You’re no longer middle-class if you own a cottage or investment property

Some in cottage country have been singing the blues since Ottawa proposed changes to capital gains taxation as part of the recent federal budget. Their tears reveal they don’t yet recognize how class dynamics have changed as a result of the damage done to our housing system.

Owning a cottage or investment property is no longer a middle-class reality. It’s a sign of affluence in a country where rent and home ownership are so much more expensive for younger residents today than when baby boomers were young.

More, not less, taxation of second properties is required to protect younger Canadians in the housing market, fill the revenue hole left by governments that did not plan adequately for boomers’ retirement, and spur productivity.

I genuinely sympathize when people struggle to ensure that a cherished cottage remains in the family, and I appreciate that taxation plays a role in complicating their planning.

But anyone struggling with that challenge has to sympathize even more with the many hard-working younger folks and newcomers who struggle to afford rent, let alone home ownership of any kind.

Paying taxes on a half-million-dollar capital gain from a cottage or an investment property is a good problem to have. I could line up millions of younger Canadians who would jump at the opportunity to trade their housing woes for that privilege.

Plus, mom-and-pop investors have been harming housing affordability. They contribute to bidding-up average home prices, and they’re implicated in rising rents charged to younger folks increasingly locked out of home ownership. Purpose-built rental construction is a more efficient way to scale up the supply of rental units.

Social Capital Partners, a non-profit focused on broadening access to ownership, rightly calls out this problem, lamenting the role that domestic, small-scale investors have played in crowding-out first-time buyers. They remind us that mom-and-pop investors in residential real estate now outnumber corporate and foreign investors combined.

Canada could “make upward of a million [homes] available over the next decade” for aspiring owners, SCP observes, if we reduce the activity of investors in the housing system to levels that resemble their share of purchases 10 years ago – “all with no additional shovels.”

To advance this goal, they recommend “taxing capital gains on investment property at the same rate as income.” In other words, they propose 100 per cent of capital gains earned from properties other than principal residences should be subject to income taxation – not just the 50 to 66 per cent required by the 2024 budget.

I like this recommendation for three reasons.

First, it’s hard for younger Canadians to compete with mom-and-pop investors in the housing market. Whereas young folks only bring their earnings to bid on a home, investors can also tap into profits they’ve gained from their housing assets. Since those profits are sheltered from taxation by comparison with labour earnings, the SCP proposal would reduce the tax advantage that helps investors outbid first-time buyers.

Second, mom-and-pop investors tend to be older, which means they are especially likely to be in the generations for which federal and provincial spending is growing most rapidly in government budgets. The SCP proposal would raise additional revenue disproportionately from affluent members of the generations that are benefitting from new spending that is driving government deficits.

Third, the SCP tax change would stimulate productivity. Real estate, rental and leasing have represented the largest share of Canada’s GDP for years, but relatively little employment. This pattern is a root cause of the nations’ poor performance when it comes to economic growth per capita.

When Canadians use their investments to bid up the price of existing homes (which is the vast majority of what is on sale), the investments do relatively little to increase productivity. Instead, they seek wealth windfalls at the expense of inflating the major cost of living for those who are not yet home owners.

By discouraging speculation in housing that is not purpose-built rental, the SCP proposal would incentivize investment in manufacturing, the green economy and other industries that have a better track record at improving productivity than investment in most real estate.

We may lament that owning a second property is no longer a marker of the middle-class. But we need Ottawa to recalibrate the tax code for the present, not the past. Further taxation of second properties and mom-and-pop investors is necessary to promote fairness for every generation.

Dr. Paul Kershaw is a policy professor at UBC and founder of Generation Squeeze, Canada’s leading voice for generational fairness. You can follow Gen Squeeze on X, Facebook and subscribe to Paul’s Hard Truths podcast.