Canadian provinces are one by one introducing a tax on foreign real estate purchases
As noted in a publication by the editorial board of "Russian Toronto", this approach by the governments of British Columbia and Ontario raises many questions. Besides the complete ineffectiveness of this measure, the course taken creates a negative long-term effect that impacts not only these provinces but all of Canada. In particular, foreign investors are given a clear signal that Canada is not interested in their money.
Since Vancouver as a place to buy real estate was of little interest to our compatriots, the introduction of the tax on foreign purchases there went almost unnoticed. The same cannot be said for Toronto, where buyers from Russia, Ukraine, and Kazakhstan were more than abundant. Therefore, the introduction of the tax on foreign real estate purchases in Toronto and surrounding areas affected a large number of people and raised many questions.
Below are explanations of who this tax applies to and how it is applied.
Essence of the introduced tax
The tax is called the Non-Resident Speculation Tax – that is, a tax on speculation by foreigners. In reality, there is no talk of speculators; in fact, it is a tax on real estate purchases by foreigners in the Greater Toronto Area and surrounding regions.
In brief, the background of this tax's introduction is as follows. In recent years, the real estate market in Toronto and its suburbs saw high growth in prices for houses and townhouses, up to 25-30% per year. However, in early 2017, the situation reached a qualitatively new level – prices literally skyrocketed, rising by 50% or more in a few months. This was accompanied by bidding wars with insane overpayments, with houses selling within days of being listed.
The Ontario provincial government decided to intervene and cool the market. It saw the main cause of the frenzied price growth in foreign buyers, and to stabilize the market, it was decided to introduce a 15% tax on foreign real estate purchases.
The decision to introduce the NRST was made by Kathleen Wynne's government, despite protests from those involved in the real estate market and contrary to statistics showing that foreigners make up a tiny fraction of residential real estate buyers in Toronto. That is, the decision is purely populist, like all the activities of the Liberal government, which ultimately harms the province's economy.
That is the background. Now about who is subject to this tax, who is not, and how it will be collected.
Who and what is taxed
Only residential real estate is taxed. All other property – for example, commercial or agricultural – is not subject to this tax. Incidentally, apartment buildings with more than six units are no longer considered residential property, and when purchased by foreigners, the tax is not levied.
Regionally, only real estate located in the Greater Toronto Area and surrounding regions is taxed. This is a fairly large area, home to about 9 million people. In fact, it is the most densely populated region of Canada.
At the same time, Canada's capital city, Ottawa, is not included in this zone; foreigners can buy residential real estate there without paying the 15% tax. The problem, however, is that investors are not yet very interested in Ottawa, and whether there will be future interest in this city is hard to say.
The tax is levied on all foreigners who do not have Canadian citizenship or permanent resident status. This applies to both individuals and legal entities. All foreign companies, branches of foreign companies, and even Canadian companies that include foreigners among their owners must pay the 15% tax when purchasing residential real estate. Canadian citizens and permanent residents are exempt from this tax.
A special case is the purchase of real estate by a married couple where one spouse is a foreigner and the other has Canadian citizenship or permanent resident status. However, if at least one more foreigner is included as a co-owner – for example, the parents of the husband or wife – that property immediately becomes subject to taxation.
Refund of the paid tax
The paid tax may be refunded if certain conditions are met. Specifically, if a foreign buyer obtains Canadian permanent resident status within four years of the purchase, the paid tax will be refunded.
The same applies to foreigners who have come to study in Canada. After two years of study, the tax will be refunded to them. For foreigners who have come to work in Canada and purchased real estate, the tax will be refunded after one year.
However, there is an important requirement for receiving the refund – the purchased property must be the foreigner's primary place of residence in Canada. Otherwise, the tax will not be refunded.
Who will the NRST affect first
Although the NRST is formally aimed at limiting real estate purchases in Toronto by foreign speculators, in practice it will mainly affect those foreigners who have tied their lives to Canada.
