The Canadian property market has been under the spotlight for some time now as prices continue to move higher amid unprecedented investment from overseas investors. The authorities have confiscated undeclared cash from an array of foreign investors and many expect a tightening of regulations in the short term. This is not the first time that the Canadian real estate market has been seen as a “parking place” for foreign investment but the amount of funds confiscated, $6.4 million in 2015, is surprising.
Demand for property
There is no doubt that in some parts of Canada demand for property from overseas investors has helped pushed prices beyond the reach of first-time buyers. Indeed there is a suspicion that many domestic real estate investors are sitting on the sidelines waiting for the market to correct itself with a lurch downwards. So far we have seen little signs of a correction but the British Columbia government recently introduced a 15% tax on foreign investment on property in Metro Vancouver which could be a sign of things to come.
It seems as though the idea is to hit short-term speculators in the pocket while those with a more long-term view should be able to claw back the 15% additional cost over time. There has been an initial drop in demand from overseas investors in the region after the introduction of the tax on 1 August but many experts believe it will have little impact in the longer term.
While Chinese investors have not been targeted specifically by the British Columbia authorities they certainly figure heavily in the Canadian property market. Even though we have seen large amounts of money confiscated by the authorities it is worth remembering that many Chinese investors have a legitimate reason for looking elsewhere from their domestic market. The Chinese property market has cooled of late and while the authorities continue with attempts to re-engage with investors there are concerns about the short to medium-term outlook.
It is also worth noting that the authorities recently began cracked down on those looking to flip properties for a short-term profit. There have been accusations of tax avoidance by investors who have deemed their investment properties to be their main residence before crystallising a short-term profit. It is difficult to know with any great certainty the extent to which this practice has been ongoing but the authorities have certainly got the bit between their teeth and have this particular practice under very close scrutiny.
Canada is not the only country where investors are legitimately allowed to change their home residence as a means of potentially mitigating tax charges. However, to fully comply with the regulations the actual property deemed to be a home residence has to be a person’s main residence.
Governments and regulators around the world are now cracking down on various alleged tax evasion practices many of which are connected to the worldwide real estate market. It is worth noting there is an array of legitimate tools available to mitigate potential tax liabilities although some investors do push regulations to the limit. There is every chance that actions by the British Columbia authorities will impact the level of foreign investment in the short term but whether there will be any long-term ramifications remains to be seen.