? I guess because maybe I don't want to pay Right, much taxes. There you go. It's even easier if you think about it like condo fees right like a condo corp is made up

[00:44:29] A million square feet my unit is 10,000 square feet so I pay 1% of the total condo corps annual budget anyway My point is who is going to deal with all of the people who call in to reject the tax and claim their home is worth

[00:44:41] 999,000 not 1.1 million surely not the existing assessment companies There's currently like a process you have to go through and it's it's a lot of work

[00:44:50] It's kind of a lot of red tape bureaucracy, et cetera, too, and I imagine that's a lot of work on the bureaucrats as well to To do that so how is enforcement going to take place without some more infrastructure?

[00:45:01] It's not like to me. This is a note. This is a wrong solution look how easy it is Was to put and I'm not saying by the way, I'm not advocating for capital gains

[00:45:11] But look how easy it was for them to change the capital gains inclusion rating Canada Lawyers and accountants do that on the closing of a transaction you sell your property your account and files that your

[00:45:23] Your tax and they they state that you did the sale and then they calculate the capital gains Tax that you have to pay a

[00:45:31] Sir tax relies on bureaucrats not the private sector to execute it, which means that it will have a lower likelihood of succeeding from my perspective no offense Now their site does acknowledge the critics that you mentioned in it says some people argue that putting a price on

[00:45:48] Housing and equity is unfair unfair to those that are a house rich in cash poor seniors with fixed incomes for instance Unfair to new homeowners with Big mortgages or just generally

[00:46:03] Unfair because why should people who have worked hard to put a roof over their head now be penalized with more new taxes And then they go on to basically say we don't care what do these problems have in common you have a house right?

[00:46:18] They they all are about the circumstances of people who already have homes putting a modest price on housing in Equity addresses the unfairness of a housing system that is preventing younger generations renters and newcomers

[00:46:30] From finding a place to call home at all. I would say that there are other more solvable problems preventing that like for the like it is an example like the demonization of investors like

[00:46:40] The fact that we don't have a supply pipeline that can keep up with the population growth and Canada I mean there are so many different problems that a Sir tax is just like maybe not the right solution right anyway because you're you're making it more expensive to own

[00:46:56] Real estate over a certain value That's like not enough for the ability mechanism right? Yeah, and that value is already quite high now again the liberals party did say that they won't put a couple of gains tax on a primary residence

[00:47:11] They did not say that they won't put a sur tax on homes valued over a million dollars Yeah, the final graphic they have is interesting it read it just reads Policies can have unintended consequences that entangle households to counter unrising home prices feedback loops grow this gap

[00:47:27] The policies that they're talking about monetary and lending policies tax policies zoning Yeah, do they know though that these are that those policies are Ver policies like no, I mean it'd be silly for them to

[00:47:41] Tax all of the wealth that they created no one might my wrong there. Yeah on the contrary I feel like it's actually well, maybe what they want it's like from my perspective

[00:47:50] Textbook modern monetary theory in my opinion and we covered this before Nick so describe this image to me here So we have got what looks like an overflowing sink so let's start with the faucet the faucet is

[00:48:04] Government spending and that's lawmakers funding programs and services and it's it's on right now And that on is dispensing water and that water is money and that represents government spending and And

[00:48:22] New money being put into the economy so again think of the water as that money being spent But then we only have this small sink base in here So think of that overflow the water that's leaving that sink base and as inflation

[00:48:38] Inflation happens when there is too much money in the economy or in this case too much money in the sink So modern monetary theory pauses that government that issues its own currency can never run out of money in the same way of business or individual can

[00:48:52] They can always create more currency to finance spending however This power comes with the responsibility to manage inflation and the economic stability through taxation and other regulatory tools So taxes Redistribute wealth encourage or discourage behaviors which is what they're describing here. They're they're proposing a sur tax to

[00:49:12] Discourage the ownership of homes over one million dollars. I suppose But it also sustains the demand for a currency because taxes MMR use that taxes are sort of like a revenue system of the government's currency Stacking on this idea from the idea from the image that you

[00:49:31] Manchin from marketplace dot org we can see the capital gains tax like the faucet would be government spending on things like Canada mortgage bonds as an example the government's buying a bunch of those the water is being used for mortgages in this case

[00:49:42] The sink stopper is an increase to the capital gains policy or maybe a house sur tax and the drain is the tax revenue that the government would earn From the increased capital gains. That's taking money out of the economy. This is other government gets

