Finance Committee on Nov. 14th, 2023

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Livingstone.

Witnesses and members, before we get into questions, I will note that we started a little late, and then we did have some technical difficulties and some interruptions, so we'll add on another 10 minutes to our time. This first panel will go to 10:40. We have one hour right now for questions.

With that, we'll start the first round. Each party will have up to six minutes to ask questions of the witnesses.

We are starting with MP Chambers for the first six minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

I appreciate everybody attending, in addition to those who made individual deputations at the beginning. Thank you very much.

I know that some of you have made formal submissions and have made submissions in previous years, which I know we consider, so thank you very much.

Mr. Butler, I want to follow up with you, but I want to give everyone else a fair shot here.

I'm going to spend a couple of minutes with Mr. Butler and then I'm going to ask if anyone else has recommendations that don't cost any money. I'd like a couple of ideas. You can put up your hand, and I'll go to you.

Mr. Butler, you mentioned using borrowed money to purchase an investment property—a rental property, as an example. Would you differentiate between retail investor money that's paying to build or fund new construction versus investor retail money that is purchasing existing stock? Or would you just say, look, it's a simple rule—just freeze it for everybody?

[Ron Butler]

Reasonably, it's freeze it for everybody. The bottom line is that it's overly leveraged money. You have 20% or 25% that's coming from another residence, so that's borrowed and mortgage interest is being paid on it. Then you have another 75% or 80% mortgage on the rental property you're purchasing or [Technical difficulty—Editor].

[The Chair, Liberal, Peter Fonseca]

We'll suspend again, please. I apologize.

Okay. We're back up.

[Ron Butler]

Whether it's new construction or an existing property, 100% financing of a rental purchase is essentially unreasonable. You're borrowing money that you're paying mortgage interest on and making payments on for the down payment, and then you're also getting a mortgage on the property itself. It's 100% financing.

In the United States, they've effectively banned this practice. You can't do it in the United States. It's not acceptable in their banking laws, both federally and by state. It really makes no sense that we would allow it to happen in Canada, and there are very easy mechanisms to stop it from happening.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

You mentioned that they stopped doing this in the United States. What actually happened in the market in the U.S. after they banned it in terms of investors getting together? What happened to the types of homes that were built and the professionalization of the rental market?

[Ron Butler]

The rental market changed into one in which groups of investors formed companies and built small townhouse units, effectively, small townhouse groupings, and also low-rise five-storey and six-storey buildings for multi-families. It was professionally run.

Here's another terrible thing about what we do in Canada. These are individually owned. These units purchased at 100% are owned by families and individuals. When their situation changes and they no longer want to own that property, they have to evict the tenant or they have to sell it. It creates this ongoing mobility among renters, who are constantly being thrown out of their places.

[Adam Chambers, Conservative, Simcoe North, ON]

I have a last question before I open it up to the panel. You spend a lot of time in the mortgage market. I see a lot of people on social media saying that interest rates are going to come down in the spring. What do you think is going to happen? What do you think Canadians should be planning for?

[Ron Butler]

We experienced it last year or earlier this year, I should say, when interest rates dropped from the fives and sixes into the fours, and there was a sudden burst of activity in the housing market. Purchases started happening.

It's going to be a little different this time. If you read the economic tea leaves and if this really is a recession that we're entering into in a meaningful way, people won't be quite as eager once mortgage rates drop if they're concerned about the future of their employment. We may not see as big a burst of activity, but we may get one.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Are there any recommendations on regulations or additional things the government could do at the moment that don't cost any money?

[Paul Cheliak]

I would pick up on the interest deductibility issue. The utility industry, gas and electric, has in the tens of billions of dollars of debt that it uses to finance wires, pipelines, transformers, etc. The carrying cost on that debt, the interest, is what's being proposed to be remitted federally. We're suggesting that this not happen.

It's an element of the money either going to the federal treasury or staying with consumers. I would argue that's a saving for consumers because they don't have to pay it to the federal treasury. Therefore, the treasury doesn't have it to spend. It's probably a net-neutral, but the point is, why do we pay it if it's going to go into the coffer and then be allocated out?

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Mr. Polito, I'm quite interested in some of the suggestions you're making.

