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For sale signs in Oakville, Ont., on Dec. 1, 2018.Richard Buchan/The Canadian Press

Taxing the profits from selling a home has been a no-go zone in Canadian politics – until this campaign.

Now, the Liberals are tip-toeing in that direction, with a proposal for an anti-flipping tax that they say will help cool speculation and slow the rise of real estate prices. Most homeowners would be untouched, but the tax would affect Canadians who sell their principal residences within a year of purchasing them.

Unlike other assets, principal residences are exempt from capital gains tax in Canada. That means the white-hot real estate market of recent years has generated hundreds of thousands – sometimes millions – of dollars of tax-free profit for individual homeowners who bought at the right time.

For the most part, the Liberal proposal keeps that exemption intact. The exception would be homeowners who sell their residences within a year. Even then, there would be additional exemptions for those who need to sell because of major life events such as pregnancy, death, divorce, disability or changes in employment. Homeowners who had to pay the tax would be able to deduct “legitimate investments in refurbishment,” the party’s website said.

The Liberal campaign did not answer questions about how the anti-flipping tax would work, including what rate would be charged, whether the tax would be based on capital gains and whether a homeowner paying the tax would be able to make use of the existing lifetime exemption for capital gains. Instead, the campaign said a re-elected Liberal government would undertake formal consultations that would be used to design the policy and underpinning legislation.

The Liberals have repeatedly emphasized this year that they will not end the principal-residence exemption. But even a tax of limited scope on principal residences would break new ground, both in policy and in politics.

In June, the Canada-British Columbia Expert Panel on the Future of Housing Supply and Affordability recommended tax benefits for homeowners and renters be aligned, either by increasing deductions for renters or by scrapping the principal residence exemption.

B.C. and the federal Liberal government both immediately rejected the idea of ending the principal residence exemption, with Finance Minister Chrystia Freeland, now a Liberal candidate, stating in a press release, “ … our government has been clear that we are not considering a capital gains tax on principal residences.”

The federal NDP has said it would tax principal residences, as part of the wealth tax the party is proposing. But a household would need to have at least $10-million in wealth before being subject to that tax – a cutoff point high enough that it would not affect most homeowners.

Profits from the sale of principal residences are typically exempt from tax, but there are exceptions if the Canada Revenue Agency can demonstrate that a homeowner purchased a property as an investment, said Alexander Demner, a Vancouver-based partner at Thorsteinssons LLP.

There is no hard and fast rule, but the factors that a court considers include the intention of the taxpayer when purchasing the property, and the length of time the property was owned. Mr. Demner said if the anti-flipping tax were to be implemented, it may have the unintended effect of leading courts to define that length of time as being around the 12-month mark, allowing flippers who held properties for longer to secure the principal residence exemption.

Economists interviewed by The Globe and Mail said the anti-flipping tax would help to dampen activity by speculators that has helped to propel prices. They added that it would be a useless measure if it did not include principal residences. They also said prices have already soared to unaffordable heights in many markets.

Mike Moffatt, senior director at the Smart Prosperity Institute in Ottawa, said the tax would cool speculative activity, particularly for condominiums in markets such as Toronto. More than that, he said, the measure would help remedy the perception among younger buyers that the real estate market is hopelessly tilted against them. “It’s more of a fairness issue, more than anything else,” he said.

David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said while there is debate about what factors are driving up real estate prices, there is no doubt that a segment of Canadian society has benefited greatly from the rapid rise in the market.

He said the favourable tax treatment of the sale of principal residences benefits wealthier Canadians, and it would be reasonable to tax those proceeds, so long as a certain amount of capital gains remained tax-free.

Rob Gillezeau, assistant professor at the University of Victoria’s department of economics and school of public administration, said he worried about what would happen if the Liberals implement an anti-flipping tax and real estate prices later retreat sharply.

Then, overextended homeowners who had bought at the top of the market could find themselves underwater, wanting to sell immediately. If they did so, they would have to pay a new tax that would compound their losses. Proper design of the tax could make that unintended consequence less of an issue, Prof. Gillezeau said.

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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