Rethinking Taxation on Basic Residential Housing in Canada
In a world grappling with the complex challenge of climate change, a housing crisis, economic equity, and sustainable development, it becomes imperative for governments to reassess existing taxation policies to align with evolving societal priorities. Canada, often heralded for its prudent fiscal approach and progressive policies, finds itself at a crossroads in the realm of housing taxation.
As the nation looks to shape a future that is both environmentally responsible and socially inclusive, an intriguing proposal emerges:
Exempt, or classify as zero-rated, new basic housing (i.e., apartments and townhouses) from the Sales Tax (GST/HST), on the grounds that they penalise the least wealthy in our society, and discourages the creation of a type of housing serves to benefit society and not just the occupant.
New apartments are the fastest way to provide large quantities of basic housing during a housing crisis, and they are typically the most environmentally friendly housing option in their operation and the ability for cities to service them.
The Purpose of GST/HST
The Goods and Services Tax (GST) sales tax was introduced in Canada on January 1, 1991, by the government of Prime Minister Brian Mulroney. It was introduced to replace the 13.5% manufacturers' sales tax (MST). Mulroney claimed the GST was implemented because the MST was hindering the manufacturing sector's ability to export competitively.
While perhaps there was a convincing argument for abolishing the MST, the case for replacing it with a consumer sales tax is weaker. However, at that time, most provinces in Canada already had their own provincial sales tax imposed at the point of sale.
Political analysts widely credit the introduction of the GST for felling the Canadian Conservative Party in the 1993 election. During the election campaign, Liberal Party leader Jean Chrétien promised to repeal the GST and replace it with a different tax. The Liberals won, and instead of repealing the GST, the Chrétien government attempted to restructure the tax and merge it with the provincial sales taxes in each province. They intended to call it the "Blended Sales Tax", but opponents quickly renamed it the "B.S. Tax." It was rebranded to the Harmonized Sales Tax before its introduction.
The introduction of the GST was very controversial even though it was promoted as being revenue-neutral (i.e., raises exactly the same taxes as the MST), and a large proportion of the Canadian population disapproved of the tax.
The GST is a regressive tax. Regressive taxes (e.g., sales taxes and property taxes) have a greater impact on low earners because they spend a higher share of their income paying the tax than other higher-income earners.
Since its inception, the Goods and Services Tax has been a subject of deliberation and debate. While the tax was designed to capture revenue from a broad range of goods and services, exceptions have been a constant feature, reflecting shifting perceptions of what is truly essential to modern life.
Zero-rated and Exempt
The Canada Revenue Agency, in its detailing of zero-rated supplies, hints at the current proposal’s potential by exempting critical basic goods :
basic groceries such as milk, bread, and vegetables;
most fishery products such as fish for human consumption;
prescription drugs and drug-dispensing services;
certain medical devices such as hearing aids and artificial teeth;
feminine hygiene products;
The above are “zero-rated” products. They are subject to GST but the government has chosent to tax them at a zero per cent tax rate. This is different from tax-exempt products, such as:
a sale of existing housing (i.e. not a new build)
monthly rent on long-term rentals
most health, medical, and dental services
child care services
many educational services
the issuance of insurance policies
most property and services provided by charities and government institutions
From the list above, it is clear that the government did not want to tax the basics like food and medicine. At the inception of the tax, the majority of housing was detached houses, so rent was considered basic housing and was exempted.
At the time, the government was not grappling with a housing crisis, and the rental stock was not dependent on creating condominiums that are then rented.
In the context of what basic housing looks like in the 2020s, exempting all multi-unit residential housing from sales tax, would support Canada’s commitment to prioritising the fundamental human need for shelter.
The Canadian Housing Crisis
The sprawling expanse of the Canadian landscape has long been celebrated as a symbol of abundance and opportunity. Yet, beneath the surface of this idyllic tableau lies a housing crisis that encapsulates two deeply interconnected challenges, each with far-reaching implications for individuals, communities, and the very fabric of the nation.
The first challenge, a scarcity of housing supply, has given rise to soaring prices and rents, threatening the financial security of households and the pace of economic growth.
The second challenge, closely linked to the first, calls for a radical rethinking of housing sustainability, particularly in the context of detached homes. This dual predicament demands a holistic approach that fuses economic prudence with environmental stewardship.
Not Enough Supply
The Canadian housing market, often viewed as a testament to stability, has grappled with an acute imbalance between supply and demand. The dearth of available homes has precipitated a steep ascent in both home prices and rental costs, placing the dream of homeownership beyond the reach of many and leaving renters burdened by a disproportionate share of their income devoted to shelter. This, in turn, has ripple effects that stretch beyond mere finances.
While immigration doesn’t help the housing problem, it is plugging a hole in government finances and filling jobs vacated by retiring baby boomers. Given Canada’s population needs to grow, more supply must be built.
