History shows Liberals’ housing plan failed the last time

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I love studying history. In my undergraduate studies, I made sure to load up on post-Confederation Canadian history courses and it’s truly fascinating to learn how this country was built. Similarly, I am always interested if proposed taxation policies were ever considered historically. More often than not, the answer is yes.

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There have also always been pockets of time in our history when there were great needs for more housing units, most often because of significant population growth. Governments have often let the market respond to such needs, as they should, but Canada also has an interventionist history that has been questionable at times.

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For example, the Liberal government played the bogeyman approach to housing challenges instead of looking in the mirror to realize that its immigration policies were a significant contributor. To make things worse, the bogeymen were largely attacked through the taxation system. Need a reminder? Here’s a quick list.

The Underused Housing Tax applies a one per cent tax and an annual filing requirement on non-Canadian citizens, who are apparently sucking up a significant portion of the housing at the expense of average Canadians. The tax and filing requirement have been a debacle since they were first introduced in 2022.

Then’s there’s the prohibition of non-citizens from purchasing Canadian residential property (since, again, non-citizens are supposedly causing our housing problems). This is not a taxation measure, but it has caused a chill and created complexity when planning for non-resident investment. First introduced in 2023 for a two-year period, it was extended for another two-year period that expires Jan. 1, 2027.

Property “flippers” are also apparently a problem. Accordingly, a property flipping tax was introduced in 2023 that causes residential property disposition gains to be treated as fully taxable if disposed of within 12 months from acquisition, unless certain “life exceptions” are met. This is an absurd and duplicative tax since the current Income Tax Act already has tools to deal with flippers.

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In 2024, the prohibition of deductions for short-term rental owners who operate in a jurisdiction where such rentals are prohibited was introduced, as if short-term rental owners, especially in my neighbourhood, are one of the causes of housing shortages. Yeah, right. This dangerous provision is an affront to good Canadian tax policy.

In case the above strokes of genius weren’t enough, the Liberals are now reaching back to a flawed 1970s’ playbook. Last week, they announced that they would “get back into the business of housing” by building 500,000 homes per year. You don’t need a grade 12 diploma or, in Mark Carney’s case, a PhD in economics to realize that such a target is simple bluster.

Anyone who believes this is an achievable target should spend five minutes with our country’s great entrepreneurial homebuilders, since most will give you an earful on how unrealistic such a plan is.

Buried in that announcement was a statement that the Liberals would like to resurrect a 1970s’ tax-shelter program to try to encourage rental property construction: the multiple unit residential building (MURB) program.

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Investors in certified MURB projects were allowed to claim accelerated capital cost allowance — essentially, depreciation — on the building and use those deductions to create or increase a rental loss for tax purposes.

Those paper losses could be deducted against the investor’s other income, thereby sheltering that income from tax. This favourable tax treatment was intended to attract private capital into rental housing by improving after-tax returns.

The MURB program did cause rental construction, but it came with some significant behavioural consequences.

The Liberals’ recent announcement boasted that the MURB program helped produce almost 200,000 units from 1974 to 1981. However, a Canada Mortgage and Housing Corp. report in March 1981 said, “Estimates prepared in the course of this study indicate that at the end of 1980 there was a total of 170,000 MURB dwelling units either completed or under construction in Canada.”

But the report made it clear that those estimates should not be interpreted as implying that the MURB provision stimulated additional rental starts. That’s a distinction with a difference.

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The report also said MURB projects were more expensive because investors valued the tax benefits and that it was not an efficient mechanism for promoting rental investment. It called the program a stopgap measure that didn’t solve the fundamental issues of high development costs and low rental yields.

The main beneficiaries of the MURB program were found to be developers, promoters and investors with high marginal tax rates. Many investors were buying MURB investments simply for the tax shelter, with little to no consideration of the investment issues.

“It appears likely that, if left to its own devices, the rental market would have begun to respond to the excess demand on its own — albeit at higher rents,” the report said.

Yep, letting the market deal with supply and demand is almost always the most appropriate answer.

Given the above, the famous Allan MacEachen budget on Nov. 12, 1981, terminated the MURB program for any new projects. In 1987, the complete repeal of the MURB program was announced and phased out over a three-year period.

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In other words, the MURB program’s economic and social benefits did not exceed nor justify its costs.

Revisionist history has been quite popular in recent years. In the present case, having the Liberals think that resuscitating the MURB tax shelter is a good idea conveniently ignores historical facts and experiences.

The study of history isn’t just a hobby; it’s a guide. If Carney truly understood history — or basic economics — he’d understand that real solutions come from unleashing market forces, not failed government tax vanity projects dressed up as housing plans.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. 

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