The Hot Market, a Cooling Off Tax, and Your Assets

Tax Matters for Canadian Businesses

Your Business, Your Money: tax advice to help you keep more of what you earn

With Canadian top tax rate over 50%, a dollar of tax saved is now more than two dollars earned. Each month we translate the complexities of tax news into actions for Canadian businesses. This month we change from our usual focus on cross-border trade to address the rumours on what tax changes could be contained in the upcoming federal budget.

What a foreign buyer tax and other potential measures for the GTA’s overheated housing market could mean for you   

 April 2017

Without question, real estate seems to be a seller’s market these days as the average price of a detached home in Toronto has exceeded the one million dollar mark. With no signs of slowing, the Toronto Real Estate Board’s benchmark index also revealed a 22% year-over-year increase in home prices for the month of January. The numbers speak for themselves, and they are accompanied by stories of bidding wars, multiple offers and homes selling for tens of thousands – if not hundreds of thousands – over asking.

We’ve already seen this play out, out west. Vancouver’s market has soared in recent years and local residents, especially first-time home buyers, were getting priced out. To try to curb the influx of foreigners buying up property in Vancouver, the BC government introduced a 15% real estate tax on properties purchased by foreign nationals (in simplest terms*). The result: “home sales in the Vancouver area fell by 33 percent in September compared with the same month last year as the market [adjusted]”1. Whether this has effectually corrected the market for the long term is still to be seen, but would this same approach ease the stress in the Toronto market? How will it affect the value of your assets if enacted?     

Here’s what’s being said: 

  • “Ontario has balked at the idea of taxing foreign buyers over concerns that such a tax could significantly hurt the value of homes that people already own.” – CBC News, January, 2017
  • “Across Canada, real estate prices rose by a seasonally adjusted 1.3 per cent in February compared with January. In Toronto, however, the rise for the same period was 2.6 per cent, marking the strongest gain in five months.” – The Globe & Mail, March, 2017
  • “The Ontario Real Estate Association has come out against a foreign buyer tax, saying the overwhelming majority of foreign home buyers are immigrants or permanent residents looking for a home, not speculators.” – The Star, March, 2017
  • “What’s driving the Toronto market is mostly a mix of psychology and adrenalin. …Realtors don’t want a foreign-buyers tax. They prefer politicians to instead address what they see as a supply problem caused by regulations that restrict construction of new houses. … New housing projects are scarcer, and this imbalance needs attention because a lot of buyers prefer houses over condos.” – The Globe & Mail, March, 2017

 The Richter take:

In a January 2017 article, The Star reported that “fewer than 5% of the 113,133 residential real estate transactions in the Toronto region last year involved buyers from outside Canada.”2 Many industry experts have also commented that implementing a tax in a single city region would only put more pressure on home prices in neighboring areas, like Guelph or Hamilton.

These are the statistics and perspectives from industry experts and politicians. But if such a tax was created, or if other measures were taken in order to curb the skyrocketing prices in the current market, what would that mean for the value of your home?

The Ontario government has been watching the impact of BC’s 15% additional tax in metro Vancouver. According to data from the Real Estate Board of Greater Vancouver, residential sales dropped 39.4% in December 2016 from a year earlier. Interestingly though, at the same time, the benchmark price for a detached home was 18.6% higher than in 2015. It seems then that while this did scare away some foreign buyers, reduced the overall transaction volume, and might have contributed to maintaining the frenzy at a relatively stable level, it did not lower prices for the local buyer.

There have been divergent views on this tax for the GTA. Those in favour believe that foreign buyers are the main force driving up market prices. The opposing side, including many realtors, claims the imbalance between supply and demand has been the core issue. The third voice is somewhere in the middle. They agree with government intervention, but do not believe that a tax on foreign nationals is the best option. They argue that the new tax should focus on the speculative action of house-flippers. Even though there may be unwanted side effects, the Ontario government appears to be now open to a BC-style levy, although it is not fully convinced that foreign buyers are the main reason for the current red hot housing market in Toronto, which certain analysts forecast will climb 20-25% this year if no measure is taken. 

What to expect…

Faced with tremendous public pressure, it appears that it is just a matter of time that the Ontario government will take measures to cool down the GTA housing market, particularly in Toronto. Charles Sousa, Finance Minister of Ontario, has recently confirmed that the upcoming Ontario budget will include housing affordability measures; and the foreign buyers’ tax has been floated for consideration. However, Sousa also stated that “unintended consequences” of such a tax must be avoided, so the government might adopt a distinct approach compared to BC. Measures directed to counter speculation in the market may be taken, including, for example, a heavy tax on short term house flipping, or a GTA property transfer tax more focused on the speculative intention rather than on the identity of the buyers.  

If such measures are taken, it is possible that they will lead to more stable real estate values as observed in BC, however there is still significant uncertainty about the market reactions in the near future. If you are in the real estate game already or are considering purchasing investment properties, it’s crucial you protect your Principle Residence status should any legislative changes take effect.

Given this uncertainty, it is important to follow the real estate market, including the likely upcoming actions by the Ontario government, in order to be able to make informed decisions regarding sales, purchases and rental arrangements.

*A deeper dive into the BC tax legislation and its impact: the 15% tax is essentially an additional property transfer tax on top of the general transfer tax. This tax is levied on the purchase price of residential property transferred within the Greater Vancouver Regional District. Although the mechanism is somewhat straightforward, the crux of this regulation is who falls into the ‘foreign buyers’ net. These foreign buyers are mostly “foreign entities”, i.e. foreign nationals (a person who is not a Canadian citizen or a permanent resident) or the corporations controlled by them. Failure to pay the 15% tax could lead to serious consequences, such as interest and penalties of up to $200,000 for a corporation and $100,000 for an individual. In the worst case, it could mean jail time of up to two years for an individual.

Read more:

Written by:

David Hogan, Partner – Tax
Andre Oliveira, Sr. Manager 

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About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.


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