Foreigners who buy residential property in the Vancouver area will have to pay an extra 15-per-cent tax as part of a B.C. government plan to slow the foreign speculation that many blame for making the region's homes the most unaffordable in Canada.
The change to the province's property transfer tax announced on Monday means an extra $300,000 in taxes for people from abroad buying a home for $2-million. Detached houses in the area typically run around that or higher. The surprise move comes after the government tracked all residential real estate transactions across British Columbia over four weeks in June and July and found foreign citizens who were not permanent residents bought just more than a billion dollars worth of property.
For the first time since taking office five years ago, Premier Christy Clark said that limiting demand – not just increasing supply – could help make Metro Vancouver's housing market more affordable.
"I want to keep home ownership within the grasp of the middle class in British Columbia," Ms. Clark said at a news conference in Victoria.
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Until now, policy makers have been reluctant to get involved in addressing the role of foreign investors in the heated housing markets of Vancouver and Toronto. In Ontario on Monday, a Finance Ministry spokesman said the province "is not considering implementing" a specific property transfer tax that applies to foreigners.
However, unease is growing over skyrocketing prices. The Bank of Canada's Governor recently warned that foreign ownership is contributing to an unsustainable rise in housing prices. And Ottawa struck a working group last month where bureaucrats from the federal government, Vancouver, Toronto and both provincial governments are aiming to come up with some solutions to the housing affordability crisis by the end of the year.
Douglas Porter, the chief economist from Bank of Montreal, called British Columbia's move a "very reasonable step" that Ontario should consider following.
"I do believe it's an issue in Toronto. I think it's more of an issue than many analysts realize and fully comprehend," he said. "At the very least Ontario should be taking a long look at this measure themselves for the GTA."
When asked about such a tax in British Columbia last month, Stuart Levings, president and CEO of Genworth MI Canada, the country's main private-sector mortgage insurer, said without similar action in Ontario, foreign investors may simply head to Canada's next hottest real estate market.
"If you tighten up Vancouver and not Toronto, what was going to Vancouver is just going to go to Toronto," he said. "So we're shifting the problem from the west coast to Central Canada."
Housing prices will be a central issue in British Columbia's election next spring, as the benchmark price for a single-family home in Metro Vancouver has risen more than 30 per cent in the past year. The Globe and Mail has reported some investors have figured out ways to avoid paying property transfer taxes through bare trusts and shadow flipping, both loopholes the government has said it has taken measures to close.
British Columbia's current transfer tax is a 1-per-cent levy on the first $200,000 of a home's sale price and another 2 per cent on the rest of the price up to $2-million. That system was instituted in 1987, when homes were much cheaper. Earlier this year, 3 per cent was added for the portion of the price above $2-million.
The additional tax announced on Monday will apply to the sale of all residential properties within 22 communities in Metro Vancouver, and will apply to buyers who are not Canadian citizens or permanent residents and corporations that are either not registered in Canada or are controlled by foreigners. These foreign buyers must indicate their citizenship in the paperwork when transferring title.
Experts say the new tax could cool demand, but can also be avoided through common practices such as using friends or family.
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Tom Davidoff, a professor at the University of British Columbia and the economist leading the charge for a targeted property tax in British Columbia, said the government's move will definitely scare some foreign speculators off.
"Suppose you bought a $5-million house. Is someone really going to pay $750,000 in tax off the bat for the privilege?" he said.
Foreign speculators could avoid paying the tax by getting friends or family who are permanent residents to buy on their behalf. Or the tax may lead to inflated housing prices in cities such as Victoria, Kelowna or Toronto, he added.
A group of more than 40 local economists led by Prof. Davidoff is proposing the government not "drag nationality" into the housing debate, but rather focus on whether people owning homes in this market also earn their money in the region. Prof. Davidoff's colleague Joshua Gottlieb said such a tax would be more accurate and efficient than the government's new tax.
"If we are going to have two tiers of [the property transfer tax], why not offer the advantageous rate to anyone who pays Canadian income taxes on worldwide income and subject non-taxpayers to the higher rate – regardless of citizenship?"
B.C. NDP Leader John Horgan said a similar proposal floated by his party to zero in on foreign capital – not citizens – would do much more to help slow Metro Vancouver's runaway market.
"People of good intent will check that box, but people of ill intent who are here to launder their money are not going to check that box," he said on Monday of the citizenship declaration on the property transfer form.
Conservative MP Jason Kenney said he hopes this tax "works to dampen some of the crazy speculation." But he added that a more effective way to cut down on foreign real estate speculation would be to shut down Quebec's investor-immigrant program, because he said more than 90 per cent of its participants end up buying property in Vancouver.
Liberal MP John Aldag praised British Columbia's step as "taking action on the rising housing costs we have."
Vancouver's local board of realtors slammed Britsh Columbia, saying it is needlessly injecting uncertainty into the market and is giving its 12,500 members almost no advance notice.
Critics of British Columbia's Liberal government have linked its caution about acting on foreign investment to the large donations the party reaps from the real estate industry and the sizable budget boost it receives through the transfer tax.
Provincial cabinet members have long said they are not in favour of such a tax because they do not want to send the wrong message to Asia-Pacific investors or hurt the equity many locals have built up through home ownership.
With reports from Tamsin McMahon, Laura Stone, Adriana Barton, Adrian Morrow and The Canadian Press
By the numbers
Percentage of Vancouver-region home sales involving buyers who are not citizens or permanent residents from June 10 to 29
Percentage of sales in Richmond involving foreign buyers for the same period
Value of foreign purchases across British Columbia from June 10 to 29
Value of foreign purchases across B.C. from June 30 to July 14
15 per cent
New tax on Vancouver-area home purchases involving foreign buyers
Foreign-buyer tax on a $2-million home
Source: B.C. Ministry of Finance