A few weeks ago, some banks urged the government to take immediate actions to cool the housing market.
We went through some of the BMO suggestions in a previous post.
The ones that got the most attention or debates were the ones related to adding new taxes, especially applying the capital gain tax on principal residences.
So the federal government delivered the 2021 budget on April 19.
It’s the first budget since the pandemic and it’s massive in both size and spending. We have a 725 page document proposing $101 billion dollars in new spending. And the federal debt is expected to climb over $1.2 trillion dollars in the current fiscal year. In this video, we’re going to take a look at the top 3 government spendings in the 2021 budget.
Then we’re going to talk about the top 3 revenue measures. Yup, that means new taxes and one of them is a housing related tax.
Let’s start with the top 3 spendings over the next 5 years.
#1 Women, Youth and Low Wage Workers
These are the people who got hit the most by the pandemic.
So the government is planning to spend over $36 billion dollars to create new opportunities for them.
The closure of schools and child care centres are the main reasons why women were hit earlier and harder in the pandemic.
To help women re-establish their careers, around 80% of the funding will be used to establish a Canada-wide early learning and child care system.
For students, there will be relief from student loans and more student grants.
The Canada Workers Benefit program will expand to support about 1 million additional low-wage workers.
#2 Extending Pandemic Support
The government launched a range of emergency programs to help protect jobs and businesses during the pandemic.
For example, the Wage Subsidy program helped more than 5.3 million people keep their jobs.
The Rent Subsidy and Lockdown Support helped more than 154,000 organizations with rent, mortgages and other expenses.
There were also interest free loans for small businesses, extended recovery and EI benefits for workers and so on.
Sounds like a lot of money, right?
Extending these programs through to recovery will cost $32 billion dollars.
#3 Help Businesses Grow and Succeed
This will include helping hard-hit businesses hire more workers, helping small and medium sized businesses move into the digital age, supporting entrepreneurs, investing in research and innovation…
$16 billion dollars.
So just these top 3 categories add up to around $84 billion dollars of spending. What about the housing side of things?
We’ve talked about the ultimate solution to cool the market is to increase housing supply.
The government is going to invest $2.5 billion over 7 years and reallocate $1.3 billion in existing funding to speed up the construction, repair, or support of 35,000 affordable housing units.
That will help the low income families.
But in terms of increasing the general housing supply and accommodating the 1.2 million new immigrants in the next 3 years, it probably won’t have much impact.
Is the government going to kill the demand with new taxes then?
Let’s take a look at the government’s top 3 revenue measures proposed to take effect on January 1, 2022.
#1 Digital Services Tax
This tax targets large businesses with gross revenue of 750 million euros or more.
If they rely on data and content contributions from Canadian users, then they need to pay a 3% tax on their revenues.
This measure is expected to raise $3.4 billion in revenue for our government over the next 5 years.
#2 Luxury Tax
If you buy a new car over $100,000 next year, then you need to pay a new luxury tax. Let’s suppose you buy a $150,000 car, then you’ll need to calculate 2 numbers. The 1st number is 10% of the total value, so that’s $15,000.
For the 2nd number, you subtract the value of your car by $100,000, in our case, that’s $50,000. Then you multiply that by 20%, so that’s $10,000.
Now, we have 2 numbers, $15,000 and $10,000.
Take the smaller number of the 2, so it’s $10,000 and that’s the amount of luxury tax you need to pay.
Besides cars, this luxury tax will also be applied to personal aircraft over $100,000 and boats over $250,000.
The luxury tax is projected to increase the government’s revenue by $604 million dollars over the next 5 years.
#3 Vacant Home Tax
An annual 1% tax will be applied to the value of a home if the home is owned by a foreigner and is left vacant.
If you are a Canadian citizen or a permanent resident of Canada, then this vacant home tax does NOT apply to you.
In other words, as long as you are a Canadian, even though you’re currently living outside of Canada, this vacant home tax still won’t apply to you.
The government is estimating a $700 million revenue over 4 years from the vacant home tax. So that’s roughly $175 million dollars per year.
Let’s just assume that the average home price is $1 million dollars.
That means the government thinks that roughly 17,500 vacant homes across Canada are owned by foreigners.
If the foreigners want to avoid this vacant home tax, they might rent the property out or they might sell it.
That would increase the housing supply.
But again, 17,500 is going to be insignificant on the grand scheme of things plus 1.2 million new immigrants in the next 3 years.
Here’s the thing.
The government is putting in some minor efforts to increase housing supply but that’s not going to have much impact on the market in the near future.
In fact, with the massive spending in this new budget, they probably have to print more money. So the things that we previously talked about will continue for a while…
There’s too much cash, so cash depreciates.
People with the excess cash want to spend it.
Demand for things skyrockets. That turns into global shortages of everything and so prices also skyrocket.
That’s how we end up in an era when the risk of NOT investing is much bigger than investing because there’s an unprecedented imbalance of supply and demand.