Canada Applies New Policy to Overseas Property Buyers

Canada follows Australia and other jurisdictions in applying new policy to overseas buyers as a way to cool overheating markets

Canada may not be making news quite as earth-shattering as its southern neighbours, but recent affordability fears and runaway prices in Toronto and Vancouver in particular prompted the federal government to implement new cooling measures. Chief among the reforms announced in October were lending rules designed to insure borrowers can afford insured mortgages, and closing a legal loophole that allowed non-residents to avoid capital gains taxes. “Overall, I believe the housing market is sound,” stated Finance Minister Bill Morneau when unveiling the measures. “But … I want to make sure we are proactive in assessing and addressing the factors that could lead to excess risk.”

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No New Taxes — Yet

Following the British Columbia government’s move to slap a 15% tax on foreign purchases in the summer, many expected Ontario to follow suit, but that is a provincial levy and so there was no news from the federal government on October 3. While lobby groups urge Ontario legislators not to follow BC’s example (sales in BC fell off 26% year-on-year after the tax was implemented), Ottawa is taking aim at speculative foreign money and over-extended buyers. “The government is taking these measures to cool the overheated market, primarily in Vancouver and Toronto. It remains to be seen over the next few months the effect it will have on inventory, and thus on selling prices,” notes Jennifer Kay Chan, a sales representative at Forest Hill Real Estate in Toronto.

Investors or buyers considering financing through Canadian banks will, as of October 17, be subjected to a new stress test on insured mortgages. Currently, buyers with a down payment lower than 20% must be insured by the Canada Mortgage and Housing Corporation (CMHC), which protects the lender. The new metric will be applied even to mortgages below 80% financing, and is designed to ensure the buyer can afford the loan were interest rates to rise. “The home buyer would need to qualify for a loan at the Bank of Canada’s five-year fixed posted mortgage rate, which is an average of the posted rates of the big six banks in Canada. This rate is usually higher than what buyers can negotiate,” explains mortgage broker Amina Mohamed. The BOC rate is 4.64%. The stress test also demands buyers spend no more than 39% of their income on housing.

“The purchasing power of buyers, especially first-timers, is reduced by the new mortgage rules and stress tests. It may reduce their purchasing power by about 20%,” theorises Chan. “Government intervention to help buyers manage their debt load is a good thing, as the government does not want defaults.”

Fighting Speculation

Elsewhere, legal loopholes that previously allowed non-residents to claim a property in Canada as their primary residents — and thus qualify for a capital gains exemption upon sale — have been closed. Currently any profit from a primary residence sale is tax-free, and it’s not required it be reported as income. Starting this year, the exemption still stands — but everyone must report a primary home sale on tax returns. In addition, owners must be resident in Canada to claim the exemption. “The change is mainly aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption. There is still no firm evidence of this to be true, but in light of all the activity seen from, mainly, China, they want to curb this activity,” argues Mohamed.

A September investigation by The Globe and Mail seemed to find evidence, revealing a speculation network that was allowed to operate largely due to ineffective enforcement of existing laws. Real estate lawyer Bob Aaron sees the measure as a good way to stop tax leakage, and told the CBC, “There [are] a lot of people who are declaring their homes as principal residences when they're not. I think it's more of cracking down on the existing law rather than plugging a loophole."

For expatriate Canadians who own property in Canada, the legal changes will have no affect on how they’ll be taxed. “The changes will ensure that properties are reported so that they are less able to escape taxation. For those expats that are already properly complying with all of their filings (reporting rental or investment properties as non-owner occupied residences, paying the proper taxes on rental income etc), there should not be any negative implications,” adds Chan.

Changes in the Fine Print

Also on tap are new restrictions on when the federal government will provide insurance on low-ratio mortgages, now on properties priced below CA$1 million (HK$5.7) and on mortgage terms less than 25 years as a start, essentially restricting insured mortgages to a smaller buyer pool. The idea is to lower the government’s risk exposure and control prices. Finally, Ottawa is looking at consultations in the near future on proposals that would see lenders (Royal Bank, CIBC, Bank of Montreal and the rest of the so-called big six) taking on more of the default risk currently borne solely by the CMHC — a crown corporation. That’s good news for taxpayers, but could mean higher rates for consumers, as lenders could seek to cover their risk, ironic considering Canada has a low default ratio.

For now, nothing is a deal-breaker for investors. “We are professionals and it will be business as usual,” finishes Mohamed. The litmus test will be whether or not the Ontario government takes more drastic measures to cool down the Toronto market. “We will roll with the punches as they come, and I don’t think the government is finished throwing them unfortunately.”