Mohamad Sawwaf is the co-founder and chief executive officer of Manzil, a Toronto-based Islamic financial institution, and has a PhD in Islamic Finance.
What if I told you our governments could significantly contribute to solving the housing affordability crisis, and addressing concerns about equity and inclusion, at the same time?
It’s possible – if we embrace simple changes necessary to assist first-time Muslim homebuyers in a manner that respects their personal faith choices.
The Muslim-Canadian population, at more than one million people, is the country’s second-largest and fastest-growing religious community. However, according to the 2011 National Household Survey, the group’s homeownership rates were less than half of the Canadian average. In practice, Muslims are disproportionately renters, despite the population having comparable earnings and savings to the national average.
One simple factor: Islamic law around financing. For practising Muslims, paying or receiving interest is not allowed, since money has no intrinsic value and entering into financing transactions must meet certain strict conditions under Islamic law – specifically, being asset-backed or asset-based. This means that to honour our faith, Muslims have to structure their finances in a way that is different from traditional mortgages, putting us at a comparative disadvantage in acquiring homes.
While my company, Manzil, now offers mortgages compliant with Islamic law, there are still barriers to overcome. Mortgage products are put together in such a way that first-time homebuyers are not eligible for existing government tax benefits.
The two most common structures used for home financing in the Islamic banking world are murabaha, or cost-plus, which is an asset-based transaction; and musharaka, or partnership, which is an asset-backed transaction.
Unlike a conventional mortgage, an Islamic banking institution would acquire a home for, say, $500,000 and mutually agree with the Muslim homebuyer to sell it back for $731,772 (while still providing a $100,000 down payment). There would be monthly payments of $2,439.24 for 25 years, equal to an embedded profit rate of 5.49 per cent.
The key difference here, compared to the conventional mortgage, is acquiring the asset while creating a trade-based financing mechanism that does not require the bank to lend money, which is impermissible in Islam. A major benefit to Muslims and non-Muslims alike is that, just like in the United States and Europe, you can have a fixed payment mortgage for up to 25 years.
This cost-plus transaction leads to a few tax issues, including potential major issues such as facing double land transfer tax (DLTT) on the back-to-back sale of the property, capital gains tax on the higher second sale value and HST on profit revenues, as they are not tax-exempt like interest revenues. To counter these challenges, Manzil has introduced a Special Purpose Vehicle, which creates a commercial entity that allows us to conduct these transactions in a manner that doesn’t result in extra tax – hence making our product more competitive financially.
There still remain a few minor tax obstacles: For example, first-time Muslim homebuyers would not currently be able to benefit from rebates on land-transfer tax, which for an Ontario resident can be worth up to $4,000; for those living in Toronto, an additional $4,475 can be claimed. Similarly, HST rebates of up to $24,000 provincially and an additional $6,000 federally are also at stake.
In 2003, Britain abolished the double stamp duty tax (our equivalent of the DLTT) on halal mortgages, paving the way for these transactions to be on a level playing field as their conventional counterparts. Canada needs to follow this precedent set in another Commonwealth jurisdiction.
If the federal and provincial governments were to make simple reforms – whether through statutory or regulatory changes, or both – to allow first-time Muslim homebuyers to access rebates on the land-transfer tax and HST tax credits when using an Islamic mortgage product, the beneficial ripple effects would be significant.
Every first-time Muslim homebuyer we are able to get into a new home will open up rental housing stock, creating a positive feedback loop. Helping this demographic enter the property market and get on that housing ladder is critical to the promise of Canada, intergenerational wealth creation and an increased sense of belonging and inclusion.
The timing is crucial: In a recent report published by Urbanation.ca, rental rates are at an all-time high, with vacancy rates continually dropping – making it more challenging than ever to access units. Studios and one-bedroom units recorded 25-per-cent and 19-per-cent annual rent growth rates in the second quarter of 2022.
The good news for decision makers is there are already similar religious exemptions for other faith communities, such as the Amish or other Anabaptist groups who do not hold property individually, to access tax benefits such as the Canada Child Benefit – a significantly more complicated workaround than would be required to allow Muslims to access first-time homebuyers’ benefits.
As the federal government embarks on its strategy to support homeownership, and the Ontario government pursues its own goals around home building, changes to empower Muslims should be at the top of the agenda.