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The Speculation and Vacancy Tax – What the government isn’t saying

On November 27, 2018, the speculation tax was passed in B.C. to, in the government’s words “target speculators who own residences in B.C. but don’t pay taxes here, turn empty homes into good housing for people, and raise revenue that will directly support affordable housing.”

The pitch to the public was that this tax would aid in tackling the housing crises in major urban centers in British Columbia and make housing more affordable for people in our province.

The government also claimed that over 99% of British Columbians would be exempt from the tax.

So far so good?

Well in realty the impact of The Speculation and Vacancy Tax is not exactly as advertised. Below are but a few of the issues that government neglected to include in its marketing materials:
What are Speculators?

The Speculation and Vacancy Tax does not define the terms “speculator” or “speculation.” Moreover, the term speculation is not even mentioned in the Act. There is no pre-amble or other section that explains how the Act is supposed to stop speculation. Then why is it called The Speculation and Vacancy Tax?

The term “speculation” is normally a pejorative description of the dubious practice of trying to make a quick buck on a venture while not contributing any long term value for anyone else.

It would seem that the BC government thinks that anyone who owns a property that is neither occupied by themselves or rented out is a speculator –and hence, should be punished by a hefty tax penalty.
Renting your property for 6 months is not as easy as you might think.

To avoid the tax penalty an owner has to occupy the property as his principal residence or rent it out for at least six months of the year. The implied assumption is that it is entirely possible to rent one’s property out for this minimum period of time and thus, be in compliance with the Act.

Firstly, who rents a residential property for just six months? Most renters want a place to live for the indefinite future, which is usually measured in years, not months.

Secondly, even if you can find someone who agrees to rent for six months, recent changes to the Residential Tenancy Act (RTA) have now made a term lease very difficult to terminate. The amendments to the RTA prohibit landlords from ending fixed term tenancy agreements when they expire except in very limited circumstances. Therefore, your tenant is under no legal obligation to vacate the premises at the end of the fixed term!

Unless the tenant agrees to vacate, the tenancy will continue on a month to month basis and there is little the Landlord can do to terminate it thereafter except to move into the property (or have a family member move in), extensively renovate the property such that it’s not possible to live in during the renovations or sell it.
The Act is retroactive to January 1, 2018

Instead of making this tax prospective so that people could have arranged their affairs accordingly, the government made this tax retroactive to January 1, 2018. The act was passed in late November when it was too late for people to bring their properties into compliance with the Act.

This is incredibly disingenuous on the government’s part.

In addition, any form of retroactive legislation is generally considered bad tax policy.

As a marketing ploy the government generously allowed everyone a “tax break” to the lowest tax rate of one half of one percent of the assessed values of their properties. I am sure that the people affected are thrilled to be stuck with an extra tax bill (i.e. on a million dollar property that’s an extra $5,000 on top of the owner’s normal property taxes!)

The fact that the government made the tax retroactive is evidence that that the Speculation and Vacancy Tax is a tax grab –the NDP just couldn’t resist legally pilfering that extra .5% for 2018 from unsuspecting property owners.
Non-arm’s length Tenancies for Foreign Owners and their unreasonable requirements

The non-arm’s length tenancy requirements for foreign owners leaves more questions than answers.

The law states that for non-arm’s length tenancies there is no need for a lease/tenancy agreement or for any rent to be paid. However, if the owner is a foreign owner then the tenant must meet other requirements for the owner to be exempt. The tenant must:

– Be a Canadian citizen or permanent resident;

– Be a resident of B.C. for income tax purposes at the end of the last day of the calendar year;

– Not be a member of a satellite family; and

– Have a B.C. income for the calendar year that is equal to or greater than three times the annual fair market rent for the entire residential property.

You may be wondering why the government cares about how much income the tenant is earning? That is a good question. This tax is supposed to be targeting vacant homes, so if there is someone occupying the property why does it matter how much income the tenant is earning?

Furthermore, even if the tenant is non-arm’s length how are landlords going to get their tenants to disclose their annual income? Clearly the government did not think about how this act would interact with privacy legislation.

Moreover, without the requirement of a lease or rent obligations if the government were to audit a filed Spec Tax Declaration, how does the owner prove that there was someone living in the property? I recently posed just this question to the Speculation and Vacancy Tax department and the answer I received was “that is a question for the Audit and Compliance team, which by the way hasn’t even been formed yet.”

Clearly the government sought to rush this piece of legislation through Parliament without considering the implications or how they were going to enforce it.
Issues in Estate Planning

A common estate planning method is to have children or other family members registered as joint tenants on title of the property to avoid probate fees when the elder joint tenant (usually the parent) dies. However, the Speculation and Vacancy Tax, unlike the Empty Homes tax is applicable to all owners of the property and its applicability depends on each owner’s use of the property, not just that of the person in possession.