First, the introduction of this tax will harm individuals coming to Canada for study. The study process in Canada takes at least 2-3 years, or even longer. Then comes at least one year of work in Canada, and roughly the same amount of time is currently taken by the immigration process.
As a result, a person who goes to study with plans for subsequent immigration expects to live in the country for at least four years. The cost of renting housing is high and costs a pretty penny. Naturally, if he or his parents have money for a down payment, it is much more profitable to buy housing in Toronto than to rent it.
Currently, a significant portion of such buyers will be washed out of the market. Even if the tax paid is refunded after two years, not everyone has the opportunity or desire to pay an additional 15%.
Another category of buyers hit by the new tax is young immigrants whose parents give them money to buy from abroad. This is a fairly large group of buyers who will now be deprived of such an opportunity.
As a rule, the involvement of foreign parents is due to the fact that it is easier for them to get a mortgage from a Canadian bank than for their Canadian children, who do not have high incomes. Also, many parents prefer to buy property in their own name so that in case of divorce of the children, they do not lose the invested money.
Due to the introduction of the tax on foreign buyers, these schemes will not work, and those who previously could count on their own housing will have to make do with renting.
Another group of foreigners who buy real estate in Canada are those who have children with permanent resident status or Canadian citizenship. Family sponsorship to Canada for parents is currently very limited due to small quotas. Therefore, most immigrants apply for a super visa for their parents, which gives them the opportunity to legally live in Canada for long periods.
Some of those who receive a super visa bought housing in Canada, as it was more profitable and comfortable than renting. Due to the fact that they do not have permanent resident status and are considered foreigners, they now have to pay a 15% tax when purchasing. Accordingly, the new measures hit them.
Undoubtedly, among foreigners there are also those who invest in Toronto real estate for profit, and not only for the purpose of acquiring housing for themselves. According to statistics, this group constitutes a very small part of residential real estate buyers to have any serious impact on the market. But most importantly, the share of speculators among them is negligible. It must be understood that foreigners make investments for the long term, actually financing the creation of a rental housing market, which is catastrophically lacking in Toronto. Now this category of buyers is effectively being driven out of the market.
It should be especially noted that the real estate market is not an area where there is room for speculators, since each transaction involves large expenses. Therefore, investments in the real estate market are made for the long term, at least for several years, so that the investor can make a profit. It is for this reason that there are practically no speculators in the Toronto real estate market, only investors and people buying real estate for their own residence. Moreover, investors are mostly not foreigners, but local ones.
Consequences of introducing the tax
As the experience of Vancouver, whose real estate market was indeed heavily dependent on foreign buyers, showed, the introduction of a tax on real estate purchases by foreigners had a very weak effect on the price situation – they grew and continue to grow. However, sales volumes fell, and the provincial treasury is losing taxes that came from purchase and sale transactions.
In Toronto, where the percentage of foreign buyers is generally minuscule, these measures will have even less effect. The fact is that the reasons for price increases lie in the housing shortage. To solve this problem, completely different measures are needed, including deregulation, tax reduction, easing of permit approvals, changes in density and height regulations, and so on. The tax on real estate purchases by foreigners has nothing to do with solving this problem.
The fact that the Ontario government does not understand the situation on the real estate market and, out of the blue, classified foreign buyers as speculators, speaks only of the unprofessionalism of both the province's Premier Kathleen Wynne and the members of her cabinet who participated in the preparation of these measures.
In the spring of 2018, the next elections in the province of Ontario will take place. Given that Premier Kathleen Wynne has a record low level of support, everything points to the Liberal Party losing these elections.
Those who come to replace them will have to deal with the province's economy, which, through the efforts of Kathleen Wynne's government, is not in the best shape. And it can be assumed with a very high degree of probability that the NRST tax on real estate purchases by foreigners in Toronto will be abolished. So, as it seems now, the NRST tax is only a temporary measure.