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Tax on foreigners buying homes could heat up market: Drummie

Toronto real estate lawyer Blair Drummie says the B.C. government's new 15 per cent tax on foreigners buying homes in a red-hot housing market may not cool it off as it intends.

Indeed, Drummie suggests it may even heat up the sizzling west coast market. By way of example, the two separate land transfer taxes — provincial and municipal in Ontario and Toronto — which apply to housing sales in Toronto, earned a "huge amount of money for Toronto," he says. "But the Toronto land transfer tax has done nothing to slow anything down."

The tax, which applies to home sales in the Greater Vancouver Regional District, took effect on Tuesday, adding a 15 per cent levy on sales to "foreign entities" including individuals, corporations and trusts.

The foreigner buyer tax is an attempt to cool the market and make housing affordable, according to a CBC report. The report also raises concerns whether the law is constitutional and that it may infringe provisions in NAFTA.

"I question whether or not it’s in good stead with international treaties," Drummie agrees.

The average price of a B.C. home in June was just under $695,000, the most recent statistic available, compared to about $632,000 at the same time last year, according to the Canadian Real Estate Association (CREA). The average price of a home in Vancouver in June was $1.03 million, compared to about $922,000 in June 2015, according to CREA statistics.

"They brought it in very quickly," Drummie says. The Clark government proposed the tax July 2nd and it was imposed August 2nd.

Nevertheless, timing is key for this type of tax, and that moment passed a while ago, he says. The B.C. government should have introduced it "when they first noticed the foreign ownership going through the roof. These increases in house prices are not driven by the free market, they are driven by uncertainly in foreign jurisdictions, and Canada is considered a safe haven for international money," Drummie says.

The demand first spiked for luxury homes, and when that supply dried up, focus turned to more affordable and modest homes.

"Shadow flipping" or "assignments" have also been a cause of hiking prices in B.C., something which, while technically  permitted in Ontario and other provinces, it is not a practice that most real estate agents in Ontario partake in. The B.C. government initiated a move in March prohibiting shadow flipping, where someone agrees to buy a home for a set price but the agent or purchaser will sell it at a higher price before the first deal is closed. The initial seller ends up receiving the amount they negotiated for the property, but the the end buyer pays substantially more, with each agent along the line getting their cut.  Agents owe a duty to their clients to get the highest price possible, and if they end up selling a firm deal for more than the initial price, they have not respected that duty.

Nevertheless, the tax may not do much to cool the market, Drummie suggests.

"In fact, it may even heat it up more," he says. The 15 per cent could act as the first "shadow sale", just adding to the price of homes.

"All it's doing is giving the government its first cut." 

The tax list in B.C. for a home sale by a non-resident buyer in the affected district now includes the 15 per cent tax, the land transfer tax and, when it's sold again, a capital gains tax, a tool Drummie says could have worked to cool sales.

Drummie wonders if foreign buyers were ever alerted about the capital gains tax. "We've had it for decades. They have to pay a 25 per cent capital gains tax when they sell the property," he says.

"It's too bad they didn't have some sort of informational program advising foreign purchasers of this because it might have slowed the market down when it first started," Drummie says. "Foreigners are buying property without having any idea they are going to get hit with this large capital gains tax on the way out.

"Lawyers are the gatekeepers of the capital gains tax," he says. "There is no way of getting around it."

He acknowledges the government was stuck between the need to keep housing affordable and "mega-wealthy foreign owners" seeking a safe and stable haven. But if the new tax has an effect on the B.C. market, it could heat up markets in other provinces, Drummie says.

As part of the B.C. government's move, Vancouver now has the ability to tax vacant homes to force owners to put them on the rental market. A city report suggests that Vancouver had about 10,800 vacant homes in 2014 compared to 8,400 in 2002, and presently rental vacancy rates are below one per cent. One in 10 of the condo units sit empty in Vancouver.

The tax urges owners to put vacant homes and condos onto the rental market, increasing the supply of units.

"It's a very good idea," Drummie says. "This law has given municipalities the ability to impose a tax on vacant condos. That sounds like a good solution to reduce the vacancy rate."

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