What is the Foreign Buyer Tax?
Vancouver recently introduced a 15% land transfer tax on foreign owners in an attempt to cool the ultra-hot real estate market there. It may also be coming to the Ontario market soon, according to a leading CIBC economist.
The tax is levied on foreign nationals, corporations or taxable trustees, and is on top of the BC Property Transfer Tax (PTT), and applies to property in the Greater Vancouver Regional District.
According to statistics released by the Real Estate Board of Greater Vancouver (REBGV), the new tax may already be having an impact since the tax came into effect on August 2. The MLS Home Price Index, which normalizes sales statistics to show how typical homes are selling, has risen just 4.9 percent in the last three months, to $933,100. That's also 31.4% over August of 2015, but the current trend is much lower. Sales volume in August dropped an astonishing 44.6% from last year.
How does the BC foreign buyer tax impact the GTA?
With the lack of land to build new residential housing in the Toronto area, the current lack of housing inventory is driving prices up at a record pace. There is concern that the Vancouver tax will drive foreign investors east to the Toronto market, where analysis already shows a considerable amount of foreign purchasing, especially in the new condo market.
Benjamin Tal of CIBC has warned his clients that Ontario will need to deal with the issue by responding with a similar tax here. Other ways to help curb local demand include raising the minimum down payment to 10% and forcing lenders to tighten lending by making them shoulder the costs of mortgage insurance.
Toronto already has a municipal land transfer tax, and this one would be stacked on top of both existing land transfer taxes.
The intent of these actions would be to help lower demand, thereby lowering the pace of price increases. What they couldn't affect, however, would be the continuing lack of supply. The alternative approaches that don't target foreign buyers may only serve to shut more prospective homeowners out of the GTA housing market.
Foreign Buyers Lauch Lawsuit Against BC Government
The situation in Vancouver became more murky following the launch of a class action lawsuit by foreign buyers against the BC government in the BC Supreme Court. The suit alleges that the provincial government has no business discriminating against foreign buyers as the province has no constitutional authority or legal authority as they are foreign nationals and are protected by over 30 international treaties, including NAFTA.
If the lawsuit becomes certified by a judge, proceeds and is successful, the BC government could be forced to repeal the tax and repay millions of dollars to the plaintiffs. The process could take up to a year to get to trial. Those new tax dollars were earmarked to go to affordable housing projects in the Vancouver area.
If this lawsuit is successful, the impact could be felt here in Ontario. If Ontario were to launch a similar tax, it could also be repealed on similar grounds. In that case, the federal government may need to launch a national tax, provided that it could be done within the constraints of the treaties referred to in the BC case.