Foreign investors looking to buy residential property in Vancouver area will have to pay an additional tax of 15% as part of the British Columbia government plan. This has been done to slow down the speculation that many experts believe is responsible for making homes unaffordable in this region of Canada. Experts think that other cities in Canada will follow Vancouver’s footsteps and they may introduce this type of tax.
The change to the property transfer tax that has been announced may result in an extra $300,000 for investors from abroad buying a residential property of $2 million. A free standing residential building in the area may typically cost this amount or more.
The surprise move by the government came after all residential real estate transactions in British Columbia were tracked for four weeks in June and July. This helped the government to find out that foreign nationals who were not permanent residents had bought more than a billion dollars’ worth of property.
It was for the first time after taking office five years ago that Premier Christy Clark said that apart from increasing supply, limiting demand may also have an effect on the Vancouver and Toronto real estate market. This can assist in making housing more affordable. Furthermore, he said that he wanted to keep home ownership within the grasp of the middle class in British Columbia.
Until recently, policy makers were reluctant to get involved in issues that addressed foreign investment in the heated real estate market of Toronto and Vancouver. A finance spokesperson of the government has stated that the province is not considering implementing a specific property transfer tax that applies to foreign investors.
The skyrocketing prices of residential property have caused a lot of unease and this has led to the Governor of Bank of Canada warning about foreign investment contributing to the unsustainable rise in residential property prices.
The warning by the Governor has led to the formation of a working group that consists of bureaucrats from the federal government and Toronto and Vancouver provincial governments with the aim to come up with some solutions for the residential housing affordability crisis by the end of the year.
Most experts consider the British Columbia move as a reasonable one and Ontario should consider following it. Who pays land transfer tax in Ontario?
Experts in the mortgage industry feel that if similar action is taken in Ontario, it may result in foreign investors looking for the next hottest real estate market in Canada. They feel that if things are tightened in Vancouver and not Toronto then the focus may just shift from one place to the other. This can result in the problem shifting from West Coast to Central Canada.
British Columbia elections are due next spring and the housing crisis may become a major poll issue. In Metro Vancouver, the benchmark price for single housing units has appreciated by more than 30% in the last year as per the free home report.
There have also been reports of some investors figuring out ways to avoid paying property transfer tax using loopholes such as bare trusts and shadow flipping. The government had clarified that steps have been taken to close these loopholes.
As per the home report, the current transfer tax in British Columbia is 1% on the first $200,000 of the home sale price and 2% on the remaining price up to $2 million. This system was instituted in the year 1987 when housing prices were cheap. Early this year, 3% was added to housing sale transactions above $2 million.
The additional tax announced will apply to the sale of all residential properties that are within the 22 communities in Metro Vancouver. This will apply to buyers who are not Canadian citizens or permanent residents. It also applies to corporations that are not registered in Canada or the ownership is controlled by foreigners. When transferring title, the foreign buyers need to indicate citizenship in papers.
Experts are of the opinion that the new tax may help cool the real estate market but this can also be easily avoided by using family and friends to buy property. They are of the opinion that the tax may end up scarring some foreign speculators.
Foreign investors may be able to easily avoid paying the tax by getting family or friends that are permanent residents of Canada to buy property on their behalf. The tax may also result in inflating real estate prices in Kelowna, Toronto or Victoria.
A group of economists are urging the government not to focus on nationality in the housing crisis. They want the focus to be on people owing their homes in a region also earning money from that region. They feel that such a tax may be more efficient and accurate than the one proposed by the government.
The argument by the economists is that when there are two tiers of property transfer tax, it is best to offer the advantageous rate to buyers who pay Canadian income tax and non-taxpayers should be charged a higher rate, irrespective of their citizenship. So who pays land transfer tax? When the focus in on foreign capital and not on citizens, it can help slow down the runaway real estate market of Metro Vancouver.
Some politicians are of the opinion that although the tax may dampen speculation to some extent, real solution is possible only when the Quebec investor immigrant program is stopped. They feel that nearly 90% of participants of the program end up buying property.
Realtors have slammed the move by the government saying that it brings uncertainty to the real estate market and the members were given no advance notice of the proposal. This can have an effect on the MLS listing.
Critics of the Liberal Government of British Columbia see the reluctance of the government to act against foreign investors due to the large donations that the party gets from the real estate industry. It also gets a sizable boost in the budget from the land transfer tax.
The provincial cabinet members are of the opinion that such a tax is not favorable, as it can send a wrong message to investors of the Asia-Pacific region. It can also affect the equity that most locals in Canada had built through home ownership.