Finance Committee on March 28th, 2022

[The Chair, Liberal, Peter Fonseca]

Thank you.

We're moving to the NDP and Mr. Blaikie for six minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

I wanted to start with Ms. Lunney. Correct me if I'm wrong, but I believe you mentioned real estate investment trusts in your opening statement. I was wondering if you have some recommendations for the committee in terms of concrete policy suggestions that we might consider.

[Sarah Lunney]

At ACORN, we have been advocating for the income tax loophole to be closed for real estate investment trusts, so that they're taxed appropriately. That's what I mentioned today within my first five minutes of discussion, and that's what we're still hoping for.

We're hoping to see that income tax loophole closed so that it disincentivizes—as Ms. Keesmaat has been saying—that type of investment in housing and the financialization of it. It's a tactic that REITs are able to mobilize by renovicting and evicting tenants out of their buildings, which is contributing to the housing crisis and the lack of affordability.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Just for members of the committee, would you mind explaining how that loophole works or what particularly we might look at changing in order to close it?

[Sarah Lunney]

Yes, sure.

Unlike other income trusts in Canada, REITs enjoy preferential tax treatment provided by the Income Tax Act that exempts them from paying any tax at the corporate level or at the entity level. Recognizing a loss in tax money due to the way that income trusts were taxed at the time, in 2006 the Minister of Finance announced specified investment flow-through trusts—SIFTs—and rules introducing those at the entity tax level on publicly traded income trusts and partnerships.

However, when these rules were introduced, they provided an exemption for REITs by mentioning that a specified investment flow-through trust—a SIFT—is one, other than real estate investment trusts for a tax year, that can be included. That's basically how real estate investment trusts are able to get around the tax loophole.

If you have any other questions and want more detail, ACORN is happy to provide the research we have done on REITs with the Canadians for Tax Fairness. We can submit that to you.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Right on. Thank you very much.

Ms. Keesmaat, on a similar topic, I wonder if you could elaborate for the committee on your proposal around capital gains. Is it the idea that the capital gains inclusion rate would be 100% for all properties, or would it exclude the lifetime exclusion on capital gains for principal residences?

Could you give us a little more detail on your proposal around changing the capital gains inclusion rate?

[Jennifer Keesmaat]

The intent of the policy recommendation is not to solve everything, but to solve this problem that has emerged, which is an investor class that is not currently disincentivized through taxation. I would recommend excluding principal residences for that reason, because they are our homes, as opposed to homes that have been acquired for the purposes of generating revenue.

The specifics of how that taxation takes place is not something that I've gone into detail.... What I wanted to highlight is that, currently, there is a tax incentive to be an owner of investor units and housing that could be mitigated through creating more tax fairness. That tax fairness would involve taxing the capital gains on investor units.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

Mr. MacBeth, I wanted to circle back to you as well. You talked about how housing prices aren't included in the CPI.

It seems to me we're in a curious situation in which the CPI doesn't provide much of an early warning system for problems in housing affordability. As house prices come down, we might actually see an increase in inflation, according to the CPI, as the monthly cost of maintaining a home goes up with higher interest rates.

Is that a possible outcome, or have I misunderstood your testimony?

[Hilliard MacBeth]

I didn't mention the decline in house prices as much as the interest rate on mortgages. The mortgage interest is the biggest component of the monthly payment for most people, depending on the amount of down payment they have, but let's assume it's a first-time buyer with the minimum down payment.

Interest rates are already rising, by the way. Interest rates have gone up a lot. As we're speaking here today, I was looking at the markets and there's quite a change. That's going to feature into the CPI and that's going to push the shelter component measurement of CPI—which is the largest in the CPI, at 31%—higher. For a long time it's been too low, because the mortgage rates were low and going lower. They got under 2%. I've heard people bragging that they got a mortgage at one and a half per cent. It's unbelievable. That made inflation look small. At the same time, house prices were rising, but they didn't get reflected in the CPI.

Now, in a perverse way, the Bank of Canada's going to be raising rates in order to get inflation under control. The act of raising rates is actually going to have the effect of increasing CPI. It's going to look—initially, anyway—like they're not succeeding in getting inflation under control by raising rates, because it's going to push the actual number higher.

A lot of countries in the world use this method for CPI measurement and housing costs. There are some advantages, but there are, in certain circumstances, some big disadvantages to using the monthly payment system. We're going to see the worst of it here in the next little while.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Blaikie. That is the end of our first round.

We're moving into our second round, members. We're starting with the Conservatives, with Mr. Albas, for five minutes.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair, and thank you, all of the witnesses, for coming to committee today.

I'm going to focus on the Canadian Real Estate Association. Mr. Bourque, have you ever witnessed a real estate market in a situation like we see today?

[Michael Bourque]

We haven't, but Shaun could probably tell you what those numbers look like. On the supply side, we've not seen such a poor supply response, considering demographic change and population growth. He can quantify that for you.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

That's fine, Mr. Bourque. I'll continue.

How do you think the real estate market will evolve in the short term if no additional measures are introduced by government?

[Michael Bourque]

Well, as I said, I think we're going to continue to see housing inflation unless we do something very different from what we've been doing. You've heard from people today representing interests and Canadians across the housing spectrum. We all have the same concern, which is that there are not enough housing units for people at the entry level, where there is the most dire need. There's a lack of housing.

In typical market housing, we don't have enough supply to satisfy demand. The reason is very simple. It is that the new supply has been choked off at the municipal level across the country with independent decision-makers, because of Nimbyism and a belief that more taxes need to be raised in order to build. They've constrained the market to the point that it has created a national crisis in housing.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Mr. Bourque, I'd like to focus on the federal side right now. In previous elections, Conservatives have put forward the idea of making 15% of federally owned properties available for the development of market and social housing.

