Canadian real estate speculation has been a huge issue, and BC plans on addressing it. The Province of British Columbia revealed the 2018 budget, along with their 30 Point Plan For Housing Affordability In British Columbia. The plan reveals the most aggressive strategy for tackling real estate speculation Canada has ever seen. Here’s the most important points that will impact real estate prices.
A 2% ANNUAL Speculator Tax
The new annual speculator tax targets both foreign and domestic homeowners that don’t pay income taxes in BC. The tax begins at 0.5% of the assessed value of the home, beginning this fall. It will gradually increase to 2% by 2019. The Province acknowledges most homeowners will be exempt from this tax. Those with high worldwide incomes, paying little to no taxes in BC, are the target. The Province warns that audits will be used to ensure compliance.
Why the tax? BC has been seeing a number of low income households, in very pricey real estate. This has made some suspicious that international income is not being declared by many homeowners. The rule comes after one of Canada’s largest banks has decided to crack down on a similar issue, when issuing mortgages.
Luxury Transfer Tax Increase
The wealthiest homeowners are being hit with an additional transfer tax. Effective today, February 21, 2018, the property transfer tax above $3 million is increased from 3% to 5%. If that didn’t hurt enough, the province is also increasing the provincial school tax for these homeowners. The Province is sending the message that luxury home prices, are really only for those that can afford it.
Why the tax? These might seem like “eat the rich” tax schemes, but it may tackle an interesting, only-in-Vancouver issue. Tear-downs, houses that a buyer would likely destroy, have been trading to speculators for well over $3 million. The buyers sometimes tear it down to build their dream home. More often buyers are building new “luxury housing.” There’s a whole Facebook group dedicated to the historic homes lost, that’s worth checking out. The Province wants to make sure you really want that home. If you don’t, they want to make it harder for you to make a profit on the flip.
Increasing The Foreign Buyer Tax
The expansion and increase of the province’s foreign buyer tax is effective as of today. The 15% tax levied on property transfers to non-residents buying in Metro Vancouver, will be increased to 20%. The tax will also be expanded to the Capital Regional District, the Fraser Valley, the Central Okanagan and the Nanaimo Regional District. The expansion will prevent any non-resident speculation from spilling over into neighbouring communities.
Why The Tax? It’s BC. Non-residents buy 1 in 5 condos in Vancouver, according to the CMHC. Condos are the starting point for homeowners, and placing excess pricing pressure breaks the chain. Many young people with pretty good jobs, can’t begin their homeownership journey. You know… if they’re into that kind of thing.
Even worse, the 1 in 5 overseas buyers are only the ones that hold the property through completion. The foreign buyer tax does not address speculators engaging in pre-sale flips. For them, there’s the next measure.
Cracking Down On Pre-Sale Flipping
The province is creating a mandatory database of condo-presale buyers. Previously, only developers knew who were buying and flipping properties. The BC government would like to know who these people are, how often they do it, where they’re from, and ensure they’re paying the right amount of taxes. This information will be shared with federal tax authorities. More important, it will give the province some hard numbers on whether this is a real or imagined problem.
Why The Tax? For just a 5% down, you can play the condo speculation game. Across Canada, condo assignments are being used as an impromptu real estate derivatives market. You buy a pre-sale for 5% down, and try to sell the assignment to someone else before you owe the next 5%. It’s kind of like margin trading for the stock market, or buying options.
For example, you can buy a $1,000,000 condo assignment with just $50,000 down. Before the next 5% is due, you attempt to sell it for a 5% increase. If you close that, you made $50,000 on a $50,000 investment. Heck, even if you get half – you’ve just made a 50% return. If you do that often enough, it should be taxed like a job – just like regular traders get hit with.
Moving To End Hidden Ownership
The Province is looking to track beneficial ownership of property. That is, who actually owns every home. The Land Title and Survey Authority will now be requesting additional information on property transfers. A publically accessible registry of beneficial ownership of all properties will also be maintained by the province. The information will be shared with tax authorities, and law enforcement, to ensure compliance with the law.
Why The Tax? No one’s really sure how big of a problem hidden ownership is, but there’s some signs it’s not a great situation. Transparency International Canada found that half of Vancouver’s most expensive homes, had anonymous ownership structures. Some people just like their privacy, after all who hasn’t had a lunatic reader show up at their home? However, politicians have expressed concern that masking ownership is being used to dodge foreign buyer or land transfer taxes.
Which strategy do you think is going to have the most impact? Let us know in the comments below.
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