B.C.’s new tax will impact more than foreign nationals

Canadian home sellers may feel the brunt of new tax

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Mount Pleasant Vancouver East - Ruth Hartnup FlickrThe B.C. government wants a solution to hot housing prices in Metro Vancouver. It wants to deliver on a promise to make housing more affordable for city residents, many of whom feel they are priced out of their own market. On Monday, the B.C. government tried to make good on that promise by announcing a new 15% foreign buyer’s tax on all homes sold on or after August 2, 2016. Here’s the problem: The impact of the new tax isn’t isolated to foreign buyers.

Canadian citizens also caught in impact of new tax

“Being on the frontline, we’ve already seen fall-out,” explains Vancouver realtor Adil Dinani of Royal Lepage West. “I’ve had calls in the last 24 hours from agents representing foreign buyers who are backing out of deals because of this new tax,” says Dinani. As a result, Dinani and his team are scrambling to complete these sales by the end of this week. Why? Because quite often, a seller doesn’t completely exit the market, but purchases a home that’s more suitable for their current stage in life. If a foreign buyer backs out of the sale, then they may be forced to back out of the purchase of their new home, which impacts yet another seller. Very often this is when lawyers get involved and things get messy and expensive.

“The provincial government really should have looked downstream,” says Dinani, “to see all the different groups that would be impacted by this retroactive tax. I’m just not sure this was thoroughly thought out.”

According to Dinani and other realtors, any purchase of a Metro Vancouver property by a foreign national (excluding the treaty lands of the Tsawwassen First Nation) that closes on or after August 2, 2016, will be subject to the tax. On a home that sold for $1.2 million that’s an extra $180,000 to be paid into the provincial coffers. Last month, the Real Estate Board of Greater Vancouver said its benchmark price for detached properties in Vancouver had risen above $1.5 million.

Provincial Finance Minister Mike de Jong says he unveiled the tax as part of legislation aimed at addressing low vacancy rates and high real estate prices in southern B.C.

“The real concern is the implementation of this tax,” explains Dinani. “Usually there’s a policy effective date, like with the last mortgage amortization or down payment changes, but this time there was no consultation. Just an imposed policy.”

Let the free market reign? 

For Toronto Royal LePage realtor, Cailey Heaps Estrin, the new B.C. tax is a hinderance to an “open and fair market.” She’s concerned that other jurisdictions will consider a similar move. “I just don’t see how it will help, considering how much our nation’s housing market helps the economy.”  She adds, “there’s not a financial market in the world that doesn’t slow down. Eventually the Vancouver and Toronto market will slow down, so I’m not sure if this tax will create the desired effect.”

Anecdotally, Dinali concedes that there’s already a shift happening in the Vancouver and lower mainland markets. “We’re seeing homes with multiple bids not sell. We’re seeing homes sell for below list price. The market is actually sorting itself out; buyer demand is waning. Equilibrium was happening and how the B.C. government has introduced a new tax.”

In a response to the government’s announcement yesterday, the president of the Real Estate Board of Greater Vancouver Dan Morrison reiterated that housing affordability was a concern for all involved in the B.C. housing market. He also accused the government of acting too quickly.

“Implementing a new real estate tax with just eight days’ notice and no consultation with the professionals who serve home buyers and sellers needlessly injects uncertainty into the market,” stated Morrison.

Still, it’s hard to argue with provincial government’s recent numbers. According to De Jong, foreign nationals spent more than $1 billion on B.C. property between June 10 and July 14, 2016—86% of these purchases were in the Lower Mainland area.

Many more loopholes to close

Even with this new tax, there’s little probability of an end to shady practices and legal loopholes.

In a Canadian Press story:

Foreign nationals could avoid the [new] tax, which would take effect on Aug. 2, by purchasing properties through locals — something that is already suspected to be common practice.

Or, they could go back to using bare trusts; a foreign property buyer can set up a bare trust and then create a company that becomes the owner of the trust. That company will purchase a property, which can then be sold and resold within the bare trust without having to change the company’s name on the title of that property. Tax is never owed, despite multiple transactions. Another reason why bare trusts are popular with wealthy non-resident homebuyers is that it shelters them from having to disclose whether or not they are Canadian citizens.

While it’s a good sign that the B.C. government is taking that affordability problems in Vancouver and the lower mainland quite seriously, I’m not so sure that a retroactive tax is the best first step. Perhaps that’s why the Trudeau Liberals’ opted to create a multi-level governmental task force that would analyze the problems and offer potential solutions, hopefully in as little as six weeks from now. In markets where every policy, every tax and every decision has multiple targets, a more thoughtful approach is probably a better approach.

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17 comments on “B.C.’s new tax will impact more than foreign nationals

  1. Only a fool would take the advice of a real estate agent in this argument. The faster the tech sector disrupts the whole industry the better. Lawyers are the only profession that makes them look good which is highly telling.