Thus, having one’s child as a co-owner of the property without living in it may have adverse tax implications. For instance, if the child is a foreign owner and the parent does not meet the above requirements (e.g. doesn’t make the requisite amount of income), the child could be subject to the tax, thereby eliminating the advantages of avoiding probate fees.

This again leads to the same question. If someone is living in the property why should it be subject to tax?
Erosion of Property Rights

As long as your use of your house or condo is not illegal, why should the government be able to tell you what you can do with it?

Fee simple title, which is the highest form of ownership available in common law countries, is being eroded by laws such as The Speculation and Vacancy Tax and the Empty Homes Tax which require rental of properties not otherwise occupied as principal residences.

Failure to comply with such laws will result in a 1% property tax on the property in Vancouver AND a fine of up to $10,000 a day if a false declaration is made. Does that fine strike you as a bit much?

The Speculation and Vacancy Tax will add a further 2% tax if you are a foreign owner and 0.5 if you are a Canadian citizen or BC resident, for failure to comply with its rules (and to add insult to injury, it applies in Vancouver as well!) So for example, let’s look at a high end condo in the Shaw Tower in Vancouver where a “speculator” has owned the property for 15 years, but doesn’t live in it for more than six months each year. With an assessed value of $4,000,000, the owner would have to pay an extra $40,000 in taxes to the city of Vancouver and an additional $80,000 in taxes to the BC government.

If such taxes only applied to foreign owners, one could justify the tax grab on the basis that arguably, foreign capital has driven up the price of BC real estate, so foreign owners should foot the bills.

However, these taxes are applicable to any owners including Canadian citizens and BC residents.

This is clearly an unwarranted infringement on one’s ownership rights.
As usual, the unproven hypothesis is that the “many thousands” of vacant homes and apartments are the culprits and if the government could only get them occupied the housing problem would be ameliorated.

With all due respect, that is wishful thinking.

With some 50,000 people a year moving to the Lower Mainland, even mandating occupancy for every otherwise unoccupied house or condo in BC won’t even make a dent in the housing shortage –but it will create two more expensive bureaucracies and further siphon off people’s hard earned incomes.
What about raising revenue to support affordable housing?

The government estimates that the tax will raise about $200M in revenue.

Even if the cost of running the bureaucracy needed to administer this program was zero (which it clearly will not be), $200M is a drop in the bucket when it comes to building more affordable housing. That’s basically the cost of one large high rise condo development.

Furthermore, I did not notice in any articles or press releases that the $200M would be specifically ear marked for affordable housing, so one can only assume that this revenue, like all government levies will go into GENERAL REVENUE of the Province of BC, to be used for whatever project of the day that government deems most expedient.*
SUMMARY

The BC Speculation and Vacancy Tax will fall far short in terms of achieving its stated policy goals.

Unfortunately, that is not relevant. These “virtue-signaling” taxes are supposed to make tax payers feel good about paying them –whether they work or not.

*PST (provincial sales tax) is generally levied on goods sold in BC, however in 1992 Premier Glen Clark amended the law to allow the government to tax legal services under this legislation –ostensibly to fund the provincial legal aid plan, a worthwhile cause which is perpetually short of money.

However rather than using the money to fund legal aid, both the province’s political parties have used the levy to siphon money into general revenue rather than earmarking the funds collected by lawyers for much-needed legal aid and other justice-related services.

The government is pocketing more than $140 million a year while spending only about $80 million on legal aid when the courts are overflowing with the unrepresented litigants who can’t afford lawyers and don’t qualify for legal aid.

Mortgage Professionals Canada Renews Calls to Tweak Stress Tests

Mortgage Professionals Canada has renewed calls for changes to the federal government’s stress tests, arguing they pose serious risk to the housing market and overall economy.

The association’s annual report on the state of the mortgage market, authored by its Chief Economist Will Dunning, followed up on previously published concerns over the federal government’s mortgage stress tests.

It noted that housing markets across Canada slowed significantly in 2018 due to a combination of higher  mortgage stress tests, higher interest rates and other policy changes that have “constrained” home buying.

The report notes that resale activity fell an annualized 11% in 2018 and was down 15% from the all-time high in 2016.

“The mortgage stress tests are raising the risks to house prices and the economy of Canada,” Dunning wrote in the report, adding that falling house prices pose one of the greatest threats to a modern economy due to impaired consumer confidence.

Not only that, he says regulations intended to remove risk from the housing market are actually having an opposite effect by driving a greater share of buyers to alternative lenders that are not federally regulated, and that often come with higher interest rates.

“The expansion of alternative mortgage lending is certainly an added risk for the entire financial system,” Dunning wrote. “If it adds to risks for the broader economy, then OSFI’s B-20 Guideline indirectly adds to risks for the lenders that it regulates.”

