It's not the first time that mortgage interest deductibility has been used as an election promise in Canada – Joe Clark's short-lived government tried it out in 1979 – but this is the closest that Ontario homeowners have been to a mortgage interest tax break in years. The ruling Progressive Conservative party, under Premier Ernie Eves, is proposing that if it's re-elected on Oct. 2, homeowners will soon be able to deduct part of their mortgage interest payments from their provincial income tax. Up to $5,000 could be deducted by the fifth year of the plan.

Unfortunately for homeowners embracing this idea, the Conservatives are trailing the Liberals in public opinion polls and appear destined to lose the election. Education and health care are the hottest issues in the election, and the mortgage break is drawing little support – only the province's home builders' associations have come out strongly in favour of the idea.

A recent editorial in The Globe and Mail called the plan "the worst kind of political flim-flammery". It says, "There is no public-policy reason to encourage Ontarians to buy houses at this point. Housing sales have been booming because interest rates are the lowest they have been in 40 years … the rate of home ownership in Ontario in 2001 was an impressive 67.8 per cent of all Ontario households."

Critics say that's almost the same ownership rate as in the United States, where full mortgage interest deductibility has been in place for years. They also point out that Canada already provides a tax break to homeowners because there is no capital-gains tax on the sale of a principal residence. And, they say, mortgage deductibility encourages boom-bust real estate cycles, as were seen in the United Kingdom before deductibility was phased out in 2000.

The Liberals and New Democrats say they oppose the tax break because the province just can't afford it, and needs to direct that tax money to more pressing needs.

The Greater Toronto Home Builders' Association responded with a study that says mortgage interest deductibility as proposed by the PC party could save a homeowner almost two years' worth of payments, and almost $19,000 over the life of a mortgage. It says that depending on the house price and down payment, tax savings range from $4,729 to $9,266, the number of monthly payments eliminated ranges from 14 to 23 months, and the money saved ranges from $10,131 to $18,870 -- from 4.7 per cent to 7.7 per cent of the total mortgage cost.

The home builders argue that a tax break is justified because taxes currently account for 24 to 26 per cent of the selling price of a new home.

"What's wrong with cutting homeowners a little slack once in awhile?" says GTHBA president Joe Valela. "The provincial government derives billions in tax revenue from the real estate industry. The province is currently taking in more than $700 million a year just from the land transfer tax. This is sufficient to cover the entire program cost in year five … And let's not forget that every time a new home gets built, the province receives approximately $5,000 in provincial sales tax ... What's wrong with leaving a little bit of this money within the system that generates it?"

Valela disputes the claim that mortgage interest deductibility will fuel an already hot market and drive up the price of housing, offsetting the benefits of deductibility. "How desperate can you be to deny middle-class homeowners a tax break? They can't seriously think a tax break of up to $100 in the first year and $500 after five years is going to drive rampant inflation in the real estate market."

He says, "To those who have expressed concern that the program is providing benefits to existing homeowners, I say what's wrong with that? There are plenty of social housing programs in this province targeted at non-owners, and guess where the funding comes from?"

Andrew Brethour of PMA Brethour Group, a consultant for the GTHBA, says that in the U.S., "The primary beneficiary and the vast percentage of households exploiting mortgage tax deductibility to the maximum is the first-time buyer." He says first-timers are critical to the overall economic health of the housing market, and that a good first-time market also stimulates the existing homes market because that's what most first-time buyers purchase.

Brethour suggests that mortgage interest deductibility should be limited to first-time buyers, and that it should allow a 100 per cent deduction rather than the proposed 50 per cent. He says this would eliminate criticism that the program would only benefit the wealthy.

Published: September 25, 2003

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .