As we begin 2023, the Federal and Provincial governments in Canada have introduced several new tax and legislative changes that are impacting the Canadian Real Estate Market for homeowners, homebuyers and investors. From anti-flipping taxes, foreign buyer bans, vacant home taxes, and a buyer's remorse plan, the majority of these measures have been put in place to temper a Canadian Real Estate market that has been growing exponentially over more than two decades and has caused major home affordability challenges for most Canadians. Here is what’s new as of January 2023:
Vacant Home Tax introduced for Toronto and Ottawa
Following the footsteps of cities like Vancouver, Toronto and Ottawa are introducing a vacant home tax (or Vacant Unit Tax as it’s referred to in Ottawa). This initiative is aimed at increasing housing and rental supply by discouraging investors who may have kept their properties vacant for prolonged periods. Property owners in Toronto and Ottawa must fill out an annual declaration indicating the primary use of their property and whether their property has been occupied or vacant, and for how long, for the previous year. While there are some exemptions, a non-owner-occupied property in the cities of Toronto or Ottawa will now cost the owner an extra 1% of the property’s value each year. On a $1M property, that's $10,000 on top of current property taxes. You also don’t want to miss the declaration deadline as your property may be assumed vacant by default and you may be subject to fines and penalties for being late or submitting a false declaration. Missing or falsifying a declaration can come back to bite you when you're looking to sell your property. Vacant home tax programs are also under consideration for Hamilton and Peel Region, but have yet to be implemented.
Foreign Buyers are now banned from buying Canadian residential properties for two years
For the past few years, one of the narratives behind the rapid appreciation in Canadian home prices was that Canadian Real Estate attracted foreign buyers and investors. When foreign investors swoop on Canadian properties, it creates more competition for Canadian residents and citizens (and Canadian investors), hence, after trying (and failing) at multiple attempts of levying additional taxes to discourage foreign buyers, we're now seeing a full-out ban on foreign buyers for a two-year period. At a high level, this means that only Canadian permanent residents and citizens can purchase residential properties, however, there has been a growing list of exemptions to exclude foreign workers, some students, and even certain property types from the ban. The foreign buyer ban came into effect on January 1, 2023 and carries a hefty penalty of $10,000 for anyone found to break the rules or even assist with breaking the rules.
A crackdown on home flippers with a new anti-flipping tax
Home flippers, or in simpler terms, individuals or businesses who buy a property only to shortly sell it at a profit, have been in the crosshairs of the Canada Revenue Agency (CRA) for a while. As seen on HGTV reality series for years, flipping a home can generate tremendous profits, but often comes with a proportionate amount of risk. Whereas in the past, some flippers and investors may have been able to use tax loopholes such as declaring profits from a flip as capital gains or even using the Personal Residence Exemption, which is intended to give homeowners a tax break when selling their primary residence, under the "anti-flipping tax" the CRA will now consider all profits that are generated from selling a property that has been owned for under 365 days as personal income.
How is this different? Until now, when you "flipped" a home, it may be considered a "capital gain". 50% of capital gains are usually taxable. So if you made $100K in profit, you’d pay taxes on only $50K of your profits. Under the new rules (some exceptions apply, as always), if you owned the property for less than 365 days, you’ll be paying taxes on the full $100K in profits, at your personal tax rate.
A 3-day cooling-off period for homebuyers in British Columbia
BC is the first Canadian province to introduce a "cooling-off period" for homebuyers. Whereas previously a binding agreement was formed when homebuyers have submitted an offer that has been accepted by the sellers, homebuyers will now have a 3-day grace period where they can change their mind after their offer has been accepted. Like all the above programs, certain exemptions and conditions apply and it isn't meant to be a carte blanch for buyers to walk away from a deal. With the cooling-off period in British Columbia, buyer’s remorse won’t come for free either. If a buyer decides to walk away during the 3-day cooling-off period, they will still owe the seller 0.25% of the selling price as a “breakup” fee.
The mortgage stress test remains, despite a recent review
The Canadian mortgage stress test, also known as the mortgage qualification rule, was introduced in 2018 by the Office of the Superintendent of Financial Institutions (OSFI) in an effort to ensure that borrowers could still make their mortgage payments in the event of an interest rate hike or financial shock. The stress test was introduced following a period of rapid growth in Canada's housing market, which raised concerns about the sustainability of such growth and the potential for a housing market crash. The test was designed to reduce the risk of defaults on mortgage loans and to protect both borrowers and lenders from financial hardship. It requires borrowers to qualify for a mortgage at a higher interest rate than the rate they are actually being offered, in order to ensure that they can still afford their payments in the event of an interest rate increase. Despite several recent interest rate increases by the Bank of Canada, the Office of the Superintendent of Financial Institutions (OSFI) announced as part of an annual review in December, 2022, that the stress test, will not change from its current levels.
The regulator believes that keeping the stress test in place is “prudent” to maintain the standard even as interest rates increases from the Bank of Canada press borrowers to qualify at higher rates.
The bottom line
A slew of new initiatives have come into effect in 2023 with a focused goal of increasing the supply and increasing home affordability for Canadians. The impact of these initiatives remains to be seen, but they will undoubtedly have a profound impact on Canadian homeowners including buyers, sellers, and investors. Some of these initiatives and taxes may also have an impact on the home buying and selling process and may introduce new complexities. We strongly recommend seeking proper legal, accounting, or professional advice prior to making any buying or selling decisions.