It is estimated the stress tests introduced in 2016 and 2018 will have affected upwards of 200,000 Canadian families by the October 2019 election, by way of reducing their home-buying power or preventing them from purchasing altogether.

While the association’s position isn’t necessarily a complete removal of the stress tests, it does call for key changes, including:

  • Basing any stress test on a relevant interest rate that takes into consideration income growth and principal repayment;
  • Not subjecting mortgage renewals to stress tests, as long as the borrower is current on their payments;
  • Relaxing rules to make it easier for mortgage borrowers with small, alternative lenders to transfer to more liquid and lower-cost lenders.

Association Eyes 0.75% Stress Test

In an interview with the Toronto Star, Dunning said the issue isn’t the stress test itself, but how it’s being implemented.

“There is nothing wrong with stress testing mortgages,” he said.

The issue with the current stress tests is that they don’t take into account the fact a borrower’s income will likely rise about two percent annually over the period of the five-year loan.

“If you think five years from now interest rates will be two points higher and incomes will be 10 points higher, you make the stress test 0.75% [above the contracted interest rate] to replicate what will happen in five years,” he said. “That’s a defensible change they could make.”

The current stress test for uninsured mortgages (those with a 20%+ down payment) is the greater of the Bank of Canada’s five-year benchmark rate (currently 5.34%) or the borrower’s contract mortgage rate plus two percentage points.

“We’ve been asking for a reduction in the stress test for quite a while now because it does mathematically kind of accordion how much of a purchasing impact people will suffer, and certainly for those at the bottom of the property ladder,” Mortgage Professionals Canada President and CEO Paul Taylor said during a BNN appearance. “We feel a 75-basis-point stress test makes much more sense.”

Housing as an Election Issue

Housing is expected to be a key issue in the lead-up to this October’s federal election.

The first hint of that came on Tuesday, when Finance Minister Bill Morneau said during a pre-budget event that the government plans to look into ways to make homebuying more affordable for first-time buyers.

He noted the government has already tried to increase the supply of affordable housing and control runaway home prices in the country’s largest markets by introducing the stress tests.

“The middle part — the big middle part — is the affordable housing for millennials,” he said. “That’s a real challenge and there’s multiple things we’re looking at in order to think about how we can help in that regard.”

Vancouver metropolitan sales slacken, but prices remain elevated

Metro Vancouver home sales over the first quarter of this year were the lowest in five years, but statistics from the Real Estate Board of Greater Vancouver show prices remain high.

The board stated that home sales across the region in March tumbled 29.7% year-over-year, and are 23% below the 10-year March sales average.

Just over 2,500 homes changed hands last month, a drop of more than 1,000 compared to a year ago, although the board noted that March 2018 sales climbed 14% compared to February.

Listings of detached, attached, and apartment properties also declined by 6.6% last month compared to March 2017, marking the region’s lowest total of first-quarter new listings since 2013.

Real estate board data showed the number of sales compared to the number of active listings soared to 61.6% for condominiums in March, while the rate was 39.9% for townhomes, well above the 20% rate that has been estimated to tend to push prices upward.

The composite benchmark price for all residential properties in Metro Vancouver stood at $1,084,000, a 16.1% increase over March 2017 and a 1.1% increase since February 2018.

REBGV president Phil Moore said that even with lower sales, prices will remain high as long as the selection of properties is slim.

“Last month was the quietest March for new home listings since 2009 and the total inventory, particularly in the condo and townhome segments, of homes for sale remains well below historical norms,” Moore stated in a news release, as quoted by The Canadian Press.

“High prices, new tax announcements, rising interest rates, and stricter mortgage requirements are among the factors affecting home buyer and seller activity today,” Moore added.

The benchmark price for detached properties was $1,608,500 last month, up 7.4% from March 2017 and up less than 0.5% over February 2018, as sales-to-active listings nudged the mark where the board said downward pressure on prices could occur.

With sales outstripping supply for condos and townhomes, the benchmark price for a condo was $693,500 in March, a 26.2% leap from March 2017 and a 1.6% bump compared to February 2018.

Benchmark prices for townhomes across Metro Vancouver reached $835,300 last month, a 2% increase over February and a hike of 17.7% from March 2017.

Home buyer demand depends on property type

Attached and apartment homes are in demand across Metro Vancouver while detached home buyers are facing less competition today.

The Real Estate Board of Greater Vancouver (REBGV) reports that residential home sales in the region totalled 1,818 in January 2018, a 19.4 per cent increase from the 1,523 sales recorded in January 2017, and a 9.8 per cent decrease compared to December 2017 when 2,016 homes sold.