The financial vulnerabilities resulting from high housing costs are far-reaching. Households, laden with heavy debt burdens are rendered susceptible to economic adversity. The capacity to save for retirement dwindles, painting a gloomy picture for the future where dependence on government support may become the norm. Additionally, when workers spend most of their income on housing, it reduces their disposable income for other expenditures (e.g., cars, renovations, movie nights, and date nights). This reverberates through the economy. Less spending in the local economy leads to less business growth as consumer spending falters.
Most Existing Supply is Environmentally Unsustainable
The perils of the supply crisis become even more stark when cast in tandem with the carbon-intensive nature of detached homes—the staple of traditional Canadian housing. Detached homes, often car-oriented and energy-inefficient, stand as relics of a bygone era. Their carbon footprint is colossal, compounded by the sprawl and inefficient land use patterns that they encourage. These homes consume precious carbon-absorbing land that could be better employed for sustainable development.
This is where the sustainability imperative steps in. As global concerns about climate change intensify, the necessity to address housing's role in environmental degradation cannot be understated. The path forward beckons for a transformative approach—one that centres on multi-unit housing and the replacement of high-carbon footprint homes with ecologically conscious alternatives. This shift is not merely an aspiration; it is a practical necessity that harmonises with Canada’s commitments to reducing greenhouse gas emissions and fostering sustainable urban environments.
Two Birds One Stone?
The amalgamation of these two challenges presents a unique opportunity for policy innovation. Imagine a scenario where a concerted effort is directed at increasing the supply of sustainable, energy-efficient multi-unit housing. The positive impact could be two-fold: alleviating the housing crunch while driving Canada closer to its climate goals. A forward-thinking approach would entail not only incentivising developers to embrace such construction but also devising mechanisms to revitalise existing high-carbon footprint housing stock.
The roadmap to resolution lies at the crossroads of economic foresight and ecological prudence. A future where the Canadian housing crisis is mitigated—through an augmentation of supply and an embrace of sustainability—beckons on the horizon. The nation’s course of action will determine whether these challenges will merely be the harbingers of discord or the catalysts of a brighter, more equitable, and ecologically responsible future. In the interplay of housing policy, environmental ethics, and economic prosperity, Canada stands poised to redefine its narrative. Will it choose to script a story of resilience and innovation?
How A Tax Rethink Can Help
This brings us back to a proposal to exempt, or classify as zero-rated, basic housing (i.e., apartments and townhomes) from the Goods and Services Tax (GST).
A pivotal argument in favour of this exemption revolves around the changing housing dynamics in the modern era. Detached houses, often synonymous with affluence, have traditionally enjoyed a privileged status. Detached houses are not basic, they are a luxury.
Multi-unit residential housing, including apartment complexes, condominiums and townhouses, embody a more sustainable approach to urban living. With smaller carbon footprints per capita, these developments showcase Canada’s commitment to tackling climate change head-on. By allowing the creation of many more homes per square meter of land, they also allow Canadian cities to more than double their populations without expanding their physical footprint.
A shift toward density does not mean Canadian cities need to look like New York or Hong Kong. Higher density can look like London or Paris. The key is higher-density that improves citizen well-being is the application of regional urban design principles.
Removing homebuyer taxes on beneficial basic housing will encourage its development. Presently, all things being equal, a well-maintained existing home is preferable to a new home because a new home not only comes with the uncertainty of construction timing and quality, it also incurs sales taxes.
For example, in British Columbia, the GST on the purchase price of a new home is 5% while in Ontario the HST is 13%. In Vancouver or Toronto, most new suites (small apartments with no separate bedrooms) cost more than $500,000, so the taxes would be more than $25,000 in B.C. and more than $50,000 in Ontario.
The shift toward multi-unit housing aligns seamlessly with the nation’s efforts to reduce greenhouse gas emissions and solve the supply crisis with sustainable urban development. In a time when environmental stewardship has never been more critical, rewarding residential developments that contribute to housing everyday Canadians and positively to the fight against climate change is not just a prudent fiscal measure, but a moral imperative.
Critics may argue that exempting multi-unit housing from sales tax could lead to unintended consequences, such as exploitation of the exemption for high-end developments. However, these concerns can be addressed through careful regulatory frameworks and oversight mechanisms. The simpler the exemption, the less potential for abuse. For example, an argument could be made for continuing to tax luxury apartments, but luxury apartments are a substitute for detached houses, so they still benefit society. The best definition is to classify any home in a multi-unit building of 6 or more units as eligible.
In a world where the lines between luxury housing and housing necessity are increasingly blurred, a small step, such as exempting multi-unit residential housing from sales tax is an investment in a future with greater housing availability, sustainability, and inclusivity.
