IN THIS WEEK’S FACTS BY EMAIL:
- SPECIAL EDITION ON THE NEW TAX!
The Unbelievable, Unimaginable, UnCanadian And Unfair Retroactive Tax
Much has been written about, much has been said and – my, my – have I received a ton of questions and comments following the Michael Campbell Money Talks show on Saturday. E-mails and phone calls abounded.
I had first wanted to answer each and every question and add the numerous comments, but have decided to just do this special edition and share my thoughts and opinions. Hopefully they also answer all outstanding questions. Certainly to those, that blame me (talking about the Hong Kong tax in our Facts by Email FBE) or for forecasting at Outlook conferences that a tax was coming, I say: Nonsense. I did share that fact as well as many other Government actions (Australia, Austria etc.) with the view to forewarn – not because I advised the Government. We did believe that the Government (we thought Federal) would do something to slow down foreign investment: Yes, we forecast that. A retroactive tax: Never!
First, there are really two issues: 2 taxes enacted.
One is a new tax that will have long term consequences on all real estate investment from foreigners in BC. These consequences are (if the Hong Kong and Singapore (18%) models are to go by):
- A sharp decline in condo prices and an outright collapse in speculative development property (or potential development property) values. A lot of unsophisticated foreigners paid too much for the land in the (false?) hope of rezoning and now … fewer buyers from overseas! We said NOT to buy such land and to SELL old apartment buildings that could be rezoned.
- Long term negative consequences on how BC will be perceived by ANY company or investor wanting to bring their business here. If such a punitive tax can be brought in without warning and then retroactively … why would anyone want to take a gamble of that with a large investment?
- Legal wrangling’s galore. Not only from people that are currently negatively impacted but also from constitutional lawyers that will bathe in the glory.
The 2nd part of the tax is the fact that it is – unbelievably and dastardly – retroactive. I have sat down and tried long and hard to understand as to why this is necessary. To me it is clear: it was and is not and in fact, it is punishing the wrong targets – legal Canadian contracts. There will be a lot of unintended consequences.
“To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.” -Thomas Jefferson
Retroactive tax is taxation without representation. Taxation without due process. It may be legal but really? But where is the “due process”? Where is the warning? And for goodness sake: “Where is fairness?”
We Canadians thrive on being “fair” and open. We inherently know what’s right and wrong:
- We know when someone is being treated unfairly.
- We fight for justice.
- We think it is wrong to beat a confession out of someone.
- We think it is wrong to deny a person his right to worship.
- We have stated so in our Constitution.
I also bet that if you polled the Canadian public in general, a vast majority would say that retroactive tax laws are wrong. If retroactive taxation takes effect, taxpayers will come forward and challenge its application. On constitutional grounds, on international treaty grounds (NAFTA) and from individuals – CANADIANS – who have been made to suffer under the application of the retroactivity.
I have chatted with a knowledgeable lawyer who felt strongly that Courts have long recognized taxpayers have an economic right. A right which may be violated if retroactive legislation is enacted. Legislation that is not rationally related to a legitimate legislative interest. Which this clearly is not.
This will be a lawyer’s heaven. This is Sunday the 31st and I think there is still hope that the government will realize its folly and delete the retroactivity portion of this new tax, avoiding a lot of the lawsuits that will arise from the hardship it imposed on Canadian owners and seller.
So, while most of you have not been able to escape the gory details let’s briefly review and repeat what has happened – again:
Ace Lawyer Tony Spagnuola writes thusly:
This is what we know:
- The Province of British Columbia will be levying a 15% tax on all purchases that are not Canadian Citizens or Permanent Residents. This will come into effect on August 2nd, 2016 and will be applicable to all completions (i.e. money exchanged for title to a property) that occur after August 2nd.
- If it is a company that is purchasing, a foreign company is one that is not incorporated in Canada, or incorporated in Canada but controlled in whole or in part by a foreign national or other foreign corporation;
- The increased tax only applies to properties in the Greater Vancouver Regional District, and does not apply elsewhere in the Province, or the Tsawwassen First Nations Lands;
- The tax only applies to residential properties, not commercial;
- This is in addition to the regular PTT to be paid, and is paid on closing;
- The increased tax is effective August 2, 2016, regardless of when the contract was signed. Even if the contract was signed weeks/years ago, if it completes after August 2, 2016 there is a higher tax;
- The additional tax is payable even if there would normally be an exemption available. Transfers between related individuals, transmission to surviving joint tenant and other such items now attract the additional tax.
