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A new surtax proposed for Canadian homes worth over $1 million could be a key measure to improving housing affordability.

A newly published report by Generation Squeeze — a non-partisan, non-profit organization based in Vancouver — suggests that federal or provincial governments should create an annual progressive surtax on homes valued over $1 million. In practice, the new surtax would reduce tax sheltering while deescalating home prices.

The 69-page report, titled Wealth and the Problem of Housing Inequality across Generations: A Solutions Lab, received funding under the National Housing Strategy’s Solutions Labs Program. Employees from the Canadian Mortgage and Housing Corporation (CMHC) also independently participated in the lab.

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The Solutions Lab “surfaced tensions” between positive and negative aspects of high home prices and the policies that influence this, and how they can be adapted. As a result, the Lab identified three areas for policy innovation, including monetary and lending policy, tax policy and protective policy, that would help to achieve affordable housing in Canada. Three working groups also proposed specific recommendations in these areas.

One of the central recommendations from the report includes the implementation of a yearly deferrable tax on homes worth over $1 million. The seven-figure threshold would ensure that the majority of Canadians would avoid paying the tax, seeing that 91 per cent of Canadian households do not own a property valued over $1 million, the report said.

Instead, the tax would only apply to the nine per cent of households — about 1.3 million families nationwide — who live in the most valuable properties across Canada, including 13 per cent of Ontario households and 21 per cent of households in British Columbia.

The report estimated that a 0.2 per cent to one per cent tax on homes worth $1 million to over $2 million could generate $4.54 billion in annual revenue. This would translate to an average annual deferrable surtax payment of $408 to $14,710.

Alternatively, a tax rate from 0.5 per cent to 1 per cent on homes in the same property value range would create $5.83 billion in yearly funds. Deferrable surtax payments would run between $1,021 and $16,210.

Chart: Possible surtax rates and revenue, Wealth and the Problem of Housing Inequity across Generations: A Solutions Lab, Generation Squeeze

By making the tax deferrable, those affected would not be required to pay the tax until the home is sold or inherited. This feature would be included in order to avoid placing risks on individuals with limited income or “wealth beyond the home in which they live.”

In theory, the proposed surtax would reduce the tax shelter that reportedly incentives Canadians to rely on growing property prices as a strategy for savings and wealth accumulation. Since 1972, the report explains that Canadian tax policy has sheltered principal residences from taxation to help homeowners build wealth, but this has generated a “number of significant, unintended problems,” such as inflated demand and average housing costs.

“Reducing the tax shelter will disrupt feedback loops that fuel rising home prices,” said the report. “This would slow the escalation of home prices and improve affordability; reduce inequalities, including between renters/ owners and younger/older Canadians; and attract savings and credit towards economic activity outside of the housing sector, which may produce more jobs and innovation than is often found in real estate.”

The report noted that the government could use the collected tax to provide portable housing benefits for renters or other recommendations from the Lab, including investments in new green co-op and purpose-built rentals.

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