Market watchers have little faith in anti-flipping tax, foreign tire buyers will improve housing affordability in Canada

New federal housing policies are being met with significant skepticism as to whether they will curb speculation and increase affordability.

The new federal anti-flipping tax and the two-year ban on foreign home purchases both came into effect this month. Neither move is expected to significantly impact the housing market in a way that would lead to a reduction in property prices, or curb the treatment of housing as a commodity. A report released by the Parliamentary Budget Office in September showed the house price affordability gap widened last year. The report said the average house prices in Vancouver, Victoria, Toronto, Hamilton, Ottawa, Halifax and Montreal “were more than 50-per-cent higher than their respective affordable prices in August.”

The idea of ​​the ban is to protect the supply of housing for Canadians, which, in major markets, has been de-coupled from local incomes.

However, the foreign buyers’ ban is really just a fine, argues Toronto-based Ron Butler, owner of a large mortgage brokerage and outspoken critic of issues such as tax evasion. The maximum penalty for violating the tires is $10,000, which he calls a pittance in high-priced Vancouver and Toronto. And the numerous exemptions make it even weaker. Non-resident buyers already make up a tiny share of the market. And those who are exempt include long-term international students and people with temporary work permits, non-Canadians married to a Canadian citizen or permanent resident, those with temporary resident status, diplomats, refugee claimants and some international organizations.

Buildings with more than three units are still open to foreign investment, as are properties in less populated areas, as well as recreational properties.

The government can force the sale of a property, to be sold at the price it was purchased. And those who helped facilitate the purchase can also be fined.

Mr. Butler sees the unlikely scenario as achieving little.

“So they catch you after [the sale] closes,” Mr. Butler says. “We’re not sure how they will monitor it, but let’s assume they catch you. You’re forced to sell the house. It would appear to be a court-ordered transaction, some kind of court order, which would probably take a couple of years before it reached a point of seriousness and a forced sale.

“So you could go ahead and buy the place, you wait 18 months and they’ve chased you, and then you sell it, and you pay the $ 10,000 fine. That’s kind of the perfect money laundering timing scenario.”

Mr. Butler has been criticizing the ban on social media. His other complaint is that the ban doesn’t address the foreign wealth that flows into the market by way of international students and others who live in Canada but are funded by a family member who earns their income outside the country. Satellite typically declare little income tax in Canadian families. In Vancouver, the result has been multimillion-dollar properties owned by proxy owners, students and homemakers.

“The reality is that 95 per cent of the money that flows into Canada comes here from people who are already permanent residents,” he says. “They are the siblings, the spouses, the offspring of the foreign agents, and they’ve come here through standard immigration protocols.”

The new anti-flipping tax measure is aimed at purchasers of properties who flip them under a year. If the house is sold for less than a year after purchase, the entire net profit is taxed as business income. The owner no longer stands the possibility of benefitting from the 50-per-cent capital gains inclusion rate, or the principal residence exemption. The 50-per-cent inclusion rate is the allowable taxable capital gain, generally lower than business income tax. However, there are several exemptions for incurring that new tax as well, including divorce, death, moving far away for a job, and other situations that require a person to sell.

“Just as we found out with the foreign buyer’s tires, the new [anti-flipping] tax could have as many holes as a pair of fishnet stockings,” Mr. Butler says.

“I’m a critic of the loopholes. Here’s what will happen since there’s an exemption for marriage breakdown. Every house flipper that wants to sell before the end of the one full year, they will announce they’re filing for divorce and magically reconcile once the sale is through.”

Exemptions aside, not many people who flip homes do so in less than a year, says Prof. Rhys Kesselman, professor emeritus at Simon Fraser University’s School of Public Policy.

“I would have gone for two years or three years, frankly, if I were writing legislation and thinking about the policy goals,” Prof. Kesselman says.

“There’s one other interesting twist on the flipping tax,” he says. “If you lose money – which could happen now with the market being soft and maybe going down – the loss cannot be claimed as a business loss. That’s very interesting. They just wanted to, I imagine, say, ‘this is a no-go area. Don’t do it. If you happen to lose money you’re out of luck.’”

But he’s also doubtful that the new measures will do much to improve affordability.

“Looking back, I don’t think anything that BC has done, or now the federal government is doing, has had a big impact,” Prof. Kesselman says.

“Maybe an indefinite foreign ban on purchasing would have more of an impact, not just two years, and not with all these exclusions.”

The federal government estimates tax revenues of $64-million over five years will be generated by the anti-flipping tax measure, according to Budget 2022, tabled in April. The government’s concern was that people flipping homes were “improperly reporting their profits” as either capital gains or claiming the principal residence exemption, according to the new rule. It includes rental properties that are flipped.

The anti-flipping tax does not yet apply to sales assignments, however. That piece has yet to be legislated, according to a Ministry of Finance official who spoke on the background only about the new tax.

Once it applies to assignment sales, the government estimates another $5-million in tax revenues over five years. The proposal to extend the anti-flipping tax to assignment sales was announced in the federal government’s fall economic statement. Profits from the assignment sale would be fully taxable as business income if owned for less than 12 months.

The ministry official said that enforcement is up to the Canada Revenue Agency (CRA), and people must report the sale of their principal residences on their tax returns, as a way to monitor property sales.

Vancouver real estate lawyer Ron Usher, who participated in the Cullen Commission on money laundering, said that without proper follow-up and enforcement, policies are often meaningless. As well, the added complexity of so many new rules creates industry confusion and adds to the cost.

Prior to the sudden implementation of the foreign buyer’s ban, for example, foreign buyers were wondering if their not-yet-completed purchase would suddenly be banned.

“I think it’s pretty clear that those are valid sales,” Mr. Usher says. “As long as you have a contractual right to buy, that’s a purchase that will not be undermined even if the transaction is not completed. If you live in Shanghai and complete it in April, you can still buy the property, according to the [rules].”

Mr. Butler has a non-resident client who will live in Canada for five years for work, where she will pay taxes and contribute to the economy. She had wanted to purchase a home in order to stay in the real estate market, but she’s now banned from such a purchase. There will be those people affected by the ban, says Mr. Usher. But many countries restrict foreign property purchases, and policies are imperfect.

“In my view it’s a good thing if we can get more specificity on these various rules so we are not up to the whims and moods of [Canada Revenue Agency] inspector. I don’t want to slam them, but it shouldn’t be subjective. It shouldn’t make a difference what federal court judge you find yourself in front of.

“But the bad news is, it’s really hard to write laws that deal with all the circumstances. So inevitably there will be people who we would all agree did get caught in some unfair way.”