During the last 2 years at every conference I stated my “8 astounding predictions.” In them I speculated that we would have an investment tax and/or other investment regulations aiming at the foreign buyer. We actually discussed the Hong Kong tax (on which the BC version has been modelled) at our conferences and also on 3 occasions in our Facts by Email this year when we pointed out that the effect the Hong Kong tax had was a collapse in land prices (from last July till this spring). Hong Kong brought in a 15% tax on foreigners in 2012 and it has resulted in a market crunch in condos and an outright crash in land values.
In a nutshell this would mean
- Whistler, Abbotsford, Victoria, Kelowna and an everywhere else in BC is free of the tax (so far)
- Commercial real estate could be the next thing that foreigners will invest in. (BUT, read proviso in summary of predictions.)
BUT, because the tax is retroactive – it has these consequences:
We have laws that legislate the creation of legal and binding contracts in BC. These laws under the Real Estate Act govern the writing and signing of interim agreements in a prescribed format between buyers and sellers and if executed properly constitute a legal and binding contract. If a buyer welches on such a contract he stands to lose his deposit AND can be sued by the seller for “SPECIFIC PERFORMANCE”.
In a fine article by MacDonald Realty (in the Vancouver Sun) the writer points to the problems with the tax. Specifically, the article says that (the retroactive aspect of the tax) will have profoundly negative consequences for many Canadian families, who weren’t the intended targets of the tax.
MacDonald Realty highlight’ some real-life examples:
- “One of our clients is a new immigrant family in the process of moving to Canada. They have both children registered for school — their daughter will be studying English literature at the University of B.C. in the fall. They have already entered into a firm deal to buy a resale home priced at $765,000 (from a Canadian seller), but since the sale closes after Aug. 2, they are now looking at a sudden $114,750 increase in their cost — on a firm and binding contract. This is neither just nor reasonable.
- “Our second example involves a Canadian family who recently listed their home for sale in Surrey. They have a firm deal with an immigrant family for $480,000; however, that deal is now in peril, because the buyer’s cost just went up by $72,000. The sellers, as Canadian citizens, weren’t meant to be the subject of this tax, but now it has placed their financial lives in jeopardy.”
- Marc Jurock, Realtor with Re/Max reports countless such deals. One in particular, involves a lady that sold her home for $1.4 million and in anticipation of that cash (she has no other) bought a house for herself at $600,000 and a condo for her sons’ family for $300,000. There are three deposits in peril and the sufferers are 3 Canadian homeowners.
MacDonald Realty also points to a broader reality: “…the knock-on effects of this tax throughout the Vancouver real estate market that could be immensely damaging for many Canadians. Real estate is traditionally a linked economic activity. Once they have a firm deal on their property, many sellers promptly go on to buy their next home. If foreign buyers begin defaulting en masse, we could see a contagion scenario wherein a single default by a foreign buyer will result in many more defaults by Canadian buyers.” Indeed, and well said.
Result for buyers:
As a result of this tax any buyer that is closing a property after August 2, but where the interim agreement was signed at ANY time before that (i.e. in January this year) must pay the tax. It is also illegal to use perfectly acceptable transfers between related parties. The buyer faces: Either pay an enormous tax (15% IS ENORMOUS!) or lose deposit … plus face a possible lawsuit for Specific Performance.
Example of a buyer: Signed contract for $900,000 and gave a $60,000 deposit. He will either not close and lose $60,000 and may be sued, or he will have to pay $135,000 in tax!
By the way that deposit sits now in the Real Estate Company’s trust account and will have to be paid into court. Owners will NOT have automatic access to that money.
Result for sellers:
If the buyer cannot or will not close and the seller already bought a property (on the strength of the binding contract he had), he also stands to lose his deposit and /or be sued for specific performance also… We heard of deals that have four transactions in a row all depending on the first buyer closing.
In the above example, there are two firm legal and binding contracts. The seller on the strength of having a $900,000 sale bought a house in Langley for $1.2 million and put a $40,000 deposit down. If his sale does not close he cannot close on the Langley one either and he may lose his $40,000 – and may be sued!
There are further countless examples, of a student buying, a work permit buyer buying (none of them super rich people). In fact, most of the buyers (with an Asian population of 400,000 plus in Vancouver it is likely) may well be families that, for this and for that reason, have other family members wanting to buy here.
Imagine you had a building under construction where 60% of the buyers are foreigners. You have legal contracts, you have legal financing based on these contracts, but now you will not know for years on whether they will close… Huge impact on developers and their banks!!
Now, last month the BC Government stated that developers can assign contracts and now there will be a mad scramble of foreign buyers trying to assign their deals, likely at less than they paid for … putting a damper on ALL condo sales and values. It is silly and downright dangerous. It is untenable.
Assign your pre-sale contract – simply sell it to a Canadian after August 2. Assignments from a developer are still legal!
