Canadians face a lot of barriers to becoming homeowners or buying commercial property. There are high interest rates, bidding wars, and low inventory, to name a few. The biggest barrier, though, might be that competitiveness isn’t solely driven by Canadians anxious to buy a home. A portion of residential and commercial sales is from foreign investors who are driving prices up without any intention of occupying the home.
There is no question that the Canadian housing market has been extremely prosperous for foreign investors. Incidentally, their activity has increased housing prices, had a devastating effect on vacancy rates, and put a dent in the inventory. According to Statistics Canada, in Ontario, foreign owners buy 1 in 11 new condos and in British Columbia, the data suggests that 1 in 8 new condos are purchased by non-resident buyers. This trend has even reached Atlantic Canada.
So, what are Canadians supposed to do, and what is the role of the government and real estate companies to make sure this trend doesn’t continue? In parts of Canada, housing is not only a great investment, but it ensures that people from all walks of life have a retirement asset and somewhere to live comfortably.
Across provinces, there have been some recent changes that are poised to impact foreign investors and could pave the way for a very different housing market.
Defining a Foreign Investment
Simply put, a foreign investor is a non-resident who purchases a property solely as an investment. They have no intention of taking occupancy in their purchased home. In many cases, it offers lighter tax implications than other investments.
Foreign investors have helped encourage the condo boom in major Canadian cities, but are not fully to blame for any housing bubbles. Their biggest impact can often be felt in a bidding war where your budget suddenly feels small when a mysterious bidder enters the picture, or the property never makes it to the offer date because of an aggressive bully offer.
Intervention From the Federal Government
The federal government announced plans to restrict the abilities of foreign investors and to impose tougher measures to curb their purchasing power. The federal government has vowed to work with Housing Minister, Ahmed Hussen, to review the rules regarding down payments and the profits one can derive from an investment property. This will impact both foreign investors and, to a lesser extent, Canadians looking to snatch up investment properties.
The goal is to allow smaller, mom-and-pop-style investors and landlords to thrive while limiting the purchasing power of huge real estate trusts that buy property with reckless abandon. The difference is that smaller investors often require renters to make it work, which can positively impact vacancy rates and reduce speculative demand.
A Higher Tax on Foreign Buyers
A common strategy to cool foreign investors is to impose a tax or set of taxes on their investment(s). For instance, in 2018, the NDP government in British Columbia increased the foreign buyer tax to 20 percent and expanded its reach outside Vancouver.
In December 2021, Canada put forward more measures to cut foreign investors off at the knees. The government’s stance is that, if the housing market is going to continue to be lucrative for foreign investors, they want their cut. This has already resulted in higher taxes on foreign investors and those taxes could further spike. These taxes and reforms include but are not limited to:
- Excessive rent surplus, which is an amendment to the Income Tax Act that requires landlords to disclose rent, before and after a renovation. Landlords might have to pay an additional tax if they increase rent after a minor renovation.
- Anti-flipping tax on residential property, which limits tax investors looking to flip a property to ensure this type of investment isn’t being used as a form of money laundering.
- Investigating tax incentives for the Real Estate Investment Trusts (REIT), which are popular for their tax efficiencies and to act as a tax haven. The goal is to make these trusts less attractive to foreign investors.
Canada is tightening the vise on foreign investment to rein in the free spending that has harmed Canadian homebuyers. The result could be good for Canadians and disastrous for foreign investors.
Will Canada and Foreign Investors Find Common Ground?
There is a place where Canada can prosper from foreign investments and where foreign investors can still make healthy profits. It can never be at the expense of Canadian homebuyers, though, which is why recent changes have been quite severe.
Over time, these changes could drastically impact housing markets across Canada in ways that could help Canadians. As for now, it’s up to the government to continue to monitor foreign investments and to ensure they are in the best interest of Canadian homeowners and renters. //
Rob Shapiro | Contributing Writer