Why a capital gains tax on principal home sales could do more harm than good

It might put a momentary halt on escalating prices, but it is unlikely to improve housing affordability Author of the article: Murtaza Haider and Stephen Moranis, Special to Financial Post Publishing date: Apr 05, 2021  •  10 hours ago  •  4 minute read  • 

Rapidly escalating housing prices have led to calls to reconsider the exemption of the capital gains tax on the proceeds from principal residence sales.
Rapidly escalating housing prices have led to calls to reconsider the exemption of the capital gains tax on the proceeds from principal residence sales. PHOTO BY POSTMEDIA

Rapidly escalating housing prices, mostly in southern Ontario, have led to calls to reconsider the exemption of the capital gains tax (CGT) on the proceeds from principal residence sales in the belief that it will slow or even reverse the current trend.

Eliminating this exemption is one of several recommendations advanced by many economists and market watchers, even though research on its possible effects is not widely available. What impact will revisiting the CGT exemption have on housing prices and sales is the first question that comes to mind. Equally important are concerns about the effect on consumption, savings and the welfare of diverse groups, such as seniors, who might have a significant segment of their wealth locked up in their principal residence.

Why a capital gains tax on principal home sales could do more harm than good
Close sticky video

The CGT was first introduced in 1972 in Canada on the recommendation of a commission led by Kenneth Carter, an accountant. The tax has been revised several times over the years, but the exemption on proceeds from the sale of a principal residence has remained.

David Rosenberg, president of Rosenberg Research & Associates Inc., questions why proceeds from housing are not taxed the same way as gains from other financial instruments. For example, capital gains realized from financial instruments, such as equities, are taxed.

Those arguing for a CGT on housing highlight that the tax code in the United States treats a principal residence as a capital asset and, therefore, subject to capital gains. The devil, though, is in the details, and Canadian proponents may not have completely factored in the economy-wide implications of such a tax.

For starters, the U.S. tax code offers several exemptions on the sale of primary residences. If a couple has lived in a house for two years over the past five years, they are exempt from capital gains on the first US$500,000, provided they file taxes jointly. Single tax filers are exempted on the first US$250,000. This implies that people can claim an exemption on the sale of their primary residence once every two years.

The other significant difference is that the U.S. allows for mortgage interest tax deductions. Homeowners can, within limits, use the mortgage interest paid to reduce their income tax liability. A CGT on primary residence proceeds will have to be accompanied by a mortgage interest deduction, leading to unintended consequences for net tax revenues.


  1. Here’s how government can cool housing prices without hurting homeowners
  2. Jury still out on Canada’s housing ‘bubble’, but a national fix would do more harm than good
  3. When housing market forecasting goes wrong, we all suffer

Adam Serota, a partner at BRS Tax Lawyers LLP, believes that CGT proponents might be overstating residential sales gains. “The quantum of a capital gain on a home is not calculated by simply taking the sale price and subtracting the purchase price,” he pointed out. The process is quite complicated and involves property valuation when the new regulation is enforced and a host of deductions and adjustments to account for the expenses incurred and taxes paid to acquire, maintain, improve and dispose of residential property.

Hence, “drafting and amending the Income Tax Act to allow for a capital gains tax on principal residences would be a complex undertaking,” Serota noted.

Once all the deductions are factored in, the reduction in income tax revenue, especially from homeowners falling in the top income tax bracket, could be substantial. “The question as to how we deal with possible annual mortgage interest and property tax deductions to income would have to be factored into the calculation of the federal government’s net revenue from such a tax,” Serota said.

It is plausible that the net tax revenue from a CGT on principal residences might be less than what is naively assumed, once all the deductions and the costs associated with collecting the tax are considered.

A CGT on principal residences might put a momentary halt on rapidly escalating housing prices, but it is unlikely to improve housing affordability, which is more dependent upon household incomes, which have stayed flat for years.

Implementing it would likely be a boon for the home-improvement sector, because a tax on the sale of primary residences means families will likely stay longer in their homes, customizing them to adapt to changes in their tastes or needs. Simultaneously, a decline in demand for housing could lead to a slowdown in housing construction.

Clearly, introducing a CGT on a principal residence is not without challenges, though it could help address speculation. For example, a CGT could be imposed on residences that fail to meet a minimum duration of ownership. The tax rate can be reduced or eliminated depending on how long someone stays in their principal residence.

Budget deficits are running into tens of billions of dollars, so governments are tempted to find new revenue sources. However, the goal should not be to hurt economic growth in the sectors that are delivering during the pandemic and any decision should be mindful of the unintended consequences of taxation measures that will adversely impact most taxpayers.

Murtaza Haider is a professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website hmbulletin.com.

Leave a Comment

Your email address will not be published. Required fields are marked *