It is important for policy-makers to understand the unintended economic consequences of the property-transfer tax before they hike or broaden it.
By Benjamin Dachis
The B.C. government, among others, is taking a close look at the province’s property transfer tax. But broadening or raising the transfer tax will have harmful economic consequences for current homeowners. The province should instead look to replace the property-transfer tax with less harmful taxes.
Many provinces and municipalities across Canada levy property or land-transfer taxes. The buyer pays a tax proportional to the value of the purchase. British Columbia has a progressive rate on transaction values. Buyers pay 1 per cent on the first $200,000, and then 2 per cent on the rest of the value.
Many people think that transfer taxes also curb housing speculation. But there is international evidence that transfer taxes are ineffective at curbing speculation and house price volatility. Federally led policies on mortgage insurance, for example, are more effective ways at addressing housing market stability.
Before the province of B.C. looks to change the transfer tax, it should look at the economic effect these taxes have. In particular, it should look at what happened to the Toronto market when the city introduced a new transfer tax in 2008.
Toronto’s transfer tax is tied for the highest top statutory rate in North America. There, the top provincial and municipal combined marginal rate is 4 per cent of the value of the sale.
After disentangling the effect of the transfer tax from underlying market trends, the evidence shows that Toronto’s transfer tax caused a 16-per-cent decrease in the number of single-family home sales and an approximately 1.5-per-cent reduction in the average sale price of a Toronto home.
While the transfer tax is nominally paid by the purchaser, the economic harm of the tax is on people selling houses. While it is the buyer who writes the cheque, it is the current homeowners who are poorer.
These economic results on regular home buyers are likely to apply to B.C. just as much as Toronto.
What is different about the transfer tax in B.C. is that it currently does not apply when corporations transfer property. There is some evidence that home buyers are creating corporations with the sole purpose of transferring the property. That makes the sale exempt from the B.C. transfer tax.
In contrast, the Ontario and Toronto transfer tax applies to the value of any transfer of property from one party to another.
But levying the transfer tax on sales by corporations will have unintended consequences. The Ontario transfer tax affects corporate mergers and acquisitions. That makes regular and legitimate commercial transactions more costly, hurting businesses. A further complication is that, in such transactions, there is no market transaction of the transferred properties. That means there is no clear asset value on which to assess the tax. The result is more sand in the gears of businesses.
The core issue in B.C., especially Vancouver, is making more housing affordable for the average resident. The province should be asking whether the transfer tax is the best way to address the situation.
The long-term solution to dealing with the high cost of housing is to make it possible for more apartments and houses to be built. The transfer tax doesn’t address that.
Instead of a property transfer tax, a better way for governments to collect money from property is the old standby of annual residential property-value taxes. Government revenue from annual residential-property taxes is far less volatile than transfer taxes. And property taxes don’t have the same negative effect on mobility. Residential property taxes are also much more difficult to avoid than transfer taxes through creating corporations or trusts.
It is important for policy-makers to understand the unintended economic consequences of the property-transfer tax before they hike or broaden it.
Benjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute and the author of “Stuck in Place: The Effect of Land Transfer Taxes on Housing Transactions
Published in the Globe and Mail on October 16, 2015
