Entries from March 2017 ↓

Gaming it

“So,” Geoff said, “I see you sold a house last year. Now you need to disclose all of the details to me.” Yes, he’s my accountant, and in this cruelest month of the year, his task is to do my taxes then deliver the bad news. I am blessed with a big income. And cursed at what it costs. More than half of what comes in goes back out to government. With the rest I buy bulk ice cream and drywall.

This is the first year ever that Canadians will have to disclose the intimate details of their residential real estate. Geoff waterboarded me until I revealed the date I bought the last house, how much I paid, when it was sold, the selling price and related costs, like land transfer taxes, commissions and legal fees.

The point of the Principal Residence Exemption (you must fill out the Schedule 3, Capital Gains section of the T1 tax return) when it was first unveiled six months ago was to crack down on foreigners who dump houses and pocket the gains, evading tax. But there is scant evidence of that happening, as much as the deplorables in the steerage section wish it were so. More to the point, the CRA is developing a mother of a data base so it can nuke flippers or anyone else in the business of profiting from residential real estate.

There are three ways houses and taxes mingle. First, you’re allowed to make gains on your home and pay no tax. In order to do so, you must now fill in Schedule 3, disclosing purchase and sale values associated with a specific address. If you do not qualify for the exemption, your profits will be subject to capital gains – such as with a rental condo, tenanted duplex or the old home you hung onto and rented out when you bought a new one. In that case 50% of the profit will be taxed at your personal marginal tax rate.

However, if the CRA thinks you’re in the business of making money from houses, it’s possible you’ll have to include 100% of any profits in your annual taxable income. Ouch. That could happen if you bought a pre-construction condo and sold it upon closing, or a few months later – even if you moved in. It might apply (at the CRA’s discretion) if you bought a house, occupied it during a renovation, then put it on the market. Or if you owned a rented house, kicked the tenant out, stayed there for a while, and sold. Part of your gains might be classified as a capital gain in that instance, and part as income.

The law’s fuzzy, elastic and pliable. There’s no legislated period of time that qualifies a house as a principal residence, and the establishment of this registry is an obvious and clear first step in the war on speculation. Always remember that Ottawa has a giant weapon called GAAR – the General Anti-Avoidance Rule. This gives the CRA the authority to tax in any circumstance where it considers a taxpayer has taken action simply to avoid taxation.

The definition: where a transaction or a series of transactions achieves a reduction, avoidance or deferral of tax, and those transactions or series of transactions are not conducted for any primary purpose other than to obtain a tax benefit, the tax consequences of such may be invalidated.

So, combine the PR exemption registry with the CRA’s taxing of house profits as income and the unlimited power of GAAR, and you have the basis of a serious war on flipping, speculation and anyone who thinks they can game the market. It’s a complete myth that by simply living in a property for a short while it can become a principal residence. Already scores of taxpayers are losing tax court battles in which profits from condos bought in pre-construction are being included in regular taxable income – and the costs associated with them are not even deductible.

This is why governments at other levels are going too far, creating a Big Brother orgy of tax overkill. BC has its foreign buyer tax in Vancouver. That city has imposed an empty houses tax, while Victoria is considering the same. Toronto’s mayor thinks that’s a swell idea to impose on six million people, and Ontario is now contemplating both a foreigner’s tax plus some kind of speculation levy or additional capital gain.

All of this seeks to regulate assets people buy with dollars already taxed as never before. And none of it addresses the root cause of why houses in bubble markets cost so damn much.

Debt’s too cheap and too accessible. Because Canadians have house lust, no discipline and inbred financial illiteracy, they’re seriously at risk. If you think government is overreaching now, just wait.

What could go wrong?

Americans have a constitutional right to own property. Canadians? Meh. Not so much. You just have to hope for the best – that the province won’t expropriate for a road, the city won’t zone a group home next door, the conservation authority won’t prevent you from landscaping, or the mayor won’t decide you’re not home enough.

As real estate prices grow more insane in our bubble markets, politicians are hot to further abrogate private property rights – which you don’t actually have (and they know it). An empty condo, for example, that you plan to retire into next year. Or a property used for business part of the time. A secondary home in a city where you winter. Real estate you bought, paid for and shell out property taxes on. All that is now in the crosshairs in Vancouver, and may soon be in Toronto.

YVRers have been receiving these brochures in the mail – the latest news on an ugly little tax about to be slapped on thousands of unsuspecting property owners who have done nothing wrong. The tax is ginormous – 1% annually of assessed value, which is $14,700 on the average detached house, or $1,230 per month. This is on top of normal property tax of about $5,500.

The Empty House Tax, now in BC and soon in Toronto (says mayor John Tory, who used to be a conservative), doesn’t just spank foreign owners who snap up properties as long-term investments then leave them to the weeds and the mice. There actually aren’t many of those dudes. Instead, it’s intended to economically censure wealthy people as it’s now socially unacceptable to have two homes when some poor moister couple can’t afford any. There’s no evidence the EHT will increase housing stock, put more rentals on the market, or do diddly about the speculation that’s driven prices skyward. It’s just political. It’s something, when leaders have been accused of doing nothing.

How does this work?

Vancouver is the model for the Toronto tax now being crafted. A secondary family home – maybe a condo you bought for your daughter to attend school – which is not regularly occupied, or rented to a tenant for at least six months, will be taxed. To prove otherwise, an audit will require government-issued ID showing that address, or a tax return.

A secondary home, used periodically by the owner, or family members or guests which is not fully occupied for half the year, or rented out for an equal period, will be taxed. So, if you live in Toronto and spend the winter in Vancouver in a condo which is then largely vacant for seven or eight months, you pay. Even if you worked in Van for six months of the year and needed a pad – cheaper than taking a hotel – you pay the tax. Only exempt would be someone needing a place because they have a full-time job in that city.

If you own a condo which is on the rental market and you can’t find a decent tenant, after six months you will be taxed. “Therefore,” says the city, “owners are encouraged to reduce the asking rental cost until the unit is rented, as they will not be exempt from the tax on the basis of being unable to find a tenant.” Ditto for selling a property. If the housing market slows (as in YVR now) and you cannot find a buyer willing to pay your price – after 180 days, it will be taxed.

Is this fair? Just? Equitable? What purpose is served through the arbitrary imposition of an extra new levy on people, simply because they own property?

Beats me. But John Tory likes it. “I am open to exploring whether this would be the right measure for Toronto,” he told reporters this week, which is political code for lift-off. Of course, this is the same guy who wanted to make the main artery into the city from the burbs a toll road (shot down by the premier), so he’s desperate for revenue.

In fact, Toronto has already started the witch hunt. Officials have been instructed to study electricity and water usage data to ascertain the number of lightly-used properties in the city – wildly estimated to be about 65,000 (at least a third of which are newly-built condos). Tory has asked these bureaucrats for a report on the feasibility of a GTA vacancy tax.

Meanwhile, we’re four weeks away from the province imposing its own market-dousing agenda as politicians react to a 30% surge in average prices, caused largely by speculative fever and house-lusty hormones. The budget seems likely to bring a tax on speculation and flipping plus (maybe) a foreign buyer whack.

Just listen to what Treasurer Charles Sousa had to say a day or two ago: “There are individuals that are going into subdivisions that are buying 10, 40, 50 homes – holding paper – and flipping it … and they’re crowding out families who are trying to buy.”

Yeah, we know where that’s headed. Even if it’s true.

Have you listed yet?