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Canada’s housing market is bonkers. February marked another record month for sales and prices. The cost of a home is surging across the country. The average national sales price, according to the Canadian Real Estate Association, is up 25 per cent from a year ago.

During the previous housing market wildfire, in 2016 and 2017, governments took several steps to cool the unbridled free-for-all. But one tool was never used or even considered: taxing capital gains on the sale of principal residences.

Canada has a Rocky Mountains-high list of tax breaks. The Department of Finance enumerates them in its annual Report on Federal Tax Expenditures. Some are small ($130-million in deducted moving expenses for a new job, benefiting about 100,000 people a year), and some are bigger ($3.6-billion of untaxed private health and dental plans, a break enjoyed by some 13 million Canadians).

One especially generous line item stands out: the non-taxation of capital gains on the sale of principal residences. It will save sellers an estimated $7.1-billion this year.

Ottawa taxes capital gains on investments such as stocks and real estate – but it steadfastly refuses to touch gains on principal residences. Why? The answer is a decision made a half-century ago, by politicians who feared voters’ wrath. Then, as now, taxing the profit on the sale of a person’s home was not a winning idea.

Back in the 1960s, as the country created social programs such as medicare and the Canada Pension Plan, tax reform was also on agenda. A decade-long debate has defined Canada’s tax system ever since. In 1966, the Royal Commission on Taxation published a 2,600-page tome.

Among its proposals? A capital gains tax on the sale of principal residences.

There was a big asterisk: a proposed $25,000 exemption – back then, a reasonable price for a house – so “few home owners would be concerned with a potential tax liability.” Three years later, when Ottawa put out a tax-reform white paper, taxing the sale of homes, with exemptions, was still in play.

Tax reform became reality in 1971, and a capital gains tax on investments was a centerpiece. But the Liberal government dropped the whole idea of taxing principal residences. As finance minister E.J. Benson told the House of Commons, “many taxpayers feared that their homes might still be subject to taxation.” The government chose to “eliminate this concern.”

The issue remains understandably close to Canadians’ hearts, and wallets. Two-thirds of Canadian households own their home. It is usually their most valuable asset. Last summer, after the Canada Mortgage and Housing Corp. provided funding for a housing study that included a peek at taxation, outrage ensued.

No one likes taxes. But this unique hole in the tax code is big, and it encourages Canadians to sink ever more money into real estate. Since 2000, home prices in Canada’s big cities are up 270 per cent. A $300,000 home has become a $1.1-million home.

Sometimes it feels like current rules, such as this tax break, are the way things have always been, and must always be. But for decades, there were no taxes on capital gains on stocks, and then in 1971 there were, at an inclusion rate of 50 per cent – meaning tax applied to only half the gain. By 1990, Brian Mulroney had increased that to 75 per cent, and Jean Chrétien cut it back to 50 per cent in 2000.

Today, the housing tax break is one whose biggest benefits flow to those with the deepest pockets. A $200,000 gain on the sale of a $300,000 home is tax free, but so is a $10-million windfall on the sale of a $15-million home.

In the United States, gains on a principal residence are taxed – with an exemption of up to US$500,000. It’s a tax break, but with limits – echoing Canada’s long-ago idea.

The likelihood of action on this issue is? Low. Canadians have a lot of money tied up in their homes, and politicians fear that so much as mentioning the idea would be like pressing the career self-destruction button.

But the measure of a thing isn’t its popularity. Canada had the right idea a half-century ago. It’s time to consider taxing capital gains on the sale of principal residences, with an exemption large enough to spare the average homeowner. That idea started life as classically Canadian middle ground. It could be again.

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