There’s been a lot of bluster about rescinding the capital gains tax exemption on primary residences in Canada, but there’s nary a chance of that actually occurring, says a prominent real estate lawyer.

“The chances of that happening in our country are slim to none because it would be political suicide for any government to introduce that,” Bob Aaron of Toronto-based Aaron & Aaron told CREW. “Canadians view the right to tax-free capital gains on their houses as a birthright and any government that tries to change it would be voted out of office within minutes. Even if they tried it, they would have to make mortgage interest tax deductible like they have in the States. So the chances of it happening are slim to none.”

Chartered banks have sounded the alarm on runaway housing prices in Canada and lobbied policymakers to intervene, even suggesting that the capital gains tax exemption on primary residences—a sacred cow in Canada if there ever was one—should be rescinded.

Although Aaron believes rescission is unlikely to manifest, the mere proposition has sparked enough consternation that the Toronto Regional Real Estate Board’s (TRREB) leadership published an op-ed denouncing such a move.

“Currently, the sale of a principal residence is exempt from capital gains tax. This makes sense for many reasons, not the least of which is the fact that homeownership is the cornerstone of retirement planning for many people. Unfortunately, while the federal government has denied any plans to change this policy, the idea continues to be discussed in various corners. This should stop,” wrote Lisa Patel, TRREB’s president and John DiMichele, the board’s CEO.

“Imagine a first-time buyer who has been working hard to save a down payment for years and finally becomes a homeowner,” continued the board’s missive. “This tax would change the rules on them midway. Many younger homeowners and buyers already feel like they have greater challenges than previous generations to become a homeowner, and now this would penalize them on the back end when they sell, something that previous generations were not subject to. For these homeowners, it’s a situation that seems unfair, to say the least.”

Both the federal and Ontario governments have histories of intervention in the housing market, with near disastrous results. In 1971, the Ontario government introduced a speculation tax that caused a 50% decline in real estate valuations. In the 1970s, when the federal government introduced the capital gains tax, purpose-built rental housing became a casualty. Hitherto, there’s been a dearth of purpose-built units constructed and, consequently, vacancy rates have been dangerously low.

“In 2017, [then Ontario Premier] Kathleen Wynne introduced the Fair Housing Plan, which included the foreign buyer tax, and the market had a crash and people backed out of deals, and the litigation is still going on today,” said Aaron. “I have clients who have forfeited hundreds of thousands of dollars because they got caught in the squeeze between buying and selling when they couldn’t get financing as a result of the house they were buying dropping in value and the house they were selling also dropping in value. People got hit, including clients of mine with hundreds of thousands of dollars in damages. Any time a government sticks its nose in the housing business, the repercussions to the people on the streets are horrendous.”

Should the government revoke the capital gains tax exemption on principal residences, Aaron anticipates the bottom falling out of the market. In his view, the ramifications would be unlike anything seen before, ergo, the mere suggestion is myopic.

“What do they have to gain?” asks Aaron. “It’s coming from the banks, not Ottawa; maybe they want people to start buying shares. But banks have serious mortgage portfolios, and if the government introduces a capital gains tax on principal residences and the market crashed, a lot of the properties in which banks have mortgages would be under water. If they’re giving 80% loan-to-value mortgages and the value drops by 20-25%, the banks are going to suffer huge, huge losses. Right across the board, CMHC will have to pay millions and millions, or billions, in losses. People will get sued; people will be thrown out of their houses. The market will freeze and people won’t be buying or selling.”