Last month’s sales were 7.1 per cent above the 10-year January sales average. By property type, detached sales were down 24.8 per cent from the 10-year January average, attached sales increased 14.3 per cent and apartment sales were up 31.6 per cent over the same period.

“Demand remains elevated and listings scarce in the attached and apartment markets across Metro Vancouver,” Jill Oudil, REBGV president said. “Buyers in the detached market are facing less competition and have much more selection to choose. For detached home sellers to be successful, it’s important to set prices that reflect today’s market trends.”

There were 3,796 detached, attached and apartment properties newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in January 2018. This represents an 8.3 per cent decrease compared to the 4,140 homes listed in January 2017 and a 100.7 per cent increase compared to December 2017 when 1,891 homes were listed.

The total number of properties currently listed for sale on the MLS® system in Metro Vancouver is 6,947, a four per cent decrease compared to January 2017 (7,238) and a 0.2 per cent decrease compared to December 2017 (6,958).

For all property types, the sales-to-active listings ratio for January 2018 is 26.2 per cent. By property type, the ratio is 11.6 per cent for detached homes, 32.8 per cent for townhomes, and 57.2 per cent for condominiums.

Generally, analysts say that downward pressure on home prices occurs when the ratio dips below the 12 per cent mark for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months.

The MLS® Home Price Index composite benchmark price for all residential homes in Metro Vancouver is currently $1,056,500. This represents a 16.6 per cent increase over January 2017 and a 0.6 per cent increase compared to December 2017.

Detached home sales in January 2018 reached 487, a 9.7 per cent increase from the 444 detached sales recorded in January 2017. The benchmark price for detached properties is $1,601,500. This represents an 8.3 per cent increase from January 2017 and a 0.3 per cent decrease compared to December 2017.

Apartment home sales reached 1,012 in January 2018, a 22.7 per cent increase compared to the 825 sales in January 2017. The benchmark price of an apartment property is $665,400. This represents a 27.4 per cent increase from January 2017 and a 1.5 per cent increase compared to December 2017.

Attached home sales in January 2018 totalled 319, a 25.6 per cent increase compared to the 254 sales in January 2017. The benchmark price of an attached unit is $803,700. This represents a 17.5 per cent increase from January 2017 and unchanged compared to December 2017.

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Home prices in Metro Vancouver are expected to rise again in 2018, as “exceptionally” low inventory pushes up cost, according to Royal Lepage’s latest market forecast.

The real estate agency’s survey, released Wednesday, says prices increased in the fourth quarter of 2017, and predicts prices will continue to go up by 5.2 per cent by the end of the year.

The survey found that the aggregate home price in Greater Vancouver increased 8.2 per cent to $1,267,769 in the three months leading up to December, compared with the same period last year.

The largest increase was in the median price of a condo, which surged 20.2 per cent during those months to $651,885. The increases were highest in North Vancouver (26.8 per cent) followed by Burnaby (25.1 per cent) Langley (23.4 per cent) Richmond (19.5 per cent) and Coquitlam (18.8 per cent.)

The cost of a bungalow in Metro Vancouver went up 5.3 per cent to $1,436,606, while a two-storey home increased 6.6 per cent to $1,586,991.

The survey found there was double-digit growth in the city of Vancouver, where prices rose 12 per cent to $1,480,712, and in Burnaby and Coquitlam, rising 10.3 per cent and 11.1 per cent year-over-year to $1,115,541 and $1,064,247, respectively.

Surrey’s aggregate home price also saw a double-digit increase in the fourth quarter, rising 10.7 per cent to $844,869.

As buyers continued to search for reasonably priced homes near the downtown core, home values went up 5.7 per cent in North Vancouver to $1,459,570. Yet it was the area’s condominium growth that stood out. The survey says North Vancouver posted one of the largest annual gains of any property segment tracked in the nation, surging 26.8 per cent to $673,313.

Royal LePage says the prospect of new mortgage rules making it more difficult to purchase a home may have drawn prospective homeowners back into the market to compete for somewhat affordable property.

The agency’s general manager Randy Ryalls says home values have continued to strengthen in the region, particularly in the entry-level market where competition for available property is stiff.

“With each passing day, purchasers are becoming more attuned to the new price environment and consumer confidence strengthens,” he said in a release Wednesday.

“Until something is done to address current inventory levels, we will likely continue to see significant home price growth in Greater Vancouver’s future, even if demand is reined in,” said Ryalls.

On Jan. 1, new mortgage rules imposed by the Office of the Superintendent of Financial Institutions came into effect. The rules, which limit a buyer’s ability to purchase a home, are aimed at curbing Canadians’ debt levels.

Ryalls said that although the new rules may slow errant home-purchasing behaviour, it’s unlikely to bring prices down, and will push more buyers into the entry-level market, causing the price of condos and townhomes to inflate further.