Welcome Foreigners: 15% Please!

The Province of B.C. has now implemented an additional 15% Property Transfer Tax (”PTT”) on the purchase of residential properties by foreign nationals in the Greater Vancouver Regional District (GVRD).  The classification of residential property includes single family residences, duplexes, multi-family residences, apartments, condominiums, manufactured homes, nursing homes, rest homes, summer and seasonal dwellings, bunkhouses and cookhouses.

Proceeds from this new tax are intended to be contributed to the Housing Priority Initiatives Fund; a fund for provincial housing and rental programs. So far there hasn’t been any clarification as to what this entails.

Upon further reflection, it is apparent this new tax has some significant flaws and will undoubtedly result in some unintended consequences.

What About...

Past Purchases - The governing B.C. Liberal Party was so quick and certain in this new tax, that they called a special session of the Legislative Assembly on July 28th to pass Bill 28.  In doing so, they placed an unknown number of sales contracts at risk of falling apart or causing potential litigation. If they are so confident with Bill 28, why not make it retroactive to January 1st, 2016 like most new Bills are?  What about the all of the foreign nationals who purchased residential homes in the GVRD in 2015, 2014 or 2013?

Quite simply, the problem with this new PTT is it doesn’t address all of the so-called “foreign national residential purchases” from the past - the exact reason this tax has come into existence in the first place.

Future Sales - By making this tax only on the purchase of residential property, the government is only collecting revenue today and nothing in the future.  If a foreign national holds a $5 million property for 10 years and then sells for $10 million, they make 100% of the profit, without any capital gains tax.

Base vs. Residual Income - The new PTT is a one-time base tax and doesn’t provide any residual income. If the government would have considered a tax like the one proposed by the UBC Real Estate economists, the results could be far more impactful for the long run. Their proposed 1.5% annual tax on the assessed value of a home would be indexed to housing prices in the GVRD and would provide ongoing tax revenue for the Province for generations to come.

Citizens & Permanent Residents - As mentioned, UBC Real Estate economists Thomas Davidoff, Joshua Gottlieb and Tsur Somerville are the pioneers behind the B.C. Housing Affordability Fund (”BCHAF”). This is the most comprehensive and balanced proposal addressing affordable housing in the GVRD.

The basic idea behind this proposal is to apply a modest tax to all homeowners who cannot demonstrate they are contributing to the local economy through their income taxes.

As such, the provincial government wouldn’t be accused of targeting just foreigners.  It does mean that the province could start collecting taxes from even the wealthiest organized crime members and other residents of the GVRD who declare low or no income, but somehow can afford to purchase multi-million dollar homes.

Unintended Consequences

Tax Evasion/Avoidance - There is a clause in the new PTT that allows the provincial government to audit transactions for up to 6 years as well as strong wording around anti-avoidance enforcement.  This is a good thing and will hopefully deter those who would contemplate schemes to avoid paying the tax.

Policy makers need to remind themselves that there is a close correlation between the severity of a tax and the motivation for individuals and their accountants and lawyers to find ways to minimize, defer or avoid the tax.

Circling back, the proposed BCHAF’s annual tax is far more sustainable and palatable than the provincial government’s up front 15% tax.  At 1.5%, this tax simply isn’t onerous enough to motivate a buyer to engage in expensive legal and accounting bills to avoid $30,000 on a $2 million purchase. A $300,000 tax bill (under the new PTT) is a different story.

Less Sales Volume = Less Transfer Tax - The provincial government admitted that the final tally on last fiscal year’s budget was $446 million over the projected surplus. Conveniently, property transfer tax revenues grew by $468 million over the previous year as well.

Like real estate agents themselves, the provincial government doesn’t benefit from rising or declining real estate prices nearly as much as they benefit from just pure volume.  With every transaction comes property transfer tax.

As such, any decline in this sales volume by reducing the demand from foreign nationals could very easily reduce the province’s future revenue by the tens of millions.

Could Have Done Better

Implementing this new PTT of 15% on foreign nationals is better than nothing; hence the reason there was a unanimous vote in favor of the final reading on July 28th.

Unfortunately, it is being pegged more as a political move in a pending election that may occur anytime between now and May 9th, 2017.

The current provincial government seemed to have missed an opportunity to truly address affordable housing in the GVRD.  It will likely result in little or no change to many middle-class families.  Just like the proposed vacancy tax by the City of Vancouver, I suspect the results will fall well short of most expectations.

While economists often get things wrong, it seems that the well written and thoughtful concept of the BCHAF was unfortunately overlooked and won’t likely gain any traction at this point.

Still in its infancy, there is much to be learned from this new policy. But as the saying goes, “be careful what you wish for, you just might get it.”