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  2. It is pretty obvious that since the author of this piece is a realtor that this article is biased and neither a fair nor an objective analysis of the new tax. The truth is, home ownership is already out of reach for many Canadians who live in Metro Vancouver, tax or no tax. I have friends who had to move from Burnaby to Chilliwack to be able to afford to buy their first home, an affordable townhouse, and let’s be clear they have to commute to Vancouver for work – they had no desire to move to the Fraser Valley. Another family that my son goes to school with in the Tri-Cities moved to Abbotsford to afford a house that fits their 4 children and they will commute to Vancouver. Realtors are getting rich off the real estate market while others are being priced out of local markets and it is shameful. I would have expected more from a piece published by Money Sense.

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  3. What is retroactive about the tax?

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    • The fact that there are deals which complete after August 2nd, but the contracts are firmly committed before June 25th when the tax was announced. Pre-sale condos for example have been deposits invested in them and won’t be built in some cases for several years going forward. Once they are built the tax applies, but this tax was not known to the foreign purchaser because they bought it before they announced the tax. I don’t understand how this can be fair to someone, whether you think they should have been allowed to purchase or not. The problem is the foreigners shouldn’t have been able to purchase, but they did, and now the government wants to tax them in hindsight, retro-actively. The common notion is “well they deserve it” which is also debatable, but the real issue is do the local home-owners deserve it? That is what this article is raising. The local home owners are going to be impacted by this, needlessly.
      You wouldn’t allow someone to up charge you after you’ve paid your deposit and legally committed to purchasing something. If I went to order a brand new car and signed on the dotted line that I will be paying $35,000 for it, would it be fair for the dealer to call me a week before it is being delivered and say “sorry you owe an additional $5,250”, and if you don’t pay it you lose your $5,000 deposit?
      Is that a fair way to do business?

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  4. the government DID look down stream, yes people won’t be able to sell their 1 bedroom crapshacks for a million dollars anymore, but that’s hardly a great loss. maybe with this law young workers will finally be able to conceviably own property near vancouver.

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    • You are greatly generalizing. This article is not talking about people who “wont be able to sell 1 bedroom crapshacks for a million dollars”. This article is bringing up the point of people who are in between contracts, local home owners, and stand to lose their deposits on their next purchases because now their foreign buyer is backing out. This will cause a huge legal mess because when someone backs out of a committed contract, they are liable and they don’t only lose their deposit, but any damages that resulted to the next home owner. So at the end of the day you will have local home owners suing each other because they didn’t complete on their contracts and the foreign investor who lost their deposit will be long gone.
      It is a great loss to damage our own local home owners simply because they were trying to step foot in the real estate game, and the government pulls the rug under their feet because they couldn’t act on this issue years ago.

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  5. Quite disagree with the slanted perspective of this article and surprised by the focus on vested interests. If there was a recognized need for a study or review then these gentlemen could gave initiated that much earlier as opposed to this blatant attempt to slow this necessary and overdue intervention. I believe the government study of foreign ownership was completed and see the points promoted in this blog as fully biased and self-serving.
    We are very happy and supportive to see this much needed attempt to correct a ridiculous market that creates unfair barriers and ever more unattainable housing for the future generation of Canadians, who’s parents have worked hard to build a reasonable framework for their children.
    We are multi-generation Canadians, fully own our house and do not have kids. No bias. Still, we can see when something is wrong and share the frustration of others when we see our unfairly hijacked market. Kudos to deJong’s attempt to protect our home.

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    • Tod,
      Thanks for your comment. I think the concern is that the policy was implemented with such a short notice before implementation. As you are probably well aware, real estate is not a fast moving transaction. Even if a home sells within 24 hours, the closing date can often be 60 to 90 days off. If a seller sold their home to a foreign national 30 days ago, with a 60 day closing that ends sometime in September this sale would now be subject to this new tax. The buyer could quite easily get out of the contract (the seller would have to go through the Canadian court system to sue the would-be buyer…a nightmare when dealing with residents of Canada). The seller may also have committed themselves to the purchase of the next property.
      There is nothing wrong with the implementation of a foreign buyer’s tax. I’ve been calling for this action since last year (and others in the province for much, much longer). What I dislike is the way the provincial government opted to implement the tax—with little regard for how a real estate transaction works.

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      • Tax policy is ALWAYS enacted quickly and without much warning. We can argue about whether this tax policy is sound or not, but we can’t really criticize for quick implementation. While it’s true that the provincial government could have extended the date for existing transactions for 30 days or so.

        I suspect that they want a few months of data to feed the media during their bid for re-election in the spring.

        Of course, on the other hand, if a deal falls through for a homeowner, there is always the option of re-listing the property at a much lower price to make the sale. After all, if the property has increased in value by that much so quickly in the past 6 months, then surely they will still be able to sell at considerable profit.

