Federal Government to End Tax-Free Home Sales for Foreign Buyers

It appears the Federal government is doubling down on efforts to control the real estate market, with new tax rules for foreign investors – and stricter mortgage rules for Canadians – to take effect October 17.

The changes are the latest in a round of government measures designed to calm unsustainable real estate prices in Toronto and Vancouver, and to stem growing household debt; last December, the feds hiked the minimum down payment requirement to 10% on homes priced above $500,000, and have increased its scrutiny on mortgage insurers and lenders.

Related Read: New Mortgage Rules May Impact Your Ability to Buy a Home

No More Tax-Free Home Sales for Foreign Buyers

However, today’s changes are the first that specifically target foreign investors at a federal level: In a speech from his Toronto office, Finance Minister Bill Morneau announced the government will no longer offer a tax exemption to foreigners selling homes within Canada. Currently, anyone who sells their primary residence enjoys the profits of their home sale tax-free. Now, in order to be eligible for a tax exemption, a buyer must be a Canadian resident the year the home is purchased. As well, only one home may be designated as a principal residence per family.

Stated Morneau, “We will ensure that the principal residence exemption is available only to Canadian residents, and that families are able to designate only one property as the family’s principal residence any given year, as intended. We will also ensure that the Canada Revenue Agency is able to assess income tax owing in cases where taxpayers do not report the sale of a property as required under the tax rules.”

This is in efforts to discourage real estate “flipping” – purchasing Canadian homes and selling them rapidly for a profit – which has been found to be common practice among foreign investors, especially in the Vancouver real estate market.

Related Read: Foreign Investment in Canadian Real Estate – How Bad Is It?

The Pressure to Protect Local Buyers

That foreign buyers’ practices are leading to unsustainable prices for Canadians has been the hot button issue for real estate policy makers, and has raised calls for change. Most recently, the provincial B.C. government introduced a 15% tax on homes purchased by foreigners within Metro Vancouver; it’s widely expected the move will soon follow to Toronto.

Pressure has been mounting from frustrated Canadian home buyers, who say little has been done to protect their interests in the face of investment tactics, and even fraud. The narrative around out-of-control housing prices reached fever pitch following an investigative report by the Globe and Mail, which uncovered rampant abuse of Canada’s tax exemption loophole among foreign buyers. According to the Globe, large numbers of foreigners have been snapping up multiple homes and condos in Vancouver, claiming principal residence status on them, and selling them at an elevated price, pushing real estate prices further out of reach for local buyers.

Will the Changes Work?

This development may signal a sea change in the government’s attitude toward foreign investment; home buyers and the media have long called for an in-depth look into its impact on the market, but no solid numbers seem to exist. In 2014, the Canada Housing and Mortgage Corporation released foreign condo ownership numbers, pegging the highest percentage at 2.4%. The findings were met with widespread incredulity.

However, it appears all levels of government are approaching the issue, with a number of studies slated for the coming year. And, if early numbers from BC are any indicator, the 15% tax has cooled investors’ appetites for Vancouver real estate; adding taxation to home sales will certainly reduce flippers’ profits and may slow demand. But economists warn Canada must proceed with caution when discouraging investment, especially as the economy has yet to regain its steam post financial crisis.

There’s also concern that blanket initiatives can also inadvertently harm those who wish to move to Canada to live and work; one Vancouver-area agent even suggests it could lead to brain drain for Vancouver-area industries. “When you say overseas buyers, people think of the uber-rich Chinese buyers, but there’s a lot more than that,” says Casey Archibald, Realtor at RE/MAX Crest Westside. “There are a lot of Americans who have jobs here, people who are buying a place for their kid in school, Europeans who want to retire here – these people will all be affected.”

New Mortgage Rules May be More Effective

However, this measure against foreign buyers may be a small development compared to the second part of the government’s announcement: moving forward, all insured mortgages will be subjected to a “stress test”, meaning buyers must qualify at the rate of 4.64%. This move is expected to knock a considerable number of new buyers out of the market. That banks may increase their rates as a result will only further limit the number of would-be borrowers, which experts argue will have a much more dramatic impact on the market than foreign demand.

Whether declining investment interest in Canada’s market will translate to lower real estate prices remains to be seen, especially in the hottest markets; all eyes are sure to be on market data in the months to come.

Do you think taxing foreign investors will make real estate more affordable in Canada? Tell us in a comment, or visit us on Twitter.

About Penelope Graham

Penelope Graham is the Managing Editor at Zoocasa. A born-and-bred Torontonian and quintessential millennial, she has over a decade of experience covering real estate, lifestyle and personal finance topics. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods.

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