[00:49:55] Money out of the economy to pay for all the expanding Spending that caused the money to get into the economy in the first place, and this is why I Think that

[00:50:03] Amore appropriate and direct way of doing it if they were gonna do it would be to look at the US model and I'm not saying they should do it by the way

[00:50:09] I'm just saying a sur tax is a dumb way to do it in the capital gains way Gaines would be a better way to do it L I USA but both suck was that was that clear enough? Yes clear enough that your economy yeah exactly

[00:50:24] So on that note let's look at the USA capital gains now. This is from the IRS website I quote almost everything you own and Use for personal or investment purposes is a capital asset examples of capital assets include things like homes

[00:50:42] Personal use items like household furnishings stocks and bonds that are hell's investments and more and when you sell a capital asset the difference between The adjusted basis in the asset and the amount you realize from the sale is actually a capital gain or in some bad cases

[00:51:00] A capital loss yes you heard that right there is a tax on primary residents in the USA now The USA capital gains situation looks and works different because it has three key features that Canada does not have the first There is an exemption

[00:51:19] Up to $250,000 for the capital gains The second is you can tax deduct mortgage interest and the third and if you are a Canadian real estate investor Which you likely are because you listen to this show you have likely heard of it

[00:51:34] The unicorn down there you can do a 1031 exchange Now remember in the recent fiscal year 2025 budget proposal from the Biden administration There is a notable push towards increasing tax rates particularly on capital gains

[00:51:50] This comes from moody's private client by the way across border personal and corporate tax law Which is a team of Canadian the US lawyers the proposal introduces a graduated taxing structure with with further modifications to include an increase up to 44.6

[00:52:06] Capital gains rate so in Canada we hear 66% right because we just went to from 50% to but that that's their total Capital gains ours is our inclusion rate which your marginal tax rate is applied to

[00:52:17] So that's up in the US 20% capital gains rate from the 2017 Trump tax reform are up from the current 20% and An increase of 44 point or increase to 44.6% would be the highest federal capital gains rate in U.S. history at least since

[00:52:35] 1922 that is more than capital gains tax in Canada by the way Okay, so let's look at the first of those three key features the exemption In the USA they capital gains tax on the sale of a primary residence offers a significant exemption

[00:52:52] If you have owned or live in the home for at least two of the five years before the sale You can exclude up to $250,000 of that gain from your income if you are single and up to $500,000 if you are married and filing jointly

[00:53:09] Yeah, so 250,000 per person the next pieces mortgage interest in the U.S. you can tax it More you to interest on your primary residence if you itemized your deductions on your federal income tax return It has to be eligible interest so you can deduct up to

[00:53:22] Interest on up to $750,000 of mortgage debt 375,000 per person for loans taken out after 2017 for loans taken out before 2017 the limit is 1 million So 500,000 per person you have to itemize the deductions it has to be a qualified residence So a home a main home houses condo co-ops

[00:53:41] Mobile homes which is you know popular where they have decent weather how how trailers it says Bodes on this list just saying or similar properties I've sleeping cooking and toilet facilities They have different types of interest and then limitations I'm just gonna kind of blow through this because

[00:53:57] This is probably gonna be our longest episode, which is fine. That's good good a long episode every now and then for your summer drives up to the caught there you go

[00:54:06] The action of sweet flow chart for this on the website. We need these flow charts for Canadian tax law But anyway in Canada you can make mortgage some what tax deductible the Smith maneuver is a legal tax strategy

[00:54:19] In Canada that allows homeowners to convert their mortgage into tax deductible investment loan interest and you're probably Wondering why when we know an episode on the Smith maneuver yet while rather than diving into it We are going to do a podcast episode and probably a free webinar with

[00:54:34] Robinson Smith yes the Smith in Smith maneuver so let's just circle back to the 1031 exchange for a second here That of course is named after section 1031 of the United United States International revenue code

[00:54:48] Which I'm sure everyone is very familiar with and it allows investors to defer pain that capital gains tax on investment properties when they are sold as long as

[00:54:58] Another like kind of property is purchased with the profits game by that sale so hey don't worry about taxes on this You just have to go buy more real estate

[00:55:08] That's music to my ears. Now this can be a powerful tool for real estate investors grow the portfolios without immediately incurring tax liabilities So let's look at a quick example of a 1031 exchange transaction