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    • I agree with Momey Sense – no bias but strictly legally – a deal is a deal.
      “Multi-generational smells of entitlement. ”
      A co -worker young also with a family was more honest when comparing his house hunting with older established families and simply said he wished he was born 5 years earlier. Try donning the robes of a judge
      Put personal biases aside and do not give in to mob mentality. Laws are universally based on integrity and fairness to govern civilized nations. BTW if it means anything especially to First Nations I am also multi- generational. If a deal falls through we do not have
      Info on when the original seller bought so the assumption on reselling for a “considerable profit” is again a personal and subjective comment.

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  6. I will totally agree with Lori. It is not helping the economy. I would understand increase of 3 maybe 5% every year but 30% increase in 1 year? I have seen house jump by 50% in last 3 years. and is the income of the people residing in the province justify this? Quire a few of the properties were bought , repainted and sold for 100-200k more after 3 months. There has to be a correction to make it affordable, simply slowdown won’t help. Gov’t should have acted long time back and less said about the realtors who oppose this move the better.

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  7. I can see how those who are waiting for closing are greatly affected. Millionaires are asked to pay a tax on million dollar plus homes they bought for investments. Or those who were making plans to move and.now are faced with uncertainty. This seems unfair! It is also unfair that families/ people are being priced out of the market and rent has become astrinomical in price and bidding wars are occuring on rental homes. Not only are people not able to buy homes, they are now faced with the uncertainty of finding a home in general. A roof over their heads. Shelter. A basic human need. People are now moving further out and having to commute to vancouver from chilliwack and are now missing out on time with their families. People have been priced out of communities fornrent and to buy. This is unfair. At the end of the day foreign buyers have to pay 15 percent more on their homes last minute and people may lose the sale of their house and their plans will.change. at the end of the day i would assume they both have a home to go back to. I feel bad for those who grew up here, worked hard, have families here and are struggling to find a roof to put over their heads. What about these people? Selling off our city to foreign investors, driving home prices out or proportion of the median income so those paying taxes and contributing in.our.communities now have no future living in a city they grew up in is wrong. If you dont live here, pay taxes, and contribute to our community, then tou should be able to purchase homes and cause such a disconnect in our market. Housing should be just that. Housing. Instead it is.being used to generate profit. It is just plaun wrong and disgusting.

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    • I think you are confusing several things. There are local people who are being hurt by this because of the timing of this. You’re right the government should have placed this tax years ago and the fact they didn’t is the cause of the real damage to local home owners who purchased a home. What also isn’t fair is to steal people’s money. I agree there is a housing problem, but the solution is not to jeopardize our local people’s financial futures and punish them for buying into the market in order to pay for people who need to commute longer. I am not supporting commuting longer but it’s not a fair trade to sacrifice local people’s next several years to pay off what they will be owing, in order to allow people who need a shorter commute a home closer to Vancouver.

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  8. “According to De Jong, foreign nationals spent more than $1 billion on B.C. property between June 10 and July 14, 2016—86% of these purchases were in the Lower Mainland area.” These numbers don’t drive with other statistic figures, according with the statistic 5% were foreign buyers in real estates sales. Now, all a sudden, in 5 weeks, the numbers telling the public how huge the foreign nationals spent on Metro area real estates. The big question is where did De Jong got his numbers? Or is it just an excuse to impose a new tax to gain political supports? B.C. already got a big windfalls on PTT tax revenue, why can’t the government start using that money to help the locals now? Instead, open a new tax revenue to create chaos with who knows how many transactions will be put in court for back out deals?

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  9. It is absolutely, unequivocally irrelevant what realtors think of this tax. What a ridiculous article — I expect so much more from Money Sense, come on!!!

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  10. So many people are offended by this. I don’t understand why?
    BC Resident’s, local homeowners are going to be affected by the fact that this tax is retro-active. I don’t care how you slice it it is not fair and reasonable to charge someone a tax after the fact they made a purchase. If the government was in tune to what people were talking about for years now, they could have brought this tax in years ago and prevented such a prop up of the market. The government allowed the market to climb so high and now that they realize they didn’t place the tax in time they bring it in retroactively? That is not right.
    I agree with the tax. I don’t agree with making it retro-active only because the Government didn’t pay attention when everyone was saying this years ago. And furthermore I don’t agree with simply blaming the BC residents who did buy into the market.
    The local homeowners are still our very own BC Residents. Christy said she wants to place British Columbian’s first. Are the local homeowners not British Columbian’s anymore because they own a property? I mean where do we draw the line? I’m disgusted to see people say “oh they deserve it, they had it coming, I don’t feel sorry for them”. Let me remind you that these are the same people, like you and me, who barely got in the market, over-leveraged themselves to just barely be able to afford a home BECAUSE of competing with the foreign investors. And after the BC government is pulling the rug under their feet, it’s now the local home-owners fault? That is not right!
    Read the recent stories how so far, only the innocent local home owners are being hurt by the fact that this tax is retro-active. They need to change this aspect of the tax!

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