Arnold Shuchat PREC Real Estate Blog


Affordable Housing for Canadians: Mortgage Interest Deductibility

First published in my May 22, 2015 blogpost, I haven't given up on this concept.  The 4th suggestion (I added it a little after the original post) had to do with allowing some portion of resident Canadians' mortgage interest payment to be tax deductible. 

Thinking about this a little bit more, and weighing all of the options, I think this No 4 option has some political potential of being more acceptable that some of the others.  This is why:

1. It doesn't overtly target foreign investors and give the appearance of Canada "closing" its borders to investment as might some of the others. 
2. It focusses on increasing affordability for Canadians who have Canadian earned income and hence by implication pay taxes here.  Therefore it is self screening in nature. Foreigners would not likely benefit as they do not often pay income tax here and hence could not deduct interest expenses against their income.
3. It could assist in domestic residential debt management policy by restricting the deduction of interest on mortgage values not in excess of a certain percentage of the property's assessed value. Therefore, if the limit was set at loan to value ratios of 65%, any interest payments above that amount would not be deductible.  It would motivate Canadians to better manage their debt as compared to what happened in the US where because all of the mortgage interest was tax deductible, people loaded up on debt and had very little equity in their homes. This abetted the housing crisis there.
4. On a hypothetical $,1000,000 mortgage (and I am using this number just as an example) at 3% interest the annual interest expense in the first year would be around $19,440 and at around a 40% marginal tax bracket that would yield savings of some $7800 per year, or the equivalent discount equal to the taxpayer's marginal tax rate.

Although this would increase affordability dramatically, it would nevertheless still increase domestic competition and put upward pressure on residential home prices.  But at least more Canadians could afford to enter the market and we would be better able to compete for product.

5. No additional enforcement procedures or players need to get involved to manage the process.  It is simply an additional form on a taxpayer's income tax return.

6. The proposal can even provide for an offset to the RRSP annual deduction so that while the total deductions between RRSPs and home ownership interest deductability might be the same, at least the taxpayer can elect where to put his own money.  This even aligns with the current government's vision of allowing Canadians to manage their own fiinancial affairs as opposed to having it done by a government.

From an administrative workability, jurisdictional and policy standpoints, the above recommendation would be the easiest for the Federal government to undertake on its own and would not need the acquiesence of the provinces or the municipalities.

To clarify though, I am not suggesting the abandonment of the other approaches, especially the enforement and restriction of the principal residence exemption to only Candadian resident taxpayers.  It is just that this is the simplest to implement and can be done quickly by the government to respond to Canadians' housing concerns.  It is a great first solution to show that they are listening.

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