A single family home for sale in Burnaby, B.C. As of 2021, the home ownership rate was higher among Canadians aged 75 to 84 than among people in their 40s.Jennifer Gauthier/The Globe and Mail
Young families need homes large enough to raise children. Seniors, on the other hand, often live in homes with more bedrooms than occupants, leaving an estimated 12 million bedrooms empty across the country.
Despite this mismatch, Canada’s tax system disincentivizes seniors from downsizing. Australia, however, has successfully addressed this issue by eliminating the tax barriers that prevent seniors from selling, offering a potential roadmap for Canadian policy-makers.
The expectation in Canada has been that seniors would downsize their homes to something smaller and more affordable, then use the proceeds from the sale to fund their retirement. This would then free up homes for the next generations of families.
These “generational turnover” assumptions are vitally important, since they are used in municipal official plans to determine zoning rules and the amount of land to be opened up for development.
But generational turnover is not happening at the scale policy-makers anticipated, at least not for seniors under the age of 85. As of 2021, the home ownership rate was higher among people aged 75 to 84 than among people in their 40s, so they are not downsizing into rentals. And they’re largely not downsizing into smaller housing types, as 70 per cent of homeowners in both groups live in single-detached homes.
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There are many reasons a senior might choose not to downsize, but one of the most common is that the math simply does not work. While it is true that the new, smaller home will have a lower price or rent, there are substantial expenses and hassles to moving, such as land-transfer taxes and realtor fees, which reduce the potential gains.
After those expenses, the senior would invest any remaining money in an asset class such as stocks or bonds, with the dividends and capital gains being subject to capital gains tax.
With products such as reverse mortgages, seniors have options to unlock the equity in their home if they need it. Any risk that high property taxes might force a senior out is mitigated by programs that allow seniors to defer property tax payments.
Governments have created an environment where staying put is the economic choice for older Canadians, leaving young families locked out of the market.
If a senior doesn’t need to sell their home to fund their retirement or for lifestyle reasons, and gets penalized by the tax system for selling, they will not sell, at least not while the tax imbalance stays in place.
The most straightforward way to create tax parity between owning a home and owning a bond is to treat primary residences as any other investment and subject them to capital gains taxation.
But the mere suggestion of the idea is a political third rail in Canada. No political party is willing to take it on, and voters are likely to punish any party that even muses about the idea.
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Australia, a country facing similar challenges to Canada, took a different approach in 2018. Instead of increasing taxes on homeownership, they created the Downsizer Superannuation Contribution system, which allows eligible home sellers to reinvest part of the proceeds into a retirement-savings vehicle.
The capital gains on investments in a superannuation fund are tax-free after retirement, making it tax-competitive with owning a primary residence.
There are several restrictions on the program to prevent abuse: The person selling the home must be 55 or older, it must be a primary residence they have lived in for 10 years or more, and it can be used only once in a lifetime. Despite these limitations, more than 15,000 people use the program each year, transferring more than 4-billion Australian dollars in wealth from home sales into retirement savings.
Critics of the program argue that it makes the tax system even more favourable toward older, higher-wealth Australians while young middle-class people continue to struggle. Those criticisms are valid, though they must be weighed against the benefits of freeing up millions of empty bedrooms.
We cannot reasonably expect seniors to downsize when the tax implications are so unfavourable. If taxing capital gains on primary residences is off the table, then policy-makers either need to consider an Australia-like system, or accept that seniors will not downsize and that we will have to instead find other ways to create homes large enough for a young family with children.
Mike Moffatt is the founding director of the Missing Middle Initiative and co-host of the Missing Middle podcast.