SUMMARY OF PREDICTIONS
- A lot of foreign buyers will be told by their Realtors and others to go to Whistler, Kelowna and to Victoria for investment. In my view they are the next likely expansion cities for the tax. But, in any case – think it through: What is to stop the Government from bringing the tax in there – and also RETROACTIVE! Do it once, do it again.
- All potential foreign investment in business, plants will stop. If our Government can put in a retro tax on real estate contracts it might put it on all other investments as well. BC will now have an image of a government that cannot be trusted.
- Seattle is the likely future for Chinese investment. (It was one of our top five picks for cities in the USA this year.) We urged you to invest there … now even more so.
- Average unsophisticated speculators will concentrate on unaffected areas for a while (but with spotty results – see above)
- Speculators will pile into commercial BC real estate. (But now with the worry that the tax will be expanded and retroactively.)
- All thinking sophisticated speculators will back off. A lot of their properties will come onto the market.
- A lot of listings will be come to the market from now on (will soar) …this will accelerate as owners will try to still get that ‘speculator price’. They won’t get it. If you are one that sells, SHARPEN your pencil now or you will chase the price down.
- All property assemblies that were bought by unsophisticated speculators that were told they could rezone to high-rise will likely crash! Why?
A) They will try and get out. The city may not rezone in any case.
B) Developers that were willing to pay top dollars, now look at the horizon of potentially a lot fewer foreign buyers and will back off buying that speculative development property. In fact, many may want to sell.
- Old apartment buildings that sit on prime land may not be bought at the spectacular prices we reported 3 months ago.
- All real estate sales will slow and most will go down in value by 10 – 15% by year end.
- A lot of lawsuits will arise from the unfair retroactivity but as well from the general tax levy. They will be challenged on several grounds (see above)
- The Liberals will benefit from all tenants and ‘potential buyer’ voters in Vancouver.
- The Liberals have decided (I bet with Federal approval or even urging) to let BC be the guinea pig for Canada.
- After much of the shouting has died down the tax will be rolled out – first in Toronto. Later everywhere – first possibly Victoria, Kelowna, Whistler? Further down the road Canada wide … but at different percentages … somewhere between 10% and 20%.
- Lawsuits galore … owners, buyers, developers all will sue the government. Multi-million dollars in legal fees – many unnecessary – and will create untold hardships – legal wrangles.
- All luxury furniture, luxury cars, clothes etc. will experience sharply lower sales
- There may be fewer foreign students – Seattle and other US cities will look more attractive.
- Ask yourself: how would you as a Canadian feel if you are charged a super tax in Palm Springs – retroactively?
- All tenants and all potential buyers will love this.
- The re-election for the Liberals will be helped by the tax.
Major Point: In my January Outlook issue and in our FBE in several issues since January 2015 I said that Mr. Poloz is entirely to blame for soaring housing prices. He says we are overvalued as a nation, he says our home prices are 30% too high and then he lowers interest rates and talks down the dollar (in a misguided attempt to stimulate exports) – accelerating the problem.
I mused at the time:
- What does he know, fear that he is not telling?
- What measures will he introduce to the real estate and mortgage markets?
We said he had to do something, since raising interest rates (the only sure damper of prices) was not in HIS cards. And he did: he increased down payments, cracked down on all (Canadian) real estate investor mortgage qualifying criteria, etc. etc.
Now we have this tax: A Canadian Guinea Pig.
BC taking one for the Federal (Poloz?) team?!
Here are a number of articles that look at the new tax from a variety of reasons:
- New BC tax is unconstitutional: http://vancouversun.com/news/national/b-c-property-law-vulnerable-to-challenge-says-constitutional-law-expert
- The true cost… http://vancouversun.com/opinion/opinion-the-true-cost-of-the-new-tax
- This is the greater Vancouver map http://www.canadalegal.info/img–site/BC/greater-vancouver-map/GVRD-map.html
Lindsay Tedds is an associate professor of economics in the School of Public Administration at the University of Victoria.
“In economics, a tax on transactions (in this case, residential properties, but it can apply to anything) intended to curb speculation is known as a Tobin tax, after Nobel-prize winning American economist James Tobin. By raising the cost of the transaction (in this case, buying a home), so-called speculators will be dissuaded from engaging in the transaction. If speculators are dissuaded by the transactions tax, then prices should stabilize to ‘normal’ levels – in theory.
“But Tobin taxes have been well studied, both in application and in theory, and there is little consensus and evidence that they achieve the intended objective. In terms of the application to the housing market, the main finding is that this type of tax does not dissuade uninformed or ‘bad’ speculators. But it does drive out informed speculators, who are key to maintaining market and price stability. The unsurprising result is increases to volatility and decreases to price in formativeness, the end result of which is housing price instability.”
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