GST, land-transfer tax out of kilter with rising house prices

Despite the pending cut in GST, a new study argues that Canadians could soon be effectively paying two-thirds more tax on a home than 16 years ago. They are also paying more land transfer taxes while getting less from their registered retirement savings plans to cover down payments as a percentage of home prices.

Although these aren't the primary factors driving housing prices up, tax-related issues are an increasing challenge to purchasers across the country.

"When you add taxes on top of the market forces, then you just make it all the more difficult for people who are stretched financially," Will Dunning, a Toronto-based housing-market analyst, told the Georgia Straight.

Dunning is also the chief economist for the Canadian Association of Accredited Mortgage Professionals. This month, the national organization representing members of the mortgage industry released a study prepared by Dunning addressing these issues. The Perils of Non-Indexation: Three Tax Issues Affecting Canadian Housing Markets focuses on the need to adjust tax thresholds to reflect changes in the market.

Previously at seven percent before the federal Conservatives came to power in 2006, the goods and services tax is applied to the cost of a new home. Effective January 1, 2008, the GST will be cut to five percent from the current six percent.

Buyers of new homes are entitled to a rebate of 36 percent of the GST paid, but there are limits. According to Dunning's paper, the full rebate is for homes priced up to $350,000. The refund decreases for homes priced between $350,000 and $450,000, and there are no rebates for homes priced at $450,000 or more.

The study noted that when the GST was introduced in 1991, the federal government promised to review these thresholds every two years, but no such action has been taken so far, even though average new home prices have increased by 96 percent.

Citing data from the Canada Mortgage and Housing Corporation, Dunning's paper stated that 91 percent of new single-detached and semi-detached homes were priced below $350,000 in 1991, and buyers of these houses were therefore entitled to the full GST rebate. In 2007, just 52 percent of new homes are covered by the full refund.

"Even with the recent announcement of a reduction in the GST rate to five percent, the effective amount of GST per dwelling unit that might be payable in the near future will be 67 percent higher than in 1991," the paper stated.

In a phone interview from his home office, Dunning said that the applicable threshold should be updated to reflect price increases, and indexed annually.

Dunning also recommended changes to the withdrawal limit for the Home Buyers' Plan. Introduced in 1992, the plan allows first-time buyers to withdraw up to $20,000 from their registered retirement savings plans for use as a down payment.

"The maximum amounts for HBP withdrawals have not increased since 1992," the study stated. "However, house prices have more than doubled in the [past] 15 years, with the average resale price for Canada rising by 104 percent."

He recommended in his study that for 2007, the withdrawal limit should be about $28,500. Like in the case for GST thresholds, Dunning suggested that RRSP withdrawal limits be updated annually.

Home buyers are also burdened by land-transfer tax rates whose thresholds have not been revised for at least 15 years to reflect increases in the New House Price Index. According to Dunning's paper, the land-transfer tax schedule in B.C. is one percent on the first $200,000, and two percent above $200,000.

"The amount of LTT payable on an average priced home has increased by 179%, versus the 98% house price increase," the study said. "At $6,718 for an average priced home (1.54% of value), the British Columbia LTT has become a substantial burden for home buyers."

In his interview with the Straight, Dunning warned that housing affordability will get worse without appropriate action from the federal and provincial governments. He also said that when the Canadian real-estate market starts to weaken, these same tax issues will contribute to a slowdown in the industry as the number of buyers decreases but continues to be burdened by the same issues.