In a recent podcast interview, Canada’s new housing minister Gregor Robertson was asked whether he would consider removing the HST on all new homes, rather than just new homes purchased by first-time homebuyers.
The minister’s response focused largely on the practical impacts of such a change.
“The argument against doing that is that it’s a big, large sweeping change to make,” Robertson said. “We’ll see if [forthcoming housing policy changes] make a difference, particularly in Toronto and Vancouver.”
Rather than focusing on market impacts, it may be helpful to take a step back and look at the issue from first principles. Why are new houses — by any purchaser, and at any price — currently subject to sales tax at all?
The HST and GST are consumption taxes, meaning they are charged on goods and services that are consumed. For example, a restaurant meal is quite literally consumed by the end of dinner and is subject to HST/GST.
At the other extreme, items that are never consumed are generally not subject to consumption taxes. Take a plain gold bar purchased as an investment. The gold bar would likely sit in a drawer or safety deposit box. It could retain its physical form for decades or even centuries and never be consumed. The purchase of gold is therefore not subject to HST/GST.
Is the purchase of a new single-family home more like a restaurant meal or gold bar?
To help answer the question, let’s separately think about the land and the building.
The land quite clearly falls into the investment category. The land will never really be consumed.
What about the building, though? Unlike a restaurant meal, the entire home is not “consumed” right when it is purchased. But if the building were left untouched for decades, it would eventually wear down.
To be consistent with the idea of consumption, HST/GST should only be charged on the value of the building and should be spread out over the assumed life of the building — say, 30 years.
Such a reform would make tax policy more principled than it currently is.
But I’d argue policymakers could go one step further and remove consumption taxes on new homes altogether. Doing so would ensure tax neutrality between buyers and renters.
Currently, residential rents and new residential apartment buildings are completely tax free. Rents have always been free of GST/HST, and in September 2023, the government made all new apartment buildings HST-free.
Ironically, renting real estate is a service that is consumed. It is very analogous to a restaurant meal that is consumed by the end of the month.
However, in the context of renting we’ve decided that housing, like, say, groceries, is a basic necessity and should be tax free.
Some people will argue it is appropriate to treat renters differently than homeowners, because homeowners are presumptively better off than people who rent.
But this is not necessarily the case. People can and do rent luxury homes.
There are better ways to allocate tax than using homeownership as a proxy for wealth.
In sum, it is perplexing that policymakers are fixated on whether the HST should be waived for a special class of purchasers — such as first-time homebuyers — or apply only on new homes that exceed specific price points, when housing is considered a tax-free basic necessity for renters.
Examined from first principles and tax neutrality, new homes should be exempt from consumption taxes entirely. In addition to consistency, this change would advance the goal of increasing new home construction and decreasing home prices for all Canadians.
This is interesting and persuasive. But what do you make of the “horizontal equity” argument against HST exceptions? As I understand it, the idea is that if two people both make $100k, and one of them chooses to spend more in restaurants while the other prefers to spend on a nicer home, those two should pay the same HST.
Great question Noel. My read of the system is that we’ve collectively decided that some goods and services are not subject to HST at all, irrespective of the wealth of the purchaser. For example, grocery items are like this. We don’t tax lobster and fancy cheese if it’s purchased in a grocery store. So someone who prefers to eat steak at a restaurant will pay more HST than someone who prefers to buy steak and cook it at home.
For horizontal equity to apply, we’d need to apply HST to *all* consumption and not have carveouts for entire classes of goods and services.
If we did that then two people who both consumed $100k of goods and services, irrespective of what those were, would both pay the same tax.
In general I don’t mind exempting basic needs from consumption tax such as food and shelter. From there I would prefer the simplicity of making all such goods/services tax free rather than trying to draw numerous arbitrary lines around what or who exactly qualify for the break.
The housing market has become very unhealthy, and dominated by investors. It’s damaging society. Many taking advantage of renters. HST should be part of an overall strategy to stop the commodification of housing and addressing accessibility. Yes. Investor s should pay HST. Actual residents living in their home should not.