Foreign real estate surtax a bad idea for Toronto housing
British Columbia’s new 15-per-cent surtax on foreign purchasers of residential property in the Vancouver area is a bad move. And Ontario would be ill-advised to copy the idea in the Greater Toronto Area.
Yes, prices for detached resale houses have soared in recent years in Vancouver and Toronto. And, yes, this is partly attributable to rising demand, although it is not clear how much of the demand is foreign-based.
But in the Greater Toronto Area, the problem also stems from lack of supply, as provincial policy favours “intensification” of development in already built-up areas. The policy is aimed at curbing urban sprawl. But it has meant fewer singlefamily homes being built.
A decade ago, there were 29,968 new homes in builders’ inventory — 16,560 lowrise and 13,408 highrise. In June of 2016, there were just18,427 new homes in builders’ inventory — a near-record-low 2,064 lowrise and 16,363 highrise.
A tax on foreign investors would not solve that supply problem.
What such a tax would do is hamper development of condominiums, which are currently getting a boost from foreign investors and, not incidentally, driving the economy in southern Ontario. The housing sector accounts for almost 200,000 jobs and more than $11 billion in wages in the GTA, making it one of the biggest employers in the region.
Foreign buyers are helping to increase the supply of condominiums because the industry standard requires them to make a 35-per-cent down payment, whereas local buyers are allowed to put down as little as 5 per cent. In effect, the investments from foreign buyers are pushing the projects ahead. Faced with this surtax they may decide to move their money elsewhere.
If affordability of housing is the issue, then the B.C. tax will make the situation worse, not better, by hindering condo developments that provide local buyers with affordable alternatives, priced under $500,000.
Even CMHC notes that individual investor condominium purchases have alleviated the pressure on the tight rental market. Arguably, this opens up more locations and unit types as rental inventory than a purpose-built rental would.
And if speculation is the real issue, then imposing a surtax at the point of the initial sale will be useless. It would be much more effective to tax the speculative gain for anyone flipping a unit within one year of the initial purchase.
There is also a fairness issue involved with the B.C. tax, as it is effectively retroactive. It will be imposed at the time of closing, from Aug. 2. In the condo sector, sales agreements are struck well before closing — often two years or more. These deals were entered into in good faith by investors, who are now being told they will have to pay an extra 15 per cent at closing. That is punitive.
Finally, the B.C. tax is likely in violation of our international obligations. “NAFTA and other Canadian trade agreements prohibit governments from imposing discriminatory policies that punish foreigners while exempting locals,” notes Appleton & Associates, a respected Toronto law firm. “Under NAFTA, citizens forced to pay the 15-per-cent penalty . . . are entitled to obtain direct compensation from an independent tribunal for B.C.’s discriminatory tax.”
We should be welcoming foreign investment instead of discouraging it, for it enhances our economy.
Some commentators have suggested that a foreigner buying a home is not as “productive” as a foreigner investing in a new factory. But the same people may be making both decisions and may just decide that, if their money is unwelcome in one market, they will take it out of all markets in Canada.
In summary, the B.C. tax is poorly conceived. It would attack the wrong end of the problem and likely have consequences directly opposite to what it is intended. It would be a mistake to adopt it here in Ontario. Sounds a lot like building a wall and making them pay for it.
It would be much more effective to tax the speculative gain for anyone flipping a unit within one year of the initial purchase