[00:55:22] Let's say John owns a rental property in New York City that he originally purchased for 500,000 Over the years the properties are pre-shootin value and is now worth one million dollars John decides to sell the property and use the proceeds to purchase a new

[00:55:40] property and new rental property in San Francisco Which he has also valued at one million dollars so here's how the 1031 works Say of the original property John sells his New York apartment for million dollars Normally that the pay capital gains on $500,000 of that profit

[00:55:58] But there's identification periods so within 45 days of selling that New York property John must identify the new property or properties he intends to purchase so he goes and points to the San Francisco properties interested in

[00:56:11] Then there's the exchange periods so John's gone. I got 180 days from the sale of that New York property to complete the purchase of the San Francisco Then there's the qualified intermediary so to comply with 1031 exchange rules. I'll John

[00:56:25] Use as a qualified intermediary to hold the proceeds from the sale Then the intermediary uses those funds to purchase the San Francisco property on old Johnny's behalf Then of course the purchase of the new property the qualified intermediary

[00:56:43] Purchase the San Francisco property for million dollars using the proceeds from the sale of the new York property By completing the 1031 exchange Don John differs capital gains tax on five hundred thousand dollars of profit from the sale of his New York City

[00:56:58] Property and he now owns a rental property in San Francisco without having to pay Be capital gains tax immediately so an accountant from I think EY actually pointed this out to me on Twitter in this discussion as well

[00:57:12] He said you know the capital gains tax won't happen, but we already have the or 1031 in Canada wouldn't wouldn't happen But we already have a replacement property rule which seems similar to 1031 and I didn't know about it

[00:57:24] But it could be good for people using their businesses to buy real estate. It seems to To be related to kind of businesses

[00:57:30] I haven't example in here, but I'm not gonna go through it because again, we're probably gonna end up already being over an hour on this episode But from the government of Canada website it says

[00:57:39] In some cases you can postpone or defer including a capital gain or recapture of Capital cost allowance CCA in calculating income. So it's it's just on CCA capital cost allowance

[00:57:51] You might sell a business or property and replace it with a similar one or you might very property might be stolen destroyer expropriated probably not gonna happen with the house or sorry with a commercial property to defer

[00:58:02] Reporting the gain or recapture of CCA you or a person related to you must acquire replacement property within the specified Time limits and you use the new property for the same or similar purpose

[00:58:13] You can also defer a capital gain or recapture of CCA when you transfer property to a corporation A partnership or your child that's on the government of Canada website and they they provide a

[00:58:24] Example on the site, but what we're gonna do is probably just actually do an entire episode on this this replacement property rule from the government of Canada website Because something I'm keen to understand better so well

[00:58:34] Maybe I have an expert on to talk more specifically about this next why don't you hit me with the wrap up on this episode and then I will Badger people to do all of the things that we need them to do I love it and yes, appreciate everyone

[00:58:52] Stickin through us. I know this this has been a beefy episode, but tons of great stuff in here We're just gonna do a quick recap for you so you know the main takeaways here First thing to remember is that we have oddly high home ownership rates in

[00:59:07] Cogniz countries such as North Korea China allows These all have 90% plus home ownership rates to the emerging renters of economies of Canada in the United States They're in the high sixties Second thing to remember is taxing housing inequality. Sorry inequity the Jen squeeze report that we

[00:59:27] Looked at suggest a sertax on homes vada over a million dollars to address Canada's affordability crisis The third is criticisms of that sertax proposal We then looked at comparisons with the US and the capital gains tax the US capital gains tax on primary

[00:59:46] Residents includes exemptions and deductions that Canada just doesn't have making it potentially more effective but still And then of course the sink and the faucet and the economy and what we've broken in our modern

[01:00:02] Monitiri theory and housing policy which there is plenty more to come on that so Hope though you all got a ton of value out of this now Dan feel free to do your bad dream

[01:00:14] Get it to get for our multiplex event. It'll be in the show notes go to realist.ca because realist.ca Members are going to the multiplex event for free go to a meetup Second Tuesday of every month leave us a review

[01:00:29] Text this episode to your boss and we love you very much. Thank you The Canadian real estate investor podcast is for entertainment purposes only and it is not a financial advice

[01:00:40] Nick Hill is a mortgage agent with premier mortgage center and a partner in the g and each mortgage group Licent number one zero three one seven agent license m two one as zero zero four zero three seven

[01:00:56] Dino photos are real estate broker licensed with rare real estate a member of the Canadian real estate association the Toronto real estate board and the Ontario real estate association