The crash tax?

FIRE modified

On a day when the price of oil oozed back down to $43 and the Canadian dollar slid into the 75-cent range, provincial politicians in BC told foreign investors to buzz off. It was a bold, unexpected and political move.

In fact, just about all the pols had on their mind was housing. The BC government has also taken over regulation of the real estate business from the industry itself, and paved the way for Vancouver to start taxing property owners for not living full-time in their own condos and houses.

The new levy on foreign buyers was a shocking, ground-breaking reach for a bunch of people who said a few months ago this would be a dumb move. But a spring election gets closer by the week and, ya know, it’s all about perceptions. And dumping on foreigners. In a Brexit-&-Trumpian world, it’s the new normal.

Anyway, here’s the deal. Foreign nationals (or corps) registering property in Metro Vancouver will be hit with an astonishing tax of 15% of the purchase price. Yes, that’s an extra $300,000 on a $2 mill pile. Welcome to Canada. Everyone else pays the same land transfer tax as now – about $38,000.

The logic behind this: the tax will help dampen demand and throw water on runaway price acceleration in YVR. It comes weeks after the province started collecting data on foreign buyers, discovering they’re behind about 5% of deals. By the same token, this amounted to $1 billion worth of sold listings in a month. That would equal tax of $150 million. The province has also left room to raise the Chinese Dudes Tax to 20%, if it feels like it, or depending how the polls look for premier Christy Clark in March.

So what might this accomplish?

Beats me, since a lot will depend on how these two moves – a tax on non-resident buyers and another tax on investment properties – is perceived outside our borders. If we look like a bunch of anti-globalist, wall-building, inhospitable nimrod isolationists, then the flow of capital could end quickly. If everyone living in Vancouver is correct (as opposed to me) and offshore capital is the No.1 reason houses are insane, then this would be a Crash Tax.

Given the weakening energy sector, our no-growth economy and the latest job loss numbers – not to mention a US presidential candidate who wants to tear up our free trade deal and erect his own tariff barriers – predicting consequences looks easy. I think you should have listed your house in Kits last week.

Then again, the Chinese Dudes Crash Tax could also work to force the same flow of capital (that everyone believes is evil) into lesser-priced properties. After all, if these Chinese dudes are (as everyone believes) a bunch of corrupt money-laundering mainland criminals, why not just use a few condos for the wash-and-rinse cycle instead of one fat Shaughnessy mansion? Or, better yet, swim to Victoria?

That would topple prices at the top end of the market while fattening them in the middle. Suddenly the last sleeve of listings truly affordable on average Van incomes would no longer be that way. So it’s hard to know how Christy could stand up on Monday and say, “Today we are taking measures to ensure home ownership remains within reach of the middle class.” Actually, it’s the opposite.

So if Chinese dudes are a major market-maker, a tax of this magnitude would have the same impact as a big spike in mortgage rates. Given the fact prices have catapulted higher while sales of detacheds have collapsed up to 40% already, it could be game over. If the buyers flee, so do billions in home equity. Gone will be the force that pushed 91% of all Van house over the $1 million mark. So much for that early retirement.

But if the Chinese dudes’ influence is more urban myth than economic reality, how could these moves – taxing land registrations and empty condos – make housing more affordable for anyone? Vancouver continues on the same path of real estate obsession, over-borrowing, rampant speculation and a dangerous one-asset economy.

The governing Libs are gambling, of course. The more market intervention by government, the more unknown the outcome. Politicians anxious to be seen ‘doing something’ have opted for the lowest common denominator of blaming external forces – foreigners – for a problem which has been 95% created by house horny locals, and remains.

Either the market keeps soaring, or it turns into a smoky hole with a tail fin protruding. There is no soft landing. Not even for Ms. Clark.

Trouble

TROUBLE modified

Tax avoidance is cool and legal. Tax evasion’s a crime. Like knocking off a milk store. Or ogling your assistant.

Avoiding tax is easy – contributing to an RRSP, splitting income with your spouse, making an investment account joint with your kids, putting your squeeze on the company payroll, getting paid through dividends, doing an estate freeze, creating a tax-deductible mortgage or setting up a family trust.

Evading tax is as common as it is illegal. Paying cash for services to avoid paying or remitting the HST or not declaring rental income are biggies. And lately, flipping houses.

As we’ve come to know, the T2 gang loves taxes. With plans to spend $120 billion more than they take in over the next four years, they have to. Every dollar counts. It’s why the TFSA contribution limit was gutted, plus a brand new tax bracket created for the quasi-wealthy and why there’s a lot more to come in the next budget. If you’re above-income, you have a bullseye on your butt.

So there’s now an Underground Economy Advisory Committee set up to report to the revenue minister, plus a new task force to crack down on tax evasion through offshore schemes – which will require taxpayer funding of $444 million, hopefully bringing in more than it costs (don’t hold your breath). This also explains the big push to punish Toronto condo flippers and Vancouver specuvestors.

In the GTA over the past year the CRA completed about 1,900 audits of real estate deals, with the average penalty coming to more than $22,000 in tax and HST. The Revenuers have just lately been sweeping into the Vancouver area, prompted by media reports of shadow flipping, crooked realtors and tax-evading Chinese dudes. Besides, with an intensely speculative bubble market in its climax phase these days, CRA auditors know there’ll be lots of low-hanging fruit to pick. It means a bunch of people who thought they were so clever might actually end up hunkered over their chequebooks. One recent penalty amounted to $2.5 million. Ouch.

So, what’s the crime?

Flipping’s at the top of the list. For example, someone buying a condo from builder plans for $425,000 and selling it upon completion for $500,000 might think they could write it off as their principal residence and pay no tax on the gain if they lived there for a few months. Well, forget that. In fact, the CRA doesn’t even consider this to be a capital gain, taxed at 50%, but rather business income, taxed at 100%. It means every dollar of profit can be added to the seller’s income and taxed at their marginal rate in that year.

The knives are also out for flippers that buy, gut, reno and sell. The law says HST must be added to the sale price of any “substantially renovated” house, which can bloat its market price dramatically. So the seller has to add that on, report and pay it. Or eat it. Or just evade it, and hope to slip through the cracks – a risky gamble since a public paper trail exists for the CRA to go sniffing down years in the future.

Then there are the shadow flippers – people who deal in assignment clauses. As this blog had detailed in the past, this is a major channel for condo sales in the GTA of late, with whole real estate brokerages specializing in assignments, or the resale of sale agreements. It’s all legal, but most of the poor people doing these deals have no idea any profit will be treated as income.

In the crosshairs, too, are non-residents. They don’t get to claim a real estate profit on a principal residence as tax-free. In fact, it’s not even a capital gain (taxed at half-rates) but must treated as Canadian income, and fully taxed. Worse, it has to be paid within ten days. Never forget you’ll face a tax bill on the sale of any investment or recreational property, like a duplex, rental condo or hobby farm. Cottages are among the most punitively treated, since all increases in value are taxable, but mortgage interest and carrying costs are not tax-deductible.

And that rental suite? Yup, every dollar you collect from your moldy tenants must be added to your employment income and taxed at your marginal rate, often shoving unsuspecting landlords into a hostile new tax bracket. Of course, a portion of your home’s costs are deductible (including some mortgage interest), but you’re compromising the tax-free status of potential profits on your home when you eventually bail.

Of course everyone reading this pathetic, law-&-order, government-loving, ammo-and-dogs blog is law-abiding and pays their fair share of taxes. But that shifty neighbour of yours with the pool and the Benz?

You might want to call that in. It’s the sunny way.