Flip & dip

We told ya.

With a top tax rate of 54% and four in ten families wiped off the federal tax roles (their benefits exceed their tax bills), plus higher government spending (hello dentalcare) and cash-sucking deficits, what’s left for politicians to Hoover?

Your house, of course. Real estate is the asset now firmly in the crosshairs. And the assault may only expand.

Yesterday BC brought in Canada’s first true tax on principal residence capital gains. It’s a dramatic beachhead by the socialist government of that province, and something every premier and political gang in the nation will be watching closely for reaction.

Starting on the first day of 2025 (but retroactive to 2023) any profit a homeowner makes on the sale of a principal residence – or an assignment – will be taxed at the meaningful rate of 20%. That rate will fall to 10% after 18 months of ownership and to zero after two years. Exceptions will be made for unfortunate life events (death, divorce, job loss, insolvency, Drake addiction).

Interesting points are that (a) while profits are fully taxed at your marginal rate, losses cannot be claimed. (b) In establishing the ACB (adjusted cost bas) there is no deductibility for expenses or costs such as mortgage interest. (c) This tax is atop the penalty imposed by the federal anti-flip tax, which requires any gains to be added to taxable income in the year received. For reference, here is the existing federal law:

The new deeming rule applies to flipped property to ensure that profits are subject to full income inclusion. Under the new rule, profits from the sale of a flipped property are deemed to be business income.  Where the new deeming rule applies, profits on the sale cannot be treated as a capital gain (50% income inclusion) and the Principal Residence Exemption is not available.

So in BC if you need to unload your house within a year, and are unfortunate enough to make some money, the gain will be included in your taxable income for the year, and then an additional 20% of the gross profit will be payable to the province. Yup, tax on tax.

Now some people say this is good because it will teach speculators a lesson. Of course, everybody who bails within two years of buying is not a flipper. You might move into new digs and discover your next-door neighbour, six feet away, is a total butthead who smokes dope in the backyard, barbeques whole pigs, plays AC/DC all day, drives a Ram TRX and married his cousin. She’s nice, but really creepy.

You can stay and be miserable. Or you can decide life’s too short, and move. You haven’t changed the real estate market one tad, but if prices have risen for other reasons (like a Bank of Canada rate cut) why should you be whizzed?

Well, this is the issue with capricious taxation that’s unfocused, kneejerk, inconsistent and dreamed up as a band aid solution to a deeper problem. If Canada is about to scale back the principal residence capital gains tax exemption – which makes perfect sense now that we’ve financialized real estate – it should be done correctly. Fairly. Universally.

So far, however, we’re weaving a patchwork of taxation that makes real estate ownership more and more of a crap shoot.

Land transfer levies in Ontario and Toronto are withering. Property tax increases in the double-digits are cropping up across the country. BC’s ‘spec tax’ is aimed at punishing people with two properties, not dampening the market. The underutilized housing tax in Ottawa, Toronto, Vancouver and elsewhere seeks to control an owner’s behaviour (dictating how many nights a year you must sleep there) and can be raised without recourse by the least-experienced set of leaders – local councils. In addition there’s the federal anti-flip rule, sales tax slapped on assignments and the near-certainty the coming budget will further tighten the screws, now that every other market-killing measure has apparently failed.

Maybe it’s time to simply treat houses like the investment assets we’ve made them. And perchance that’s exactly where the left coast Dippers are taking us. If so, be honest about it.

By the way, this is just the beginning. Chose your neighbours well.

About the picture: “These are 2 rescues of my daughter and her fiancé from beautiful Lake of the Woods in Northwestern Ontario,” writes Rob. “Here they are resting between 24/7 wrestling bouts. Thanks for the daily blog and all your terrific insight. Do you really need a comments section? Wouldn’t life be simpler without it. Have a great day!”

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