Foreign investors are frequently painted as villains in real estate news, blamed for snapping up badly-needed homes and leaving them empty, while local Canadians are priced out of their own neighbourhoods. It’s a hot topic that reached fever pitch this week as revelatory reports cast fresh scrutiny on foreign investment in Canadian real estate – and how easily it happens.
For example, as reported by the Globe and Mail, nine post-secondary students are named as the owners of homes valuing a total of $57 million in Vancouver’s upscale Point Grey neighbourhood. Another story alleges the Canada Revenue Agency and police turned a blind eye to rampant real estate speculation and tax fraud committed by Kenny Gu, who manipulated tax exemption rules and lax income verification to flip millions of dollars-worth of British Columbia homes for foreign clients – all while paying next to no tax.
Playing by Different Rules
The reports have drawn the ire of the provincial NDP, with housing critic David Eby calling on the federal government to investigate why Canadian banks use an easier set of criteria to qualify foreign buyers for mortgages – especially those who state “student” or “homemaker” as their occupation.
According to documents obtained by the Globe, additional income verification isn’t required for foreigners taking out mortgages at some big banks as long as they have enough upfront cash; only a 50% down payment is needed at Scotiabank while BMO requires only 35% down, along with a year’s worth of liquid mortgage payments.
By comparison, domestic borrowers must prove years’ worth of income and tax history, employment stability, the source of their down payment funds, and their ability to pay their mortgage each month.
“The fact that the provincial government has so little interest in asking those questions allows the Canadian banks to have a totally different set of rules for international investors than they have for locals,” stated Eby.
A “Tax Haven” Heaven?
This isn’t the first time Canadian banks have been chided over their qualification methods, which they say are to help newcomers buy homes and build credit. However, critics argue they really just open the door to investors with no intentions to reside in Canada.
In July, the Office of the Superintendent of Financial Institutions (OSFI) grilled the big banks over this, saying it leaves them vulnerable to borrowers with poor credit and potentially high risk of default.
Combined with Canada’s principal residence tax exemption – meaning you can sell your primary residence and not be taxed on any appreciated value it has gained – critics say perfect conditions exist for savvy investors to sidestep tax laws.
According to the Globe, in the case of Mr. Gu, his overseas clients all claimed to be purchasing a primary residence – and the CRA has been hesitant to follow up on these purchases due to fears of racial profiling and lack of experience with foreign income.
A Season of Change?
Home buyers and the media have long called for an in-depth look into the extent of foreign investment in Canadian real estate. Early numbers released by the CMHC in 2014, which claimed the highest percentage of foreign condo ownership in the country was 2.4%, were met with widespread incredulity.
It appears all levels of government are now willing to investigate further, with a number of studies slated for the coming year. The Department of Finance has announced a study to be launched this fall, in addition to $500,000 in funding for a year-long Statistics Canada project. The Toronto Real Estate Board also stated in its August Monthly Resale Housing Market Figures report that it will release third party data as well as consumer and realtor survey results on foreign activity this fall.
No Slowdown in Sight
British Columbia, however, has taken the most drastic – and controversial – approach, implementing a 15% land transfer tax for foreign buyers purchasing a home within Metro Vancouver. Home sales have plummeted in the months following, as speculation grows Toronto will be the next to implement such measures.
Vancouver Mayor Gregor Robertson is also pushing for a vacant home tax, which may charge as much as 2% of a home’s appraised value if proven to be sitting empty. The province has since greenlit the tax’s development, to be finalized by 2017.
However, despite these new taxes, the British Columbia is still forecasting huge numbers over the next few years, anticipating $4.9 billion in investing through March 2019.
Do you think foreign investment is a big issue in Canada? Tell us in the comments!
