Developers lobby Ottawa for mortgage-interest tax changes on new homes

Housing developers are lobbying Ottawa for tax changes that would allow buyers of new homes to deduct the interest paid on their mortgage from their taxable income.

At a private meeting in late August with Finance Minister François-Philippe Champagne, developers said such a tax break would make homeownership more affordable for first-time buyers and young Canadians.

Under Canada’s tax code, homeowners can deduct the cost of mortgage interest for rental properties, but not for their principal residences.

The proposal to broaden the rule by trade group Building Industry and Land Development Association would only apply to newly constructed homes and not those that have already been built.

It would be linked to the existing tax exemption on profits from the sale of principal residences. The exemption has generated enormous wealth for homeowners over the past few decades.

Under the association’s mortgage-interest deduction proposal, a homeowner would have the option of whether to use the tax break.

If they decide to deduct the mortgage interest, the homeowner would no longer be fully exempt from paying capital-gains tax when they sell their home. At that point, the equivalent amount of the mortgage-interest deduction would become taxable.

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“The idea is to give the homeowner the capital gains exemption up front,” said Dave Wilkes, president and chief executive of the trade group.

If a homeowner chooses not to deduct the interest, however, they would not pay any tax on the capital gain when the house is sold.

The industry proposal is loosely based on a U.S. policy allowing mortgage interest to be deducted. Although, the American tax break is different because it is available for all homeowners, and not just those who buy newly built or preconstruction homes.

Americans also have a limit on their capital-gains exemption when they sell their primary residence.

The August discussion between developers and the Finance Minister was part of the federal government’s prebudget consultations, a long-standing tradition of soliciting input from the public on the coming budget.

Mr. Wilkes said his group was encouraged to continue the conversation with the government. “We were asked during the meeting for more details on the idea,” he said.

The Finance Department declined to comment specifically on the proposal.

Spokesperson Marie-France Faucher said in an e-mailed statement: “Proposals received by the Department are given careful consideration, taking into account a wide range of factors, including their fiscal implications, economic impacts, fairness, and administrative considerations.”

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Amending the tax code to allow homeowners to deduct mortgage interest would make homeownership more affordable. Depending on the size of the loan, a homeowner could potentially deduct more than $100,000 in mortgage interest from their taxable income, in turn lowering their tax bill.

Ottawa has announced billions of dollars in spending this year to help Ontario and B.C. reduce municipal development charges that require developers to pay to build infrastructure such as sewers for their new housing projects.

Ottawa is also providing Ontario with $875-million to help the province offer an HST rebate on new-home purchases. The rebate is designed to help developers get rid of unsold new condo stock.

Prime Minister Mark Carney has said one of his goals is to unfreeze the new condo market in the Toronto area, where sales are down significantly and buyers have been defaulting on their purchases. He has also said he wants to “supercharge” homebuilding.

Mr. Wilkes said the interest-deduction proposal would be revenue neutral, meaning it would not increase or decrease the government’s tax revenue.

However, if a homeowner uses the interest deduction and later sells their home at a loss or for less than the amount of the interest deduction, the federal government would not receive any tax revenue.

The long-standing principal-residence tax exemption has been criticized for creating significant wealth for homeowners and providing incentives to buy instead of rent.

The government projects it will lose $8.5-billion in tax revenue this year from the principal-residence tax exemption, according to its 2026 Report on Federal Tax Expenditures. Next year, the projection is $9.4-billion.

The government estimates that during the peak of the pandemic’s real estate boom, this tax policy resulted in a loss of $12-billion in tax revenue.