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Toronto Foreign Investor Tax is a Fairness Tax

After sharing Carl’s post two weeks ago, in which he called for a foreign investor tax and new regulations, we got a great response from our readers sending in their thoughts on the issue. We also had some spirited comments on the blog, and the discussion remains heatedly divided. In fact, Real Estate Professional magazine recently polled their readers on the issue of a foreign investor tax, and the poll returned a near 50/50 split. This week, we wanted to talk about the effect of foreign investment on the Canadian economy, and how a foreign investor tax would be more like a fairness tax.

 

Foreign investor tax is fair for taxpayers

 

First, some jargon: economic externalities.

Also known as ‘spillover effects,’ economic externalities are the costs or consequences of economic activities incurred by a third-party. A common example of a negative externality is the pollution caused by the automotive industry.

When it comes to real estate, a huge portion of the value of a property falls under economic externalities, notably the urban infrastructure. It is the local taxpayer who contributes to the local economy, financing public transit, parks, hospitals, and schools that provide many condos with a high level of urban convenience and value.

When a foreign investor buys property in Canada, they pay a lump sum land transfer tax and on-going property taxes, some of which contributes to the maintenance of municipal infrastructure. But if the foreign investor who lives abroad turns the property into a rental unit or one day decides to sell the property after it appreciates in value, the income/profit of the investment is taken away from the local Canadian economy and contributes nothing towards covering the cost of externalities.

Is it fair that a resident taxpayer pays the same price for a new condo as a foreign investor who lives abroad, but the foreign investor gets to take their net income and capital gain back to their own economy, depriving the Canadian economy of the multiplier effects? We don’t think so.

 

Foreign investor helps the local economy (NOT)

 

Some more jargon: multiplier effects

For every $1 a Canadian landlord makes, he/she spends that $1 in the local economy, where the money flows from the coffee shop –> barista –> grocery store –> cashier –> etc. With each transaction, the investment is multiplied with a portion taxed to the government and the rest returned to the flow of the economy. The multiplier effect in a city like Toronto can be anywhere from 3-17 times.

If foreign landlords take profits and revenues out of our economy, we do not get the multiplier effects of the investment, and it does NOT boost growth like some think. Outbidding a Canadian homebuyer and renting the property back to another Canadian is not really the kind of “foreign investment” we need right now. Build a factory, fund a new start-up—great!—but investors who speculate and exploit our housing supply are clearly pushing up the cost of living and hurting Canadians in the end. A tax on this type of foreign investor is only fair for the people trying to work and live in a city like Toronto.

Still, we continue to hear the argument that a foreign buyer tax will hurt the pre-construction industry and worsen Toronto’s housing supply issue. It’s true that new developments depend on pre-construction investment to get off the ground—they require 70-80% presale before they can build—and lately a lot of these pre-con sales are going to foreign buyers. But the demand for pre-construction in Toronto is off the charts. A recent pre-construction opening at Wyatt Condos received over 2,000 offers for 400 units!

In Toronto, a tax on foreign sales may deter some foreign investors, but big-money speculators (and money launderers) will continue to buy in Canada, just as they did in Vancouver. Even now, Vancouver developers continue to cater to high-finance investors. Implementing a foreign buyer tax in Toronto would simply help to cover the cost of real estate externalities that Canadian residents have to pay.

The demand for housing in Toronto is strong enough to keep development going. Considering we have line-ups on pre-construction launches and bidding wars on almost every listing, there are plenty of Canadian buyers waiting in line to fill the void if foreign investors decide to stop buying condos in great cities like Toronto.

  • Paul

    If a foreign buyers tax really hurts pre-construction sales (doubtful) then the true demand for that building wasn’t there to begin with. It just proves that the market was not healthy and was driven by foreign capital.

    The developer would have to lower their prices to make the project attractive to local buyers. And if prices are lowered and there still isn’t enough demand to get the project off the ground, then maybe the developers should be building rental buildings instead of condos.

  • Vikash Krishnan

    Along with Taxing Foreign Buyers a 15% Tax, the federal government should implement a Capital Gains Tax on Sale of Property not used as a Primary Residence. Foreign Buyers would be coughing up approx 30% (15% foreign Buyers + Income Tax @ the Marginal Tax Rate) – a 2% Vacancy Tax which would force investors to rent the property which in turn would increase supply in the rental market. Airbnb is another thorn that is creating huge imbalances – align Airbnb rules to the Hotel Industry which would solve problems in Toronto condo market. These steps now should be enough for a soft landing rather than a crash which is undesirable as the Canadian economy is walking a tight rope.

  • prash42

    Ultimately, this boils down to a labor vs capital argument, not different from what we see in the job market – wage growth stagnating while corporate profits rise. It’s a tough balance, but it is important to support working people while not turning anti investor.

    An investor evaluates potential return from investing in real estate, relative to investing in stocks or bonds. And if you are a wealthy investor (note I make no distinction between a wealthy foreigner and a wealthy Canadian), then you compare Toronto to San Francisco or Paris, and conclude that Toronto is cheap. The average Joe evaluates affordability, in terms of a monthly mortgage payment relative to salary. To compete with investors, they are forced to extend the loan term / lower equity / depend on low interest rates.

    Viewed from a local Torontonian’s perspective, the unfairness is glaring. Investors should be willing to bear some of the cost to the system, because ultimately real estate derives its long-term value from occupancy. I agree with all of Vikash’s suggestions: a foreign buyers tax, a capital gains tax for non-primary residences (this hits all investors, whether foreign or Canadian), and a vacancy tax.

    • Trizi

      There’s already a capital gains tax for non-primary residences.

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