Do you believe that would be helpful to increase the supply of land, particularly in many of the markets where the federal government has a huge footprint?

[Michael Bourque]

There's no doubt. I think there's been a great deal of inertia with independent departments and agencies owning property but not seeing the housing crisis as their problem. They are reluctant to let go of their surplus land, even if they're not using it. Often that land—the waterfront in Toronto, for example—has been sitting there empty or underused for a very long time.

That would undoubtedly help.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

You're supportive of that, then. That's great.

We've also run in previous elections on the need to make housing clauses in infrastructure bilateral agreements, so that there would be a density requirement. Are you in favour of that?

[Michael Bourque]

I'm a very strong supporter of that initiative. If the federal government, for example, is helping a city build a transit system, it's in its interest to ensure that there are people to use the transit system. There should be conditions around stations, and all throughout where that transit system runs, that zoning is changed to increase density.

If you look at Toronto, for example, there are transit systems running through what they call “yellow” zones, which is low-density housing, right through the city. There have been no conditions attached to any of that infrastructure spending, at least until lately, perhaps.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

In talking about things that will work—for instance, tying infrastructure to density and making more federal lands available—will the mandatory energy rating at time of sale make housing more affordable, in your opinion?

[Michael Bourque]

No. I think that's a terrible idea. There's no doubt that people should be investing in their homes to make them more energy-efficient. The problem is that the program that currently exists is very difficult to use. That's why the government has underspent the money that's there. It's too difficult. There aren't enough energy auditors. If you can't get an energy auditor, you can't bring yourself through the process.

I don't understand why they wouldn't just allow a certain amount of spending to be tax-deductible. For example, if I go and buy energy-efficient products like insulation, what else am I using it for? I should be able to just deduct that. It would be a lot more efficient to get that work done. If a great number of homes were made energy-efficient, then you could start the process of having an EnerGuide-type system. Right now we're so far from that. To start to introduce that before the entry-level program has been properly constructed doesn't make any sense.

[The Chair, Liberal, Peter Fonseca]

We're moving to the Liberals.

Ms. Dzerowicz, you have five minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

I want to say a huge thanks to all of our excellent witnesses today. I wish I had time to ask everyone questions, but I have time to ask only two.

Before I do so, I want to give a huge thanks to you, Ms. Lunney. You did an excellent job of articulating what you think the problems are. Thank you for that. I also want to directly ask you if you could give us your submission around the taxes that Mr. Blaikie was asking about before. I'm talking about the research you did with Canadians for Tax Fairness. If you could submit that, it would be very helpful.

I also want to say a special thanks to Ms. McIsaac. I used to work at Maytree, so Maytree always has a special place in my heart.

My first question is for you, Mr. Bourque. You had three recommendations. The first was related to federal-provincial-municipal co-operation. The very first recommendation started off with “faster permitting”.

Could you quickly repeat that recommendation, please? I just want to ask a question about it.

[Michael Bourque]

What I said was that we need federal, provincial and municipal collaboration, including conditions attached to infrastructure spending, to encourage more housing. That could be through faster permitting, more open zoning or reduced fees, basically getting rid of these impediments to new construction, which have been well studied and which add considerable cost and time to new construction.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you. It is an excellent recommendation. I will tell you that it's something that has come across very clearly from the Federation of Canadian Municipalities and many other organizations.

I'm going to pivot quickly over to Ms. Keesmaat.

Ms. Keesmaat, in a former life, you were a city planner and also ran for mayor of the city. Can you help finesse this recommendation? How is it that the federal government can get this recommendation right? We want to provide some conditional funding. We want faster permitting. We want open zoning and reduced fees. What's the recommendation you would make that would help us get to what we want to do, specifically as it relates to this recommendation?

[Jennifer Keesmaat]

I'll build on the comments that were made by Michael earlier. I think he hit on some critical and salient points around the role that the federal government can play in relation to municipalities, including when infrastructure funding comes forward and tying that infrastructure funding to density requirements, which does not happen today.

We have billions of dollars being spent on transit infrastructure in areas where the local residents, very local, are opposing additional density. They're opposing the building of new housing. The federal government can play a very powerful role in linking those two things together. You want funding for major infrastructure projects, but you also need to be willing to upzone areas and absorb additional density in relation to that infrastructure that is being built.

There's another critical piece to this. The comment was made by one of my colleagues, as well, about using federal, provincial and municipal lands. We've been engaged in work with CMHC on looking at the 600 school sites in the city of Toronto. Just think about that nationally. There are 600 school sites in Toronto where the vast majority of land is underutilized, in part because the schools do not have enough density, so 50% of the buildings are sitting vacant.

We have been looking at how, through missing middle housing, mid-rise intensification, we can turn those schools into new communities that will add a population of students to use the existing buildings but will also add new housing on land that is owned by the government. What we found on the Elmbank school site, for example, which I referenced in my deputation, was that the tipping point between being able to make 25% of that development into affordable housing is the $18 million we would be required to spend in HST.

Now, ironically, if the government were to forgive the HST on the 25% affordable component, the government would still be delivered the HST on the other 75% of the housing units. There are approximately 838 housing units we're proposing in that development, but, as I mentioned, it's not yet buyable because of the $18 million required in HST.

That demonstrates that there's a lever that's pretty easy for the federal government to pull in order to incentivize some of these sites that are a bit trickier to deliver from a market viability perspective.