An additional property transfer tax aimed at stemming the tide of foreign investment in residential real estate has made immediate waves in the Metro Vancouver market. In a surprise announcement last week, the B.C. government introduced the 15-per-cent surcharge without grandfathering provisions to protect deals that were in place but would not close before it took effect Aug. 2.
On Tuesday, the Fraser Valley Real Estate Board reported that the roll out of the property transfer tax had caused some deals involving foreign buyers to fall through. The board noted that its president, Charles Wiebe, and CEO, Rob Philipp, had written a letter to Finance Minister Michael de Jong conveying that its members are frustrated by the negative impact of the legislation’s “hasty implementation” on their clients.
“Consider the local seller who has proceeded with a deal involving a foreign buyer, turning down other offers and putting the work in, now being left out to dry after their arranged buyer backs out due to the tax,” Wiebe said in an announcement.
The additional property transfer tax was enacted through Bill 28, Miscellaneous Statutes (Housing Priority Initiatives) Amendment Act. It was accompanied by a new fund for provincial housing and rental programs, which will see a share of revenues generated by the new surcharge; changes to the Real Estate Services Act, including ending the self-regulation of the industry; and amendments to the Vancouver Charter that will pave the way for a vacancy tax.
“These changes are about helping to make sure that British Columbians can continue to live, work and raise their families in our vibrant communities,” said Premier Christy Clark in an announcement.
In particular, the additional property transfer tax is designed to curb the foreign demand that is believed to be contributing to runaway prices that are locking some local residents out of home ownership in the region. The Real Estate Board of Greater Vancouver reported that the benchmark price for detached homes rose to $1,561,500 in June, marking a 38.7-per-cent year-over-year increase.
“While investment from outside Canada is only one factor driving price increases, it represents an additional source of pressure on a market struggling to build enough new homes to keep up,” Finance Minister Michael de Jong added in the announcement. “This additional tax on foreign purchases will help manage foreign demand while new homes are built to meet local needs.”
The government’s announcement coincided with the release of data on this buyer group’s ownership of residential real estate in the western province. Over the course of five weeks spanning from mid-June to mid-July, foreign nationals spent more than $1-billion on B.C. property, primarily in the Lower Mainland.
Edmond Luke, a partner at Fasken Martineau whose practice areas include foreign investment and real estate investment, noted that the property transfer tax is the first of its kind in Canada, and possibly the world. Other jurisdictions have used different tools to address foreign investment. Australia, for example, has experimented with restrictions on real estate ownership, while China taxes capital gains on speculative transactions.
In fact, because the measure is untested, some professionals are questioning not only whether the contracts that failed to close before Aug. 2 remain valid, based on the principles of frustration, but whether the legislation is enforceable at all.
“Some are suggesting a Charter or constitutional challenge; others are suggesting that it violates trade treaties such as the WTO or NAFTA,” said Luke. “All of those are interesting academic questions, but practically I don’t see anybody able to lodge those challenges and try to get themselves exempt from this tax through the process — it would take too long and [be] too expensive.”
Other professionals have suggested that foreign buyers will find ways to circumvent the additional property transfer tax. However, the legislation provides for penalties of up to $100,000 for individuals and up to $200,000 for corporations, as well as possible imprisonment.
“It’s a general rule that says: ‘If you were to, through a series of transactions, or through structures, try to avoid this tax, you will get assessed,’” explained Luke. “And anyone who is caught doing this, or assisting in doing this, will be fined and the legislation said even up to two years in jail.”
The legislation builds in the flexibility for the B.C. government to adjust the rate and the geographic boundary of the additional property transfer tax, which currently applies only to Metro Vancouver. The province’s counterparts in Ontario are expected to observe closely the effects of the surcharge, given similar conditions in the Toronto housing market.
The rush to beat the Tuesday deadline and the delay of deals with conditions yet to be waived suggests that the additional property transfer tax is already doing its job.
“There’s definitely a freeze effect on the market that we’re seeing very, very visibly right now, and that in itself, I think, will have the intended effect of stopping the rise of prices or maybe effecting them to drop,” said Luke.
Michelle Ervin is the editor of CondoBusiness.