New measures to close a loophole that helped foreign buyers flip properties for a profit have been announced by Canada’s federal government.
Speculators – both foreign and Canadian – were exploiting the rules to avoid paying capital gains tax on properties that should have been classed as investments.
Instead, buyers were falsely claiming the houses were principal residences, allowing them to avoid the charges.
The Big Number
$1.58 million
Average price of a detached home in Greater Vancouver in September 2016
Source: Real Estate Board of Greater Vancouver
Under the new system, the capital gains exemption can only be claimed once a year and the owner of the house must live in the property. Tax returns must record all instances where capital gains exemptions are claimed for home sales.
The change is part of a number of new rules being introduced by the federal government aimed at reducing risk in the housing market and not allowing homebuyers to take on too much debt.
Buyers face more thorough tests when taking out mortgages covered by insurance, requiring them to be able to afford the Bank of Canada’s posted rate, which is higher than those currently being offered by lenders.
The move will essentially make it harder for buyers to stretch themselves when getting a mortgage.
Officials say the move is aimed at cooling housing markets in Toronto and Vancouver, easily the two hottest real estate zones in Canada.
According to the Real Estate Board of Greater Vancouver, the average price of a detached home in the city was $1.58 million in September 2016, an increase of 34 per cent on September 2015.
However, the September 2016 price was only 0.1 per cent higher than August, representing a significant cooling of a market that was spiralling out of control.
The cooling can be put down to the 15 per cent tax imposed on foreign property buyers on August 2, 2016.
The new tax was announced on July 25, and led to a frantic week of action as buyers, sellers, realtors and lawyers faced a race against time to complete deals.
Vancouver is a key target market for wealthy, mainly Chinese, buyers, causing house prices to rise astronomically in recent years.
Some of the blame for the problem iss attributed to the Quebec Immigrant Investor Program (QIIP), which awards permanent residency to high net worth investors in return for an $800,000 investment over five years.
Although candidates for the program must declare their intention to live in Quebec, it is their constitutional right to move wherever they want in Canada once permanent residency is granted.
Many of them end up in Vancouver and Toronto, pumping their money into the hot housing markets.
The hot housing market has turned Vancouver into Canada’s first ‘city of millionaires’, with average household net worth hitting seven figures.
In 2015, the average net worth of Vancouver households rose to $1,036,202, up 7.1 per cent on the previous year, according to the Environics Analytics WealthScapes 2016 report. The Canada-wide average, meanwhile, was $680,098.
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