Canada's Tax Grabs 'Unfair and Unjustifiable'

Written by Posted On Monday, 07 January 2008 16:00

The Canadian government is "raking in" about $2 billion per year in Goods and Services taxes on new homes -- far more than it ever intended -- and is driving up the cost of housing and making home ownership more difficult for Canadians, says a new report.

Commissioned by builder and mortgage broker associations and written by economist Will Dunning, the report says the GST on an average-priced new home in Canada is nearly $20,000, almost double what it was in 1991 when the tax was introduced. Even with the recent GST reduction to five per cent, home buyers will still be paying about $16,500 on average, says the report.

"That's a huge amount of money for anyone to have to pay, and it is especially onerous for young families and first-time buyers," says Phillip Rubinoff, chairman of the Residential Construction Council of Ontario (RESCON ).

When the tax on new homes was introduced in 1991, buyers were given a rebate of 36 per cent of the GST on houses costing up to $350,000. The rebate was less for homes priced between $350,000 and $450,000 and there was no rebate for new homes priced at $450,000 and above. Despite a government promise to review the thresholds at least every two years to reflect changes in market conditions, the rates have never been adjusted.

"In 2007, much has changed; just 52 per cent of new homes are entitled to full rebates (down from the 1991 figure of 91 per cent); 22 per cent are eligible for partial rebates (versus the prior five per cent); and 22 per cent are not eligible for any rebate (far in excess of the prior figure of four per cent)," says Dunning in the report.

"The effective amount of GST paid per new home increased by 95 per cent from 1991 to 2007," it says. "This is 2.5 times more than the rate of growth for average weekly wages in Canada." It says that with the new GST rate, it's 67 per cent higher than in 1991, compared to the average wage growth over the same period of 38.6 per cent.

"The federal government's failure to adjust GST credits on items like new homes hurts families the most," says John Williams, federal director of the Canadian Taxpayers Foundation.

RESCON says the government should bring the rebates back in line by raising the thresholds by the full amount of the change in the average price of new homes since 1991, and then by indexing the thresholds to the annual percentage increase in these prices.

Dunning was also commissioned by the Canadian Association of Accredited Mortgage Professionals (CAAMP ) to look at the federal government's Home Buyers Plan. It was introduced in 1992 and allows first-time buyers to withdraw up to $20,000 tax-free from their Registered Retirement Savings Plans to be used for a down payment on a home. But the maximum amount that can be withdrawn has not been increased since 1991, while the average resale house price has gone up by 104 per cent, says Dunning's report.

He says the amount of financing required in addition to the Home Buyers' Plan contribution has risen even more than house prices, and that the plan is "becoming less effective as a means to support Canadians in their aspirations for home ownership."

Dunning recommends that the withdrawal limit for the plan be updated to reflect increases in the New Home Price Index for Canada since 1992. "For 2007, the limit would be increased by 40.7 per cent to reflect the changes in the NHPI during 1992 to 2006," he says. This would increase the limit from $20,000 to $28,150.

In the report for CAAMP, Dunning also takes a look at land transfer taxes (LTT) across the country, which he says are "unfair and unjustifiable."

The City of Toronto will implement a controversial new land transfer tax on February 1, which when combined with the provincial tax means Toronto will have the highest LTT in the country. Dunning says Toronto's average LTT will be $8,337, based on house prices for the first nine months of 2007.

LTT rates vary across the country, but Dunning says that like the GST, land transfer taxes increased more rapidly than house prices between 1997 and 2007. Manitoba led the way with a 358 per cent increase in taxes, but the average LTT there is a relatively low $1,268. In B.C, they rose by 179 per cent to $6,718.

In Quebec, LTT increased by 136 per cent to $1,810 per home and in Ontario, they increased by 113 per cent to $2,916 for the average home.

"The amounts of taxes paid for land transfers, and the amounts by which they have increased during the past decade would fail to meet any definition of fairness," says Dunning in the report. "They are applied in a discriminatory manner, as they are levied (on) only a small percentage of the population. A discriminatory tax can be justified if it compensates government or society at-large for costs that result from an activity. At this point, taxes levied on land transfers are far in excess of any social or government 'costs' that result from the activity of home buying, and therefore these discriminatory taxes are not justifiable."

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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