Expert Panel: Implications of The Foreign Buyer Tax

Back from the summer break, UDI Vancouver hosted a panel of real estate experts to talk all things foreign buyer tax. Moderated by Neil Chrystal, President & CEO of Polygon Homes the panel included:

• Tom Davidoff, Associate Professor & Director of UBC Centre for Urban Economics and Real Estate
• Helmut Pastrick, Chief Economist at Central 1 Credit Union
• Tsur Somerville, Associate Professor & Director of UBC Centre for Urban Economics and Real Estate
• Arnon Dachner, Partner at Dentons Canada LLP

While many of the conversations surrounding the challenges of the 15% tax remain speculative, as we continue to wait for sufficient data, there were a number of interesting conversations and key takeaways.

The tax “is what it is” and the market will digest it. No one disagrees that the introduction of the tax was poorly executed. Dachner pointed out that we have seen far more orderly executions of provincial taxes in the past with the HST. That wasn’t ideal either but at the very least there was public consultation and a much higher degree of visibility, which allowed the public to account for any change in taxes prior to making their purchase decision. Dachner goes on to call the lack of grandfathering morally challenged, to which I suspect few would disagree. “We were not crazy about taxing a nationality but you have to tax something,” explains Davidoff. Someone was going to get hurt but it is what it is and only time will tell how the market will digest it.

The tax negatively impacts Canada’s reputation as a safe place for foreign investment. “[The tax] sends quite a negative signal that this government may enact negative things in the future and it may make some rethink their investment strategy,” says Pastrick. Dachner agreed, explaining that such a drastic action is not expected from the Canadian government and that it definitely looks bad.

Even the experts don’t know what is going to happen. Pastrick calls it a “temporary market disruption” that could last up to 6 months until market fundamentals take over again. Average prices will continue to drop but HPI holds steady as we are not at the end of the cycle yet. Economic recessions typically come after “shock events” and significant imbalances but we are not seeing the imbalances. Somerville candidly notes that it’s all speculation at this point but that “if things do turn the correction will be dramatic as a large portion of employment and GDP is connected to real estate.” Davidoff agrees that there’s a “real risk of correction but I wouldn’t call it highly likely.”

The tax is not without its legal challenges. One of the loudest arguments we heard within days of the tax implication was a potential NAFTA violation but Dachner explains that it has minimal merit as NAFTA permits countries to set their own tax structures. There should be room for it. To Dachner, the issue more lies in the constitutional challenge in the separation of powers between provincial and federal governments. The province has the right to set taxes for provincial purposes but given that the payer of the tax is a foreign national and the payer is outside the province, is the tax still “within the province”?

Dachner was clearly onto something here as only three days after this luncheon we have a class-action lawsuit filed against the provincial government claiming the province acted unconstitutionally and outside its jurisdiction.

Tax avoidance laws are very broad and clear. Dachner explained that anyone who ultimately does not pay the tax, who should have, is considered to have avoided the tax. This also includes anyone who willfully participated or assisted in the avoidance such as developers, their staff, realtors, etc.

We may see a change in buyer preferences. Vancouver is still an incredibly desirable place to live given the amenities, opportunity, stable economy, etc. but conceptually you would expect a shifting in preferences to cities with fewer barriers to enter the real estate market. However, Tom Davidoff would argue that “If the roast beef is right, they’ll be back.”