Skip Ribbon Commands
Skip to main content

The Foreign Buyer Tax Leaves Us With the Wrong Kind of Speculator

01/09/2016


​​​MNP's TAKE: When it comes to investment properties, individuals and corporations in the market often have a fairly good idea as to what they are looking for and why. The Vancouver housing market for instance, isn't showing any immediate signs of letting up. The returns on an investment in Canada's costliest city could be significant for those who can afford to pay top dollar.

What could come as a surprise to investors however, are the indirect taxes involved and the impact they could have. Canada operates within a complex indirect tax system. While some provinces have harmonization between federal and local indirect taxes, others operate with separate tax systems. To further complicate matters, the lack of indirect tax harmonization across our country can be a challenge for domestic and foreign individuals or corporations investing in Canada's real estate market. Indirect taxes, also known as commodity taxes, are usually transaction based and include everything from the federal Goods and Services Tax (GST), the combined federal / provincial Harmonized Sales Tax (HST), to the Provincial Sales Taxes (PST) and Property Transfer Tax (PTT) in some provinces.

Whether you are a foreign individual or corporation interested in Canadian property or a Canadian individual or corporation sourcing property abroad, it's important to work closely with a proficient tax advisor who has a keen understanding of the tax laws and requirements within that jurisdiction. Indirect and unexpected taxes can add up quickly when they are not properly accounted for and built into the structure of your investment portfolio. And when it comes to investments, every dollar adds up. 

For more information about domestic or foreign investments and how to navigate through the complex world of indirect tax, contact Angela Chang, CPA, CGA with MNP's Taxation Services team at 778.374.2121 or [email protected]


BY LINDSAY TEDDS FROM THE GLOBE AND MAIL

Associate professor of economics in the School of Public Administration at the University of Victoria

This week, the B.C. government announced a new 15 per-cent property-transfer surtax to be applied to all foreign buyers of residential property in the Greater Vancouver Regional District, effective on transactions closing on or after Aug. 2, 2016.

The objective of the tax is to curb foreign speculators from investing in residential real estate in the GVRD and help to cool the rise of prices.

The foreign buyers to whom this surtax applies are defined as individuals who are not Canadian citizens or permanent residents.

In addition, foreign buyers include foreign corporations. This includes corporations not incorporated in Canada or corporations that are incorporated in Canada but are controlled by a foreign national or foreign corporation.

The idea of a surtax applying to foreign buyers in an effort to curb prices is not novel. In fact, the B.C. surtax appears to be directly modelled after a Hong Kong tax that was implemented in 2012, in an effort to reduce foreign speculation. A similar tax also exists in Singapore, which applies an 18-per-cent surtax on foreign buyers.

In economics, a tax on transactions (in this case, residential properties, but it can apply to anything) intended to curb speculation is known as a Tobin tax, after Nobel Prize-winning U.S. economist James Tobin.

By raising the cost of the transaction (in this case, buying a home), so-called speculators will be dissuaded from engaging in the transaction.

If speculators are dissuaded by the transactions tax, then prices should stabilized to “normal” levels – in theory.

But Tobin taxes have been well studied, both in application and in theory, and there is little consensus and evidence that they achieve the intended objective.

In terms of the application to the housing market, the main finding is that this type of tax does not dissuade uninformed or “bad” speculators. But it does drive out informed speculators, who are key to maintaining market and price stability.

The unsurprising result is increases to volatility and decreases to price informativeness, the end result of which is housing price instability.

This finding is even more concerning in the presence of a housing bubble, such as has been argued exists in the GVRD, because the presence of the bubble itself drives out informed speculators, leaving mostly uninformed speculators.

In the presence of a bubble, then, the transaction tax drives out the remaining informed speculators, further destabilizing the market and prices, and potentially leading to the bursting of the bubble.

The main conclusion of the existing research is that the best way to fight housing speculation is actually to increase supply rather than pursuing anti-speculation taxes.

There are also several troubling aspects related to the implementation of this tax.

First, its application to all foreign buyers means that foreigners relocating to Vancouver for employment purposes will be subject to the tax.

Vancouver is home to numerous employers that compete in the international job market, such as the University of British Columbia. Employers are already challenged to attract top talent because of the housing prices, and the transactions tax that will apply to these individuals when they look to buy into the city’s housing market will further this challenge.

While they can wait until they are accepted as permanent residents, most find this to be a two-year process and the delay in being able to set up longterm roots will be unacceptable to many.

Second, it is already clear that the tax can be avoided through various personal options, corporate structures and government programs, notably those that guarantee permanent residency status.

The targets of this tax are high-income, high-net-worth individuals – these are people who can easily afford the advice of professionals to game the system.

Third, it ignores the fact that many “foreign” buyers, or at least their spouses or children, have already achieved permanent residency or citizenship status.

The tax will not apply to them and this status will simply lead to abuse of this status for the pure purpose of tax avoidance by others who are not so lucky.

Permanent residency or citizenship will become a commodity for the purpose of tax avoidance.

The tax might make for good politics and media ahead of next spring’s scheduled B.C. election, but it does not make for sound, evidence-informed policy.

Here’s the upside: To the extent that uninformed speculators make up the Greater Vancouver residential housing market, the tax will be successful in collecting revenues that can be dedicated toward increasing the housing supply.

 

This article was written by Lindsay Tedds from The Globe And Mail and was legally licensed through the NewsCred publisher network.