Will the Sale of Your Principal Residence Be Taxed?

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As many of us know, Canada is holding a snap election on September 20, called by Prime Minister Trudeau in hopes of capitalizing on a relative lull between pandemic waves and securing a parliamentary majority. One of the central non-pandemic issues has become housing affordability, which has seen sharp price growth over the past year.

Today, prospective homebuyers find themselves in a state of complete frustration. The main sources of that frustration come down to an insufficient number of listings, sky-high prices, and demand that's been driven to excessive levels.

Many first-time buyers are struggling to come up with a down payment, secure (or maintain) stable income to keep up with their payments, and, most importantly, qualify to buy a home that fits not just their needs but their wants as well. This is clearly a top-of-mind issue for voters, and politicians are focusing on how to make the dream of homeownership more achievable. Below, we've laid out a few key platform points from each party that may help you decide where you stand, depending on your own financial situation.

The Liberal Party continues to promote its First-Time Home Buyer Incentive (FTHBI) program. There's little change here - participants still need to come up with the minimum down payment. While the program does offer certain advantages for those trying to break into the market - since you're sharing equity in the home with the government (you're initially given an interest-free loan) - when you sell or refinance, the amount owed, based on the home's price/equity appreciation, can end up far exceeding what you'd have paid in interest on a loan. What's more, the program still requires the borrower to make the minimum down payment. Due to the program's limits, this reduces the amount a borrower can qualify for without using the FTHBI by roughly 6%.

In an effort to address the shortage of housing supply, the Liberals have proposed introducing a national tax on vacant residential properties owned by non-Canadians who don't live in the country. This measure is also meant to help make housing owned by foreigners available for rent.

In addition, as part of a platform aimed at improving housing affordability in Canada's largest cities, the Liberal Party is proposing a freeze on foreign home purchases and a ban on blind bidding.

The ban on selling property to foreign buyers would last two years. It's aimed at curbing speculation by investors living outside the country. The Conservative Party proposed a similar measure earlier, but this issue is clearly resonating strongly with voters, and the Liberals apparently felt compelled to follow suit and add it to their own list of promises.

The Liberals also plan to support the construction and renovation of affordable housing, promising to invest in 1.4 million units over the next four years. That figure includes converting empty office space into residential housing, spending on housing for Indigenous communities, and introducing a renovation tax credit for those adding extra living space to their homes.

The plan is also meant to tackle speculation through a temporary ban on quick house flipping, and to promote price transparency by banning blind bidding through a proposed Home Buyers' Bill of Rights. This measure has already drawn sharp criticism from real estate associations and home sellers. As a reminder, blind bidding is the process by which several prospective buyers submit offers on the same property without knowing how much their competitors are offering.

Other measures include introducing a tax-free savings account for first-time buyers under 40, allowing them to save $40,000 toward their first mortgage down payment with no repayment required; raising the tax credit under the First-Time Home Buyers' initiative from $5,000 to $10,000; cutting the monthly cost of insured CMHC mortgages by 25%; and introducing a tax on vacant properties.

Meanwhile, the New Democratic Party (NDP) is proposing to bring back the once-popular 30-year amortization period for insured mortgages.

Canadians with a down payment of less than 20% would gain the option to extend their amortization period from 25 to 30 years. This would let first-time buyers qualify for a mortgage amount roughly 10% higher without increasing their monthly payments.

The NDP's platform focuses on boosting supply, with the party promising to create 500,000 affordable homes over the next 10 years. They haven't left out foreign buyers either - for this category, the party is proposing a 20% tax aimed at slowing demand and meaningfully bringing prices down. As a reminder, major municipalities like the Greater Toronto Area and Vancouver already have 15-20% foreign buyer taxes in place, so extending them nationwide is unlikely to have much additional effect.

The Conservative Party, meanwhile, is putting forward the most ambitious and comprehensive plan, focusing on buyers with solid credit and stable income who nonetheless struggle to save up a 20% down payment on homes priced above $1 million. The goal is to extend mortgage insurance coverage to more expensive properties, which have already become the norm in major cities. As a reminder, under today's rules, homes priced up to $500,000 require a minimum down payment of 5%, homes priced between $500,000 and $999,999 require 10%, and properties priced above $1 million can't be insured at all, which usually means buyers have to put down 20% or more, or seek out considerably more expensive financing.

The Conservatives also want to eliminate the stress test at mortgage renewal, allowing homeowners to shop around for better rates without having to requalify for a mortgage all over again when their contract comes up for renewal. On top of that, if elected, the Conservatives want to make longer mortgage terms more widely available - 7 to 10 years, for example. This would bring somewhat greater stability for homeowners and for the sector as a whole.

The Conservative Party also plans to ban home purchases by foreign investors who don't intend to live in Canada for two years. And recognizing the severity of the housing shortage, the Conservatives are promising to build a million homes over the next three years.

Beyond these campaign promises, we're continuing to watch some concerning tax initiatives from the governing Liberal Party. Taxing income earned from the sale of a principal residence has always been something of a third rail for Canadian politicians - at least, until this campaign.

The Liberals are now starting to move in that direction, proposing an anti-flipping tax that, in their view, would help slow the rise in home prices. The tax wouldn't touch most buyers, but it would affect Canadians who sell their principal residence within a year of purchasing it.

Unlike other assets, a principal residence in Canada isn't subject to capital gains tax. That means the red-hot real estate market of recent years has generated hundreds of thousands, and in some cases millions, of dollars in tax-free profit for homeowners who bought at the right time.

The Liberal Party's proposal leaves that largely untouched. The only exception applies to homeowners who sell their property within a year of buying it. And even then, additional exemptions would apply in cases where the sale was triggered by an unforeseen life event: pregnancy, divorce, death, disability, or a change in employment status. Homeowners who do end up owing the tax would be able to deduct "legitimate investments in renovations."

The Liberals have repeatedly stressed this year that they won't be scrapping the principal residence exemption itself. Still, even a narrowly targeted tax like this one opens up that previously untouchable territory to further action by politicians down the road.

On September 20, exercising your constitutional right to choose, you'll have the opportunity to decide which party's approach best aligns with your own family's financial situation.

The team at MortgageLegko.com can't influence the price of real estate, and we're not making any campaign promises - but we can make buying a house or condo more affordable for our clients, starting today! Check out our special offer in this issue and save thousands of dollars with a mortgage at 0.99%!