Vancouver's Tax on Foreign Buyers
August 26, 2016 @ 8:06 PM by: Heather Francis
Vancouver’s Tax on Foreign Buyers – Effective as of August 2, 2016
Non-resident purchasers of real estate in Vancouver will now have to pay an additional 15% land transfer tax effective August 2, 2016.
Polls suggest people are offended about foreign money treating Vancouver real estate like a Monopoly board, buying streets and properties and moving on.
The 15% foreign tax decision has divided the real estate and mortgage industry -- with many claiming such a move is overdue, and others arguing it will have little to no impact on housing affordability. Regardless of whether opinions are for, against or indifferent to this new tax, here are some examples of what has happened as a result of the tax coming into effect.
How could it affect your real estate transaction and mortgage financing?
Collapsed Deals. According to Dan Morrison, president of the Real Estate Board of Greater Vancouver, 427 current deals will likely collapse due to the added 15% property transfer tax payable by foreign owners. In addition, Canadian sellers involved in those deals, may not be able to purchase their next home because they did not receive their proceeds of sale. This domino effect could continue for a few years by the time foreign ownership settles out with regard to pre-sale condos not yet built and ready to occupy.
Purchase Price. The purchase price remains the same but it then forms a base for calculating the transfer tax on top. For example, according to the BC Government, Finance Minister Mike de Jong, the additional 15% tax on a $2-million home would amount to $300,000.
Total Mortgage Amount. A question that I have been asked many times is: “Can I add the purchase taxes (e.g. PTT) to the mortgage amount?” The short answer is “No”, followed by a more lengthy explanation.
Consider the question: “Does the Property Purchase Tax (PTT) functionally increase the property value in the same way that the Goods & Services Tax (GST) does?”
GST is a tax that is applied to the purchase price of ALL NEW homes and/or new lots recently subdivided from larger parcels of land. For some purchases, a portion of the GST may be reduced in the form of a rebate . However, ALL buyers regardless of citizenship or residency in British Columbia must pay part or all of this tax. And, since GST is universal to buyers, lending rules allow for the applicable GST to be added to the property value. The property value is, in effect, increased on paper by the applicable added GST. As a result, qualified buyers approved for a high-ratio loan of 95% of the purchase price could effectively cover 95% of the GST cost within their mortgage financing.
As explained above, GST relates to whether the property being purchased is “new” or not. In contrast, the PTT relates more to the circumstances of the buyer in addition to the purchase price of the property.
1) For First Time Buyers, the PTT may be waived, i.e., 0%,
2) For non-foreign buyers, the PTT is approximately 2% of the purchase price, and
3) For foreign buyers, the new Foreign Buyer Tax of 15% is added to approximately 2% PTT and, thus, the foreign buyer may pay a total of 17% PTT or more at closing.
Example: The home next door sells and your new neighbor, a foreign buyer has to pay approximately 17% total PTT. If a qualified BC Resident purchased that property, that same PTT may be 0% or between 1 and 2%. The purchase price of the property remains the same but the tax costs to the buyer differ.
For clarity, PTT is calculated on 1% on the first $200,000 of the purchase price, plus 2% on any value greater than $200,000 but less than $2 million, plus 3% on any remaining amount above $2 million. The Foreign Buyer Tax of 15% on the purchase price is in addition to any Property Transfer Tax (PTT) that normally applies to non-foreign buyers of any property. When foreign buyers are completing on a purchase of a 2 to 3 million dollar home, they will be paying the PTT (approx. 2%) plus the 15% Foreign Buyer Tax - thereby paying approximately 17% closing costs at the lawyer’s office in addition to the purchase price.
Unlike the calculation of the GST, PPT is calculated and based upon different criteria including:
1) First Time Home Buyer eligibility
2) Citizenship (ranging from temporary worker/visitor, landed immigrant, permanent resident to Canadian citizen)
3) British Columbia residency (how long the buyer has lived in BC prior to the purchase or proof of submitting tax filings for two years) < http://dbmlaw.ca/bc-property-transfer-tax-changes/>
4) The purchase price of the property
Here’s another example. Prior to the new foreign tax, foreign buyers purchasing a $600,000 property using $300,000 as down payment (i.e., a Loan to Value (LTV) of 50%) would need approximately $15,000 in cash at closing to pay PTT (~2%) and legal costs, etc. With the new 15% foreign purchase tax, that cash on hand for closing costs has now risen to $105,000.
So, what if the foreign buyers do not have an additional $90,000 on hand to pay the new closing costs? Those foreign buyers may be able to arrange for more financing ($390k versus $300k). Foreign buyers who do not have sufficient funds to complete a purchase should consult a lawyer before walking away from a transaction. That legal advice will inform the buyers on the following consequences:
1) what happens to any deposits the foreign buyers have already paid, and
2) what potential legal action may be taken against them by the property sellers if the sellers claim hardship or loss due to the foreign buyers not completing their purchase.
Foreign buyers need to carefully review the costs of their pending real estate transaction. If they still wish to purchase a Canadian property, they may seek:
a) a property selling for a lower price for which they have sufficient down payment and closing costs, or
b) a property selling in a location where the tax does not apply (i.e., outside of Metro Vancouver).
To summarize, a differential purchase tax (e.g., PTT and/or the Foreign Tax) where some buyers pay and others do not will not increase the inherent value of the property on which the lenders calculate their security for a loan. Since the PTT is not universally applied to buyers and is not securitized by the property value, the PTT cost cannot be wrapped into the mortgage financing.
Debt Service Ratios. Foreign buyers who previously applied and were approved for a mortgage before August 2, 2016, may no longer qualify for that mortgage as their debt service ratios now exceed the lender’s risk threshold.
Down payment. Current deposits that were meant to go towards paying down payments at closing may now be at risk. That means that buyers, both foreign and non-foreign, who do not complete their purchase may lose their deposits plus be short those funds for their next down payment.
What should you do if you are caught in a bind by the 15% foreign buyer tax? Talk with us. We may be able to source some additional financing to help you over that financial difficulty.
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