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Tax Toronto home-flippers, not foreign buyers, Scotiabank says

Briefing highlights

  • Tax Toronto home-flippers: Scotiabank
  • What to watch for in federal budget
  • What to expect on retail sales, CPI
  • Vodafone, Idea create Indian telecom leader

Taxing flippers

Amid all the hand-wringing over Toronto’s frothy housing market, Bank of Nova Scotia economists are recommending a tax on speculators, rather than a Vancouver-style levy on foreign buyers.

It’s growing increasingly likely that policy makers will do something soon, given that many Bay Street economists and agencies around the world are calling for action, warning that the Greater Toronto Area is on the brink amid sharply rising prices.

Some have suggested, at least as a starting point, that Ontario follow the lead of British Columbia, which slapped a 15-per-cent tax on foreign buyers of Vancouver area homes.

Ontario Finance Minister Charles Sousa says that’s one of the options he’s considering.

The B.C. tax had an immediate impact, driving down sales and depressing prices. The latest reading of the Teranet-National Bank home price index, however, suggests the latter may have been short-lived.

And there are no hard numbers on the level of foreign buying in the scorching markets of Toronto and southern Ontario.

Scotiabank chief economist Jean-François Perrault and his colleague, senior economist Adrienne Warren, suggest a foreign-buyer tax isn’t the way to go.

On a longer-term basis, the issue is one of supply catching up with demand. But that won’t happen fast enough.

“Compounding the supply-demand imbalance, there appears to be some evidence of speculative activity in light of the speed of price appreciation,” Mr. Perrault and Ms. Warren said in a report.

“Based on the historical relationship between the sales-to-new listings ratio and price appreciation, current market conditions are more consistent with price appreciation in the 15-per-cent year-over-year range, roughly 10 percentage points less than the most recent readings.”

And, thus, a house-flipping tax could be a quicker, interim solution.

“The idea, simply, would be to raise the cost of speculation, without excessively interfering with the market mechanism,” the Scotiabank economists said.

“Stricter enforcement of property owners paying a capital gains tax if the home is not a principal residence will begin to address speculation but more specifically targeted measures are needed,” they added.

“A number of possibilities exist to do this, such as introducing a tax on sellers who flip a property within a certain period of time.”

This could be done at either the provincial or municipal level, Mr. Perrault said in an interview, adding that what’s needed is a “solution with a fundamental impact on the market.”

He and Ms. Warren aren’t suggesting how hefty a tax should be, or, for that matter, the length of time that determines a flip.

But conceptually, Mr. Perrault said, policy makers might consider a “graduated system” with a declining tax rate over a two-year period.

So, for example, speculators would be taxed more for flipping a home after six months than they would be at a year or 18 months.

What to watch for this week

The main event, of course, is Wednesday’s federal budget, with Finance Minister Bill Morneau in something of a pickle because he doesn’t know how tax reform will play out in the U.S.

You can count on deficits and more information on the infrastructure bank, but economists can only speculate on tax measures at this point.

“While there are many unknowns, it appears Canada will be facing a U.S. economy with lower taxes and fewer regulations in the years ahead,” Royal Bank of Canada chief economist Craig Wright and economist Laura Cooper said in a lookahead to the budget.

“There are also potential risks on the trade front, with ‘tweaks’ coming to NAFTA and a potential border-adjustment tax,” they added.

“In this challenging environment, the government should ensure that the budget does not disadvantage the Canadian economy. This implies staying away from tax increases while mapping out a credible medium-term plan back to a balanced budget. Ottawa’s biggest challenge comes from its robust spending plan, which results in deficit forecasts over the entire fiscal planning horizon, and poses the risk of higher taxes.”

That’s the main event, but not the only one, with a couple of economic indicators also on tap.

Statistics Canada starts off Tuesday with a monthly report expected to show a pick-up in January retail sales of about 1 per cent or better.

The statistics agency also closes out the week with Friday’s reading on consumer prices, which economists expect will put annual inflation at about 2.1 per cent in February.

“Weak energy prices from a year ago mean that gasoline is likely to provide a bit more lift to the headline inflation rate,” said Nick Exarhos of CIBC World markets.

“Despite what was a softening in prices on the month, the annual rate edged higher to 20 per cent,” he said of pump prices.

“That should be enough to offset the weakness in natural gas, leaving the headline inflation rate steady at 2.1 per cent.”

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