Congressman says U.S. should consider tit-for-tat tax on Canadian-owned properties in the States

A new flashpoint is emerging in the Canada-U.S. relationship that could lead towhat one congressman callsa tit-for-tat "race to the bottom."

Rep.Brian Higgins, a Democrat who represents the U.S. border community of Buffalo, New York, said he'sprepared to advocate for a new tax on Canadians who own property in the U.S. unless Americans are offered more exemptions from Ottawa's new underused housing tax, which targets foreign property owners in Canada.

Higgins saidhe hopes it doesn't get to that point. But if Canada doesn't expand its exemptions for Americans, he said, "we will explore the possibility of doing an in-kind policy as it relates to Canadian citizens who own property in the United States.

"I would rather not do that. This should be resolved diplomatically."

The underused housing tax, which came into effect last year, is a 1 per centannual levy on the value of a "vacant or underused" property belonging to "non-resident, non-Canadian owners," according to a Government of Canada website.

The tax is intended to cool the overheated Canadian housing market, particularly in major cities like Vancouver and Toronto that are struggling withhousing shortages. The government is trying to deter foreigners from purchasing residential properties as investments and leaving themvacant.

The tax is meant to motivate those foreign owners to either rent or sell their properties, which would make more housing available.

The tax offers a wide range of exemptions, including specific measures meant to shield cottage owners in designated vacation zones. Butsome Americans whose properties in Canada are not exempt complain thatthe rules are confusing, are being applied unevenly, and are unfair.

"I feel like they want us to leave, and it's a sad feeling," says Rebecca McCauley, an American whose family owns two properties in the Crystal Beach area of Fort Erie, Ont.

'We feel like we're being pushed out'

One property is a rental unit; she said she understands it will be granted an exemption. The second property, a summer cottage that has been in McCauley's family for more than 80 years, does not qualify for an exemption, she said.

McCauleysaid the tax will cost her roughly $10,000 a year.

"We feel like we're not wanted anymore, because we're being made to not be able to afford to be there," she toldCBC News. "We feel like we're being pushed out financially."

McCauley's cottage and many others owned by Americansare technically within the St. Catharines-Niagara census metropolitan area, according to Fort Erie Mayor Wayne Redekop. That means they do not qualify for an exemption.

Dozens of Americans who reached out to Higgins' office seem to be caught in the same predicament. His staff circulated an informal survey on social media and received more than 162 responses, some of which were shared with CBC News.

Most of the respondents said they ownproperties in Southern Ontario, in places like Fort Erie, Port Colborne and Ridgeway.

Their most common complaint was that the rules determining which properties qualify for an exemption are not clear.They also said it's unfair of the Canada Revenue Agency (CRA) to place the onus on property owners to file a return, even when the property is exempt.

Non-Canadians with real estate in Canada are now required to submit returns to CRA for their property here. Failure to do so could lead to finesa minimum $5,000 penalty forindividualsand a minimum $10,000 penalty for corporations, according to a Government of Canada website.

CBC News askedboth Finance Canada and the CRA to offer advice to Americans unsure of the status of their property in Canada. The CRA urged Americans with questions to call the agency.

Sledgehammer vs. stiletto

"I doubt the Canadian government will collect much in the way of tax ... because the biggest collection is going to be from failure-to-file penalties for people who didn't realize they had to file," said Jonathan Garbutt, a Canadian tax lawyer.

He said that while he understands the need to address Canada's housing crisis, he questions why the government is going about it this way.

"We've done something complicated with a bunch of little nits that are abrasive to our best trading partner," he said."Why would you do that?"

He also questions the wisdom of using the Income Tax Act to achieve a policy goal.

"The Canada Revenue Agency is a sledgehammer in the way they operate, rather than a stiletto which actually goes after the problem and gets rid of it," he said.

Higgins said he also understands the need to deal with the Canadian housing crisisand can see why such a tax would be useful in Vancouver or Toronto.

But he still wants to see exemptions clarified and expanded to cover all American seasonal property ownersespecially those who live in his district and own cottages in Southern Ontario.

The power of a single member of Congress acting alone is limited. But a single member can make a stink about an issue, gather alliesand put it on the radar of the presidential administration.

Higgins has started already to move the issue up the ladder in Washington. He said he's written a letterto Secretary of State Antony Blinken and has had conversations with the office of U.S. Trade Representative Katherine Tai.

In his letter to Blinken, Higgins called the tax a "bad faith action" by the Canadian government. Heargued it violates the non-discrimination provisions of the Canada-US-Mexico Free Trade Agreement (CUSMA) and long-standing tax treaties.

He said wants this issue on the agenda for President Joe Biden's visit to Canada next month.

"If that's not resolved, we need to look at some kind of measure that will enhance the leverage that we have," he said.

"We do not want to have to take retaliatory action against Canadian citizens. That is a race to the bottom."

According to a 2015 survey by BMO, roughly 500,000 Canadians own property in the state of Florida alone.

Former congressman John LaFalce once served as chair of the Northern Border Caucus, which dealt with Canada-U.S. relations. He said heviews this tax as a blight on the relationship.

"I'd like to see that law repealed," he said.

His frustration is at least partly subjective he's a seasonal property owner in the Niagara Region of Southern Ontarioand expects to be hit by this tax.

"It has a very pernicious effect not just on individuals, but I think on future relations between the countries."