A banker’s warning about new speculation tax

Having read much of the back and forth from both sides on this tax, and giving consideration to the macro consequences of its potential, I felt compelled to share my views on your proposed “speculation” tax with the government prior to finalization of details and/or implementation of the tax.

I worked across Canada during my career, retiring in 2013 as CEO of Canadian Western Bank after 23 years at the helm. From my discussions with individuals in larger financial institutions doing business in B.C., it appears they have significant concerns about the potential negative consequences of the tax. However, given that those institutions are more reactive than proactive in driving legislation, I suspect you likely won’t hear much from them during your consultation period as they prefer not to wade into politics. They will simply react to their effects once implemented.

When presented with such poten- tially deleterious legislation affecting their businesses, banks must undertake a full review of their current mortgage loan portfolios to determine how many may be offside the loan-to-value ratios once the tax is implemented and property values fall, as anticipated. As you are aware, becoming offside those loan ratios has significant and real consequences to financial institutions, requiring them to take steps to ensure they are in compliance with the legislation.

In addition, the banks will review their construction loan book of business, both current and proposed, in an effort to determine how many of these projects will have misstated revenue numbers (innocently, mind you, as they could not have predicted the negative effect the tax was going to have on their retail prices), what percentage will lose their pre-sales that collapse after implementation of the tax and which are offside of their loan covenants due to the impact of the tax on property values and borrowers’ abilities to repay their loans.

Further, any loans that have been approved but not yet drawn will likely be frozen until a further and better understanding of the tax’s impact is known. These projects will end up suffering significant losses due to this uncertainty and delay, resulting in many simply not proceeding which would have a trickle-down, negative effect on contractors, trades people, realtors and others in the economic chain.

In addition, the government should appreciate that all appraisals conducted by the banks in respect of future or pending mortgage applications will be of no use, as the banks would not be able to rely on them since they would have been conducted prior to the implementation of the tax. The true effect of the fall in prices may not be known until this fall or next spring as the markets will need time to settle out after the negative impact of the tax. It is likely that appraisals won’t become reliable for the purpose of approving loans until then.

A regressive and punitive tax like the one proposed will immediately drain business confidence in B.C. and make investors reluctant to consider the province as a place to invest. Investors and businesspeople have options about where and when to invest their money. The more B.C. is made to be a difficult and expensive jurisdiction in which to invest, the less capital that will flow in and the fewer jobs that will be created for the very people you’re trying to help.

In closing, based on my knowledge of the banking industry and its propensity to be cautious and defensive in times of uncertainty, as will be the case with this tax, my advice would be to withdraw from this regressive and potentially disastrous new tax and find policies that will achieve the desired result — a meaningful increase in the number of affordable homes in B.C.

Whether that be by way of incentives, subsidies, regulations or restrictions, is up to your government. To try to solve the problem by taxing unsuspecting Canadian owners is patently un-Canadian and ill-conceived and will be in nobody’s best interest.

There is a tremendous amount of innovation and creativity available out there. Why not tap into it?

Larry Pollock is a retired Canadian banker who was CEO of Canadian Western Bank for 23 years.