Taking a closer look at capital gains tax

Since October, subtle changes to the Principal Residence Tax Exemption (PRE) have meant that Canadian sellers and buyers must disclose transactions on their principal residences to the government. Somehow I missed until recently that the administration changes also affect those who work from home. Instead of capital gains made on the sale of a principal residence being entirely tax exempt, only the portion of the home used for residency is exempt; i.e. the portion used as a deductible business expense, whether by room or by footage, will be taxed if a profit is made on the sale of a home.

It’s a change that doesn’t affect CEOs or brain surgeons, but primarily sole proprietors who run daycares, freelance bookkeepers, landscapers, and other middle-class people with an entrepreneurial bent — exactly the kind of people whom I’ve often said could lead the way to less urban sprawl, more community engagement and less clogged traffic for those who still commute. These are people who don’t have paid vacations and IT departments. They don’t have supply closets or company pensions. They pay their income tax and their property taxes just like six-figure employees of corporations, but they don’t get company cars or expense accounts.

It’s disheartening. We’ve created a system that clearly favours the wealthy as it is. Although the administrative changes were purported to address a loophole through which foreign buyers might slip, wealthy foreign buyers with competent accountants can still avoid taxes on capital gains made on real estate by hiding behind a bare trust. The person who sets up the trust makes a property an asset of the trust, and then designates a beneficiary, usually family. Or they create a company that owns the property, then buy and sell the company so a change in ownership of the property never triggers the taxes.

So here I am wondering why, when we tax just about everything, we aren’t taxing capital gains on principal residences. Ours is a real estate-based economy. Homes in the GTA and Vancouver particularly are as much about the frenzy to make as much as possible as they are about spending decades raising families and building communities. Ugly bidding wars aren’t about making memories. Why don’t we treat it like the profit centre it is? Instead of going after home-workers for a percentage of the profit, why not make every buyer chip in? With a market like this, a tiny portion of such profits could go a long way towards new and improved infrastructure.

I’m sure the hue and cry would be long and loud, but if we’re really being community-minded, should we begrudge donating a pittance on potentially enormous profits made by simply living in a construct?

I’m generally conservative-minded, fiscally speaking, but I’m finding myself of two minds on this. I’m not for having government hands in my pockets, and I can see how the exemption further stimulates growth in an industry on which we’ve come to depend, perhaps too much. It incentivizes homeowners to keep their properties sound and attractive. It creates work for the building trades.

But on the other hand, we’ve been subject to much less justifiable tax grabs, and a change to tax code could include provisions for tax exemption after living in a home for, say, five years, or tax higher-priced homes at a different rate than lower priced ones.

Perhaps lower the development fees that are making it increasingly prohibitive for buyers to purchase newly constructed homes and take a pinch from the more mercenary sellers instead.

At the very least, I find myself in the strange position of wanting to understand a little more about the implications taxes.