The Liberal government made good on its promise of a sweeping speculation tax on foreign buyers of residential real estate, introducing the measure in its federal budget.
As of January 2022, the government is applying a 1 per cent annual tax on the value of non-resident and non-Canadian owned properties that are “vacant or underused.” Complementing this tax are affordable housing investments of an additional $2.5 billion over seven years to the Canada Mortgage and Housing Corporation, along with reallocating $1.3 billion of previously announced funding, both of which are expected to bump up the amount of affordable units.
As housing prices climb, supply fizzles and buyers begin snapping up condo units in specific regions (not just single-family dwellings) more readily, it’s clear that Canada can no longer be a place where foreign buyers purely speculate in the housing market, as Finance Minister Chrystia Freeland put it this week.
What isn’t clear is how the vacancy tax will help new homeowners enter a sellers’ market they cannot afford.
Impact of foreign tax on housing market
“The federal government will always have challenges finding lasting solutions when it comes to the real estate industry through policy changes,” says Freddy Mak, president of Ferrow Real Estate, a firm based in Ontario. “Changes like new taxation measures can create knee-jerk reactions in the marketplace, as we saw in Q2 of 2017. The rebound tends to be fast and furious from these market reactions.”
In April 2017, Ontario introduced its Fair Housing Plan with 16 cooling measures, including a 15 per cent tax on non-resident buyers. This prompted some buyers to delay purchasing, while many home owners listed their homes amidst a perceived peak of price growth. The number of new listings that month rose to record levels in areas like the GTA and Hamilton-Burlington where supply had been especially tight.
“The long-term effects of this new tax seems negligible,” says Mak. “Rental demand, particularly in the Toronto market, has been and will continue to be resilient. Let’s use the tech sector job growth in Toronto as an example (currently one of the highest paid and highest demand professions). These professions are often on contract base, meaning one to two year rentals would be in line with their tenure. Immigration to the city will continue to fuel rental demand. Often, families newly immigrating will rent for a few years before deciding where to buy and settle down.
“All of this is to say, vacant property will likely never be a prevailing issue, be it foreign owned or locally owned property. A tax on neglected property is good, for a few reasons, but likely will not move the needle long term as far as cooling the hot housing market.”
Issues that need clarifying; new information filing requirement
Also on the table are myriad issues related to enforcing this tax measure across jurisdictions and tracking compliance; some of which are expected to be addressed in a consultation paper the government plans to release in the next few months.
A group of lawyers from legal firm Gowling WLG recently noted other issues that will need sorting out, namely: “defining ‘non-resident, non-Canadian’ ownership in the context of partnerships, corporations, and trusts; addressing issues of joint or co-ownership of property; defining key terminology such as ‘residential property’, ‘vacant or underused’, and ‘qualified tenant’; figuring out the value of the home; and carving out exemptions, whether by geographical area or by owner, for instance ‘satellite families.’
“It therefore remains to be seen how integrated or punitive this federal “vacancy tax” will be when applied to jurisdictions that may already be subject to more than one such tax,” stated the lawyers. “For example, in some jurisdictions such as Vancouver, British Columbia, the existence of two similar regimes has already led to inconsistent results, where one property may be occupied for the purposes of one regime yet vacant for another.”
Beginning with 2023, an information filing requirement is also proposed for all owners of Canadian residential property, other than Canadian citizens and Canadian permanent residents.
According to Gowling WLG, this information return or declaration will require the owner to list each Canadian residential property that they own, and to provide more information such as the property value, their ownership interest in the property, and whether the owner is eligible for an exemption. Not filing the declaration could result in a loss of any exemption for future years and the application of penalties and/or interest, in addition to exposing the taxpayer to an unlimited assessment period.
By Rebecca Melnyk