The Case for Fixing the Unprincipled Residence Tax Exemption

When Canada overhauled its income tax to include capital gains in 1972, lawmakers suddenly had to decide how to deal with personal home sales. After heated debate, they opted to exclude the gains on an individual’s principal residence on the grounds that the core purpose of a home is to provide “basic shelter” for its owner-occupants. The principal residence tax exemption has since become one of Canada’s biggest tax shelters and now amounts to one of Canada’s largest tax subsidies to individuals. Along the way, it has created economic distortions, administrative challenges, and inequitable distributive outcomes. While lawmakers have occasionally considered how to curtail the misuse of the exemption, none have been brave enough to consider a path to unsheltering such gains, even in part. In this article, we examine why Canada continues to over-subsidize home ownership through the tax system, assess the merits of that choice using tax policy criteria, and examine the alternatives that might be available to achieve the ostensible objectives.