Here is one of the challenges I have. When we talk about a land value tax, in many municipalities, certainly outside of Toronto, a million-dollar home gets you a tax bill of at least $10,000, and sometimes even $15,000. A lot of people would say that they already pay tax on the value of their property every year with property tax. It's Toronto, actually, that has a problem, where that million-dollar home only gets you a property tax bill of $6,500.

In 20 or 30 seconds, could you—

[The Chair, Liberal, Peter Fonseca]

Give a short answer, please.

[Joseph Polito]

The concept is that you are taxing the land so it would be used for the best value. If I have a parking lot in Toronto, I'm being taxed for the lot. The same-sized lot beside me, with a great building and lots of residences, is being charged a much higher rate.

What Smith was suggesting was that you tax the lot, not the improvement. Milton Friedman said the exact same thing. The best tax, he said, was.... The “least bad tax”—those were his actual words—was a land value tax, for that reason. It encouraged construction. The current system discourages it.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you for clarifying.

[The Chair, Liberal, Peter Fonseca]

That's the time.

Thank you, MP Chambers.

Now I'll go to MP Baker, please, for six minutes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Joe, you can stay right there. Nice try.

I want to follow up on the.... There are a number of recommendations you've made.

First of all, your first recommendation touches on partnering with provinces to build campus residences on land owned by post-secondary institutions. I think that's pretty clear. You also recommend that the government partner with the provinces and municipalities to build residences on their land. That recommendation is fairly clear.

I'd like to come back to the land value tax. Before we talk about the reasons you recommend this, just so we're all on the same page, how would a land value tax work? How would it be determined who pays it?

[Joseph Polito]

It's been done in the past in Vancouver. It was very successful in Vienna. Professor Condon has a book on it, and I've done many presentations on this. He's going all the way back to Adam Smith. When you tax the land of a landowner, the landowner is already charging what the market will bear, so he or she can't pass it on to the homeowner or the renter. Therefore, all the tax is being paid by the owner.

The result is that it is now not in that person's interest to own land to gain value in the land. They're going to have a very viable business renting property to people who want and need a residence, and they'll get a fair return on that business but will no longer get the land appreciation. My parents bought a place for a dollar a square foot, and today it sells for $500 a square foot for the land. That will stop that appreciation.

Obviously, we can't collapse the housing market. People have a lot of money invested, but this would allow you to freeze it going forward. In terms of buying new land and so forth, you wouldn't have what happened with the release of the protected land. All of a sudden, that land went way up in value because it was now going to be available to the public to buy, and the developer would be able to really increase the margin for that land. The price of land would stay the same.

In the example that we discussed—Mr. Baker is my MP—he mentioned that, in Etobicoke, the municipality leases the land around the Kipling subway station to a developer, and there are affordable housing provisions, so that land is never going to go up in value. The rent will be very reasonable from now on, and it will start out reasonable.

That's how it works. It keeps the price of land down; therefore, it keeps the cost of housing down, and that money can be used for more productive purposes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Let's talk about someone who owns a piece of land, a private owner. What I hear you saying is that, if we're taxing the value of the land, then there's a strong incentive for the developer—let's call them “the owner”—to develop the land, I guess, for two reasons. Tell me if this is right. First, as the value of the “developed” property goes up, they're still paying tax on the land, the land value. Am I right?

[Joseph Polito]

Yes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Okay. The taxes aren't climbing as quickly, so there's a greater margin for them. Then, second, because of that margin, that potential profit, their incentive is to develop.

[Joseph Polito]

Right. They're not going to be taxed on all that productive revenue-generating building. They'll just be taxed on the land.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I don't know if this is where MP Chambers was going, but I just want to make sure we're clear. What happens from a government revenue perspective? What would the impact of that be on municipal governments' revenues?

[Joseph Polito]

In the past, it was done as revenue-neutral. I think in Pittsburgh it worked very successfully for a long time. Eventually, vested interests tweaked it so it didn't work as well, but the revenue stayed fine, construction increased and homeowner costs stayed very low. That was in Pittsburgh.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

If folks are paying property taxes under the current system on the assessed value of the land and buildings.... That's how property tax is determined. It's the market value.