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Lisa Philipps is a professor at York University's Osgoode Hall Law School, where she teaches tax law and policy.

There is no one simple strategy, no silver bullet, to make houses more affordable in some of Canada's overheated markets. The problem has multiple causes, including ultralow interest rates, low supplies of housing for rent or purchase, and speculation.

Policy makers looking for fixes have been drawn to new taxes, such as Vancouver's proposed vacancy tax and British Columbia's 15-per-cent tax premium on non-resident buyers. These are thought to target outsiders, people who don't really care to live in Canada but see investment potential in its real estate. But while taxing perceived outsiders may be a good sell politically, it overlooks a bigger problem right in our midst, which is abuse of the principal-residence exemption in the federal income tax code, by residents and non-residents alike.

The principal-residence exemption may be the best-loved feature of our country's income-tax system. It allows owner-occupied condos and houses to be sold without paying any tax on the capital gain (the difference between the sale price and the original cost of buying the residence). It's a key reason why buying a house can be a great financial investment, along with the security of tenure, social status and psychic benefits that draw many people to home ownership.

The trouble is that it also tempts some – including many full-time Canadian residents – to flip houses in search of a tax-free profit. By law, the principal-residence exemption is not meant to apply to such commercial transactions. But lax enforcement, and some unfortunate grey areas in the law, mean that many such deals are never scrutinized.

When some get away with abusing the exemption, a vicious cycle quickly sets in. Others decide to try the same thing, since it sounds better than paying taxes on the sale of stocks or other investments. As the behaviour spreads, many get the mistaken impression that all gains on housing are automatically tax-free. Others simply play the "audit lottery," gambling that the Canada Revenue Agency will never catch them. Authorities then face a daunting task to try to catch up through after-the-fact audits.

To break this cycle, the federal government needs to take some decisive, preventive action. Here are some options:

Require all housing sales to be reported on both the vendor's and the purchaser's tax returns.

The CRA's current policy is that a homeowner need not report profits on a sale if they are claiming the principal-residence exemption. This means that in questionable cases that stretch the law, there is no way to flag the return for a second look. Taxpayers need only commit a sin of omission, then sit back and wait to see whether the CRA ever calls. Simply having to disclose the sale on a tax return, with an associated penalty for failing to report, would be enough to get some to play by the rules. Requiring both parties to report would allow cross-checking, one of the most efficient means for the CRA to detect both honest errors and outright cheating.

Communicate the rules more clearly.

The criteria for the exemption are buried deep in tax legislation. The homeowner must be a resident in Canada, and the owner or their immediate family members (spouse or children) must have "ordinarily inhabited" the residence. Further, a couple and their under-18 children may have only one principal residence at a time for tax purposes. The CRA needs to explain in plain language that if housing is purchased primarily for speculative reasons rather than to house the owner or their family, the exemption likely does not apply. It should also make it clear that staying overnight a few times or leaving a few personal possessions at a house while it is on the market for resale does not qualify.

Change the law to clarify when a housing profit is a "capital gain" and when a residence is "ordinarily inhabited."

One option is to create a legal presumption that a housing unit sold within a certain period of time after purchase (say two years) is not a principal residence, unless the taxpayer can show there were bona fide reasons to sell that were unrelated to turning a profit. Taxpayers moving to be closer to work or school, or to otherwise improve their personal housing situation, would still be eligible. Another is to create a bright-line definition of "ordinarily inhabited" to require that the taxpayer or their family members stayed in the residence for at least half of each year. This would echo an existing rule that deems an individual to be a resident for tax purposes if they stay in the country for 183 days or more in a single year. Once again, an exception could be made for those with bona fide work-related or other reasons to live at some other location for more than half of a particular year.

Fixing the principal-residence rules, and how they are administered, is important for tax fairness across the country. It would also discourage speculation. The perceived ability to earn tax-free profit is one of the reasons why house flipping looks like such an attractive way to make money, drawing activity to the sector. Finally, collecting more of the income-tax revenue that is legally owing on real estate sales would help to finance other policy initiatives, such as to support the construction of more affordable housing in our urban centres.

It's not a complete response to housing inflation by any stretch, but income-tax rules are a piece of the puzzle that should be relatively easy to solve, without the need to vilify foreign capital or immigrant investors.