As the feds and the province crack down on tax-free prof­its from condo pre­sales, will some projects fold?

BC Business Magazine - - Contents - By Steve Saret­sky

Condo pre­sales used to be a tax-free bo­nanza for in­vestors. A fed­eral and pro­vin­cial clam­p­down has flipped that equa­tion

It seems like just yes­ter­day that the Van­cou­ver con­do­minium pre­sale mar­ket at­tracted hordes of buy­ers. Condo prices were climb­ing rapidly, and the de­sir­abil­ity and curb ap­peal of a brand­new unit looked too good to pass up.

Des­per­ate buy­ers would camp out the night be­fore a new de­vel­op­ment’s pre­sales opened. In some cases they would pay peo­ple to sit in line and hold their spot, in the hope of se­cur­ing a prop­erty.

Pre­sales have been highly spec­u­la­tive and, over the past few years, highly prof­itable. Buy­ers sim­ply needed to put down a 5-per­cent de­posit to se­cure a home, with ad­di­tional de­posits spread out over the span of a year. Soon, just like clock­work, prices would in­flate, and they’d reap a big re­turn.

With prices in­creas­ing 20 to 30 per­cent an­nu­ally, and the cost of land and con­struc­tion ris­ing, many condo de­vel­op­ers be­gan charg­ing more than the cur­rent mar­ket value. For buy­ers, it made sense to lock in the price to­day when it would surely be higher in a cou­ple of years. It was a spec­u­la­tive gam­ble, but one that largely paid off—and, in some cases, cre­ated tax- free gains.

Pre­sale buy­ers were getting a con­tract to pur­chase an un­com­pleted unit, and the only pa­per trail was a list held con­fi­den­tially by the de­vel­oper. A buyer would then as­sign— an­other word for flip—the con­tract to a new owner be­fore the unit was fin­ished. Be­cause noth­ing got reg­is­tered with the land ti­tle of­fice, tax of­fi­cials never learned of the cap­i­tal gain. In fact, for the Canada Rev­enue Agency to ob­tain the list of pre­sale buy­ers and/ or flip­pers, it had to take the de­vel­oper to court.

That’s ex­actly what the CRA did. Big-name Metro Van­cou­ver projects like MC2, Trump In­ter­na­tional Ho­tel & Tower and Wall Cen­tre Cen­tral Park were or­dered to hand over their lists of buy­ers. How­ever, it’s been a long and in­ef­fi­cient process for the tax­man.

That’s all about to change, and so is the pre­sale space. As if mort­gage stress tests and a slew of other fed­eral and pro­vin­cial poli­cies de­signed to cool the hous­ing mar­ket weren’t enough, the B.C. govern­ment has leg­is­lated that new de­vel­op­ments must col­lect and re­mit the names of buy­ers and flip­pers of all pre­sales. This move, along with condo prices trending lower, will put a damper on spec­u­la­tion. As of July, the av­er­age sale price in the city of Van­cou­ver was about $860,000, ac­cord­ing to the Real Es­tate Board of Van­cou­ver, down 2 per­cent year-over-year.

The shift is al­ready un­der way, and many de­vel­op­ments have be­gun of­fer­ing in­cen­tives such as dec­o­rat­ing bonuses—an al­lowance for floor­ing, ap­pli­ance and other upgrades—to bring back buy­ers. The new pre­sale registry is “ex­tremely sig­nif­i­cant,” says Van­cou­ver ar­chi­tect and de­vel­oper Michael Geller. “Peo­ple have been told pre­sales are a great way to make money tax-free,” Geller adds. “But as soon as you have regis­tra­tion, it’s a gamechanger. I think it will re­sult in the can­cel­la­tion of some projects mov­ing for­ward.”

De­spite the changes, hous­ing starts and per­mits to cre­ate new units are still run­ning at all-time highs, sug­gest­ing that de­vel­op­ers haven’t flinched yet. With the tides turn­ing and the storm clouds clos­ing in, though, they’ll have to nav­i­gate the choppy seas ahead with fewer buy­ers.

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