Capital gains taxes won’t fix Canada’s terrible housing market
Canada's proposed solution to its housing crisis may exacerbate the problem instead.
Canada’s Finance Minister, Chrystia Freeland, made waves yesterday when she announced that Canada would be increasing capital gains taxes, beginning in June 2024, as part of a broader initiative to “build more homes, faster, help make life cost less, and grow the economy in a way that helps every generation get ahead,” as well as to limit the size of the government’s annual budget deficit.
I struggle to see how raising capital gains will fix Canada’s woes.
As Canadian capital gains tax policy currently stands, only 50% of one’s capital gains are eligible to be taxed, and the taxable amount is taxed at one’s marginal tax rate. This new policy, which is Canada’s first change in capital gains levy in more than two decades, will raise the threshold to include 67% of all capital gains over C$250,000 (US$181,000).
Canada has one of the worst housing markets in the world right now, with Toronto leading UBS’s global real estate bubble index in 2022. Canada needs more homes, and increasing capital gains could exacerbate this problem by disincentivizing further real estate development.
According to Bloomberg, Alberta Central’s chief economist, Charles St. Arnaud, also warned that this move could deter business investment in Canada, saying, “While the tax changes are marginal, they have the potential to impact the perception of Canada’s business environment.”
Implementing a policy change that increases short-term government funding at the expense of longer term business investment and real estate development feels risky, and it also fails to address Canada’s real problem: an explosion in government spending.
Ignoring pandemic-era stimulus packages, Canada’s federal government spending has climbed 40% from prepandemic levels, and Freeland expects a C$40 billion deficit again this year. But this issue isn’t just financial: it’s political.
Prime Minister Trudeau’s approval rating has plummeted in polls, and with an election just 18 months away, he is hoping to use expanded government programs to improve his standing with disenchanted younger Canadians.
