The mortgage maze: an apple became an orange

Jane O’Hara October 1 1979

The mortgage maze: an apple became an orange

Jane O’Hara October 1 1979

The mortgage maze: an apple became an orange

The Realm

Jane O’Hara

In Finance Minister John Crosbie’s past life as a Commons MP, his sartorial tastes ran to off-the-rack suits and loud checks, his socks showing more bare ankle than executive-length resolve. Last week, however, Crosbie showed up tailored in two-piece banker’s blue at a press conference to announce the Tories’ much-touted mortgage interest and property tax credits scheme. “It’s my finance suit,” said the minister, and although he looked uncomfortably hemmed in during the 45-minute session it had little to do with his newly tarted-up image.

In unveiling the scheme that will give Canadian homeowners tax credits of up to $375 this year with four equal annual increases up to $1,500 by 1982, Crosbie did not look like a man responsible for uncorking the contents of the Tories’ major election goody. Rather, he gave the impression of a minister who lacked the courage of his party’s convictions. Faced with an already imposing federal deficit of $11.3 billion, the burly Newfoundlander is said to wince privately at the program that will cost him $575 million this year and $2.3 billion when it is fully phased in by 1982. As one finance official noted: “The minister isn’t happy about the plan. But he’s prepared to try it for four years, then throw it out if it doesn’t work.” (However, U.S. experience suggests withdrawing the credits may prove almost impossible—see box.)

In what was criticized by Liberals as “a major budget announcement outside Parliament,” Crosbie outlined the scheme that would “fulfil the Conservative pledge” to help Canadians own a piece of the rock, stimulate the housing industry and create jobs. Yet the program was substantially altered from the original Tory proposal of mortgage interest deductibility. In the original scheme, mortgage interest and property taxes would have been deducted from taxable income, whereas under the new scheme credits are subtracted from the bottom line—Tax Payable—of a personal income tax form.

Deductibility entered the electoral vernacular last year when then Opposition leader Joe Clark introduced the policy to woo voters during the October byelections and then to win them in the

federal elections. (A private Tory poll taken after May 22, however, revealed that only two per cent of those who voted for reasons other than to oust Trudeau, did so because of mortgage deductibility.)

The revised Tory scheme of tax credits is equal to 25 per cent of annual interest payments up to $5,000 (maximum $312.50 in ’79 to a maximum $1,250 in ’82), plus a flat tax credit for property taxes ($62.50 in ’79 to $250 in ’82, no matter the size of the tax bill). According to Crosbie, whose home is not mortgaged, the switch from deductions to tax credits came because tax credits were “simpler and fairer.” But, in fact, Crosbie lost a battle to the finance department, under the now deposed deputy minister William C. Hood, which violently opposed the inequity of the deductions scheme. Aside from eroding the tax base to subsidize higher income groups, deductibility would also have affected provincial revenues and would have made more Byzantine the already complex provincial-federal tax sharing arrangements. But as one disgruntled Toronto homeowner put it: “We were

promised an apple and delivered an orange.”

Bill Garrett, a 30-year-old salesman who just purchased his first home, in Vancouver, is one of close to three million Canadians in middleand lowerincome groups ($25,000 and under) who stand to benefit from the orange. Under the tax credits system, Garrett’s savings will be higher, proportional to his taxable earnings, than the savings of

those in higher tax brackets. By paying the maximum $5,000 in mortgage interest annually, he will claim $170 more in 1982 than he would have under the originally promised Tory scheme. The reverse is true for higher-income homeowners, who stood to make more by deducting their mortgage interest and property tax payments from their taxable income.

Garrett’s major beef is that of many Canadians: the scheme “doesn’t go far enough.” Opposition critics leapt at the chance to dump on the plan, saying it will promote higher mortgage rates and housing prices. They point out that there are 4.5 million renters, who will receive no tax credits, as well as 1.1 million homeowners who will not benefit at all (those who pay no income tax anyway) or very little (those who own their houses outright and will receive only the property tax). Liberal housing critic Lloyd Axworthy, a rising star at least in his own galaxy, promised to fight an election on the issue if amendments aren’t made to subsidize renters and low-income households. Although Crosbie emphasized that “we didn’t promise renters anything,” a report prepared for the Tory cabinet last week revealed the government could help low-income and senior-citizen renters for one-third the cost of the homeowners’ proposal. And it’s thought that the government will come up with some rent subsidy program to ward off a confrontation in the Commons.

Provinces with the least to gain in the scheme are Quebec, where more than 50 per cent of the population are renters, with 80 per cent renting in Montreal and Quebec City; the Atlantic provinces, where 70 per cent own homes, but only 37 per cent have mortgages; and the Prairie provinces, where 63 per cent own homes but fewer than half hold mortgages. Even among those who will gladly take the handout, there are skeptics. Says Phil Thompson, who has a $30,000 mortgage on a six-year-old bungalow near Dartmouth, Nova Scotia: “It’s a case of one hand giveth and the other taketh away. I expect the banks to raise the interest rates and it will be harder for us to sell in a couple of years.”

And, according to Dr. Michael Walker of Vancouver’s Fraser Institute, the worst flaw in the scheme is one of the Tories’ major selling points. With more than 70,000 unsold housing units in Canada and a seven-month backlog of 9,400 new homes on the market, Walker maintains: “The housing industry in this country doesn’t need any more stimulating. Now is the time to direct capital into the industrial sector where we are weakest.”

In order to meet the printing deadline for 1979 tax returns, Crosbie was forced

to announce the scheme prematurely— but politically the timing was right. With an anxious caucus urging him, as one MP put it, “not to weasel out” of the scheme this year, and an inner cabinet compelling him to make good on election promises, Crosbie will be perceived as the Good Humor man—at least until November when he brings down his belt-tightening budget. When asked how he was going to pay for the home-

owners’ program, Crosbie paused and closed his eyes in a way that made him look as though he was reading crib notes off the inside of his forehead. “General revenues,” he answered. “It’s part of the whole spectrum of government.” In that moment it appeared that Crosbie, as one critic put it, “knows he’s mortgaged his future to this program. He knows he’s not getting much bang for the buck.”^