Ottawa needs to fix foreign homebuyer tires

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My last column, wittily headlined “Property rights? No way, man. This is Canada!”, reviewed attacks on the rights of property owners by federal, provincial and urban governments claiming to be liberating housing from the clutches of investors and speculators. Bylaws and legislation in Vancouver and Toronto and at the provincial level were cited as examples of how governments, claiming to be promoting housing as a basic human right, are using abusive property taxes and other measures to free up housing.

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The effectiveness of such measures — for example, taxing owners of vacant housing $10,000 for every $1 million in assessed value — is at best dubious, leaving aside the abrogation of the rights of owners to control their own property.

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But the greatest fumbles in this national ideological campaign against property rights are still being revealed. Sources in the real estate legal community and public statements from the real estate industry suggest Ottawa has seriously bundled its property ownership measures. Major backtracking may be necessary.

The two most egregious moves by the Trudeau government were its “ban” on foreign investors under the Prohibition on the Purchase of Residential Property by Non-Canadian Act and its taxation on property owners under the Underused Housing Act. Offenders of the laws and regulations, which aim to stop foreign investors from buying and holding residential properties or certain forms of real estate in the most populated regions of the country, face fines.

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When Ahmed Hussen, federal minister of housing, diversity and inclusion, announced regulations associated with the foreign-purchaser legislation, he said the act “prohibits foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada.”

The initial major objection to Hussen’s regs came from US owners of recreational properties in Canada, with one New York congressman promising to get the US government to impose countermeasures.

The possibility that Hussen and assorted bureaucrats bungled the foreign buyer act and the Underused Housing Act was in evidence the other day when a CBC report quoted Finance Minister Chrystia Freeland’s press secretary as saying, “The government will continue to monitor the impact of this measure. ”

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The reaction of the legal real estate and investment community suggests there will be much more to come from Freeland and Hussen.

In a commentary earlier this month, Dentons, the world’s largest law firm, said Hussen’s regulations “greatly expanded the original scope of the act” by redefining who is and who is not a Canadian, what constitutes a “residential property” and what is a “purchases.” The Dentons report said that “pending clarification from the government,” the new regulations may now “effectively prohibit a broad range of commercial transactions by corporations and other entities which have a degree of foreign ownership or control.”

Last week, Kevin Lee, CEO of the Canadian Home Builders’ Association, warned Ottawa that the foreign buyer of tires threatened vital investment in housing. Under the regulations, a company that has as little as three per cent foreign ownership could be impacted when buying vacant land for residential development or purchasing properties with fewer than four units.

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The new regulations, Lee told Business in Vancouver, have created “a massive issue for our industry in home building and land developments because we have lots of companies in this country that have a small or, even in some cases, a larger amount of foreign ownership.”

Other law firms have detailed the surprising expansion of the regulations. The legal team at Bennett Jones highlighted the obvious glitches, including the provision that foreign investor control occurs when “direct or indirect ownership of shares or ownership interests of a corporation or entity represents three per cent or more of the value of the equity in it, or carries three per cent or more of its voting rights.” Another point raised by the Bennett Jones team is that such property investment regulation “has typically (and constitutionally) been the domain of the provinces.”

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So what went wrong in the Trudeau cabinet and the federal bureaucracy? One source told me off the record that the whole foreign buyer ban has been a botched job across the board, including the Canada Mortgage and Housing Corporation.

The regulations, said the source, are “a legislative disaster.” Specifically, they will impair the “supply-side of residential housing by killing transactions and development opportunities for developers with very small non-resident investor components (the threshold is three per cent, a farcically low number).” The regulations also expand the definitions of residential property and purchase transactions that could include “wide swaths of commercial properties (including office towers and shopping centers) and also capture some mortgages and, arguably, leasing transactions.”

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In another comment, my source said: “The number of problems this legislation creates goes beyond the intended scope of the act … is unlike anything I’ve seen.”

If the federal policies are as bad as described, who is responsible? Is this another example of “a system that is broken,” the words used by Yves Giroux, the Parliamentary Budget Officer, to describe the bureaucratic processes and lack of ministerial oversight that seem to be the norm in Ottawa? Appearing before a senate committee, Giroux was talking about how the federal system functions when it comes to monitoring program results.

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Program results, he said, are determined in large part by public servants, which means by assistant deputy ministers and deputy ministers and then approved by ministers. “But in my experience, ministers are not very well equipped to challenge their own officials — neither is the Treasury Board of Canada Secretariat equipped to challenge these targets — so we end up in a situation where it’s public servants responsible for delivering programs that set their own targets. … There is a system that is broken.”

Could it be that something like the Giroux conclusion applies to Ottawa’s attempt to regulate and control housing investment by Canadians and foreigners? As this policy bungle unravels, we will learn more.

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