Madam Speaker, Bill C-223 proposes to introduce an income tax deduction with respect to the mortgage interest paid on the first $100,000 of a mortgage loan by individuals purchasing a first home after 1994.
The intent and spirit of the bill is quite laudable, but I would like to make a couple of points with respect to the current Income Tax Act and then move on to some of the other issues this proposal brings forward.
The Income Tax Act presently does not allow for the deductibility of mortgage interest on principal residences. However, capital gains on the sale of a principal residence are not taxable to the owner either. If mortgage interest rates were deductible, capital gains should be made taxable.
The measure, if limited to first time home buyers at maturity, would cost about $3 billion per year. Limiting the interest deduction to first time home buyers may be somewhat difficult. The proposal would create some significant differences in the tax treatment of qualifying homeowners and would be quite difficult to defend. If mortgage interest deductions were then extended to all homeowners the annual revenue cost would be approximately $6 billion. Admittedly, if the principal residence were subject to capital gains, the revenue decline would be somewhat less.
A taxpayer's choice of accommodation, owning versus renting, is a personal choice. The hon. member attempted to make the distinction between renters and owners and provided an example of those who own rental units rather than those who live in rental units. He is quite correct. Those who own rental units are entitled to write off property taxes, insurance, heat, light, et cetera. It is a business activity. Those who rent units do not carry on a business.
Let us go back to the point that a choice of accommodation is normally a personal decision and the costs associated with it are personal expenses. The tax system does not allow deductions and credits for personal expenses. Accordingly principal residences are not treated as investments for tax purposes. The mortgage interest paid on a principal residence is not deductible. The capital gains on the sale of a principal residence is also non-taxable to the homeowner.
The proposed deduction would also be inequitable to taxpayers without a mortgage. Again it is unwarranted because capital gains in principal residences are non-taxable.
Let us look at the present case. First time home buyers already receive tax assistance under the home buyers plan. Under the plan, first time home buyers are allowed to borrow money from the RRSPs without having to include the amount as income.
This proposal would see the deductibility resulting in a net transfer to homeowners with mortgages from other taxpayers who would have either to pay higher taxes or would receive reduced services to finance the deductibility.
In the spirit of reallocation, to which I am sure the Reform Party is quite committed, if there is an expenditure the money has to come from somewhere. It does not come from the sky. There would be an increase in income taxes or a reallocation from income taxes or reduced services. The Reform Party often makes that point. I would just like to make sure that it understands the point.
Furthermore, benefits would not be fairly distributed between groups of taxpayers. Benefits would be earned disproportionately by higher income earners who are more likely to have larger mortgages. Less than 15% of the benefits under the proposal would accrue to families with less than $50,000 in income.
Quite clearly the proposal would create significant differences in the tax treatment of homeowners, identical in every respect except the timing of their home purchase. For example, a first time home buyer would be able to deduct up to $6,000 assuming an annual interest rate of 6% on a $100,000 mortgage annually, while the neighbour carrying an identical mortgage would be denied a deduction because either the residence was not his or her first home or the residence was purchased before the effective date.
The success of the government's work, its deficit reduction strategy which Canadians have been quite supportive, has meant lower interest rates which have reduced the costs of home ownership. One year mortgage rates have declined by more than 400 basis points since January 1995. This has provided savings greater than $3,000 in terms of lower annual mortgage payments for a $100,000 mortgage.
I have respect for the hon. member, for his intent with this bill and for the hard work he put into drafting and researching it. All members of this House are quite clearly interested in strengthening the economy, in ensuring our economy continues to grow and that our young people are able to participate. Quite frankly, the expenditure of $3 billion that is strictly targeted to first time home buyers or, as another hon. member mentioned, an expenditure of $6 billion annually across the board would result in some reallocation of services or an increase in taxes in order to maintain a balanced budget, in order to maintain the level of services Canadians expect.
Although the spirit of this bill is one that every member of this House would clearly support, the technical challenges that this bill faces and the requirement—