Affordable housing: 4 Steps in the Right Direction for Canada


Blog by Arnold Shuchat | May 22nd, 2015


I just finished reading this article online at: http://www.vancitybuzz.com/2015/05/affordable-housing-rally-protest-vancouver-home-prices/ which referenced a rally downtown to voice concerns about local real estate prices.

A few years ago, the bears were on the sidelines predicting the implosion of a huge real estate bubble. Now, not having been successful in that endeavour, they are trying to manufacture one politically. No doubt, we can't have it both ways: retire with a huge cash out for our homes, but be able to afford to help our children buy property in that same expensive market. I doubt that the rally described below will be attended predominantly by property owners. The reply from City Hall, "Let them have condos", will not solve the supply problem if the housing market continues to be open and free to non-residents for investment and/or speculative purposes. Therefore empty properties should be the first target of government and a strategy in that direction will be the most effective impetus to alleviate pricing without hampering foreign or dometic property investment.

I have no problem with condo towers being sold out over a weekend to buyers from anywhere in the world. Allowing that to happen is the most efficient way to increase housing stock in the fastest amount of time. Permitting the property to remain vacant without consequence once built however, is contrary to good housing policy and is a source of friction within our greater community.

The problem seems to be to find a legal and administratively workable solution to enforcement. How will anybody know if a unit is truly vacant or a "friend" is checking in on it from time to time to circumvent any punitive regulations which target vacant property?

From a legal standpoint, property and civil rights continues to be under provincial jurisdiction, whereas taxation is in the Federal domain. This is part of the problem. A few cities in the country have housing pricing issues. Should federal tax policy be changed across the board to deal with Toronto and Vancouver?

But, we as a community have an issue with non-income tax paying investors cherry picking our real estate. Sure, they pay property tax, but it seems somehow inequitable to us that they can use money earned in a country with far different math when it comes to per capita income taxation to buy property over here. Canada is a bit of a unique country. Every public thing that gets built costs far more per capita due to our thin population density. Highways cost more; airports costs more, shipping costs more etc...So, as a community of contributors, we pay more for common expenses and have less to keep for ourselves. Hence, we can afford to buy less property than people from countries that keep more of their money after taxes. Taking this to its limit, we will one day find that too much of our country is owned by people from elsewhere, unless as a country we apply some kind of equalizer so that non-residents (for income tax purposes) are not better able than Canadians to buy Canadian residential property.

Here are a few possible solutions to this problem to which I invite discussion. Please note, that at this time, I have not taken the liberty of drafting detailed legislation, but rather put these methodoligies out there as discussion points.  So far, this topic has garnered one of the highest interest levels of policy posts that I have made. Consider them as discussion points.  Even if only some of the ideas were implemented, I believe part of the pressure of increasing property prices would be alleviated.

1. Anybody in Canada who wants to buy a property and who needs a mortgage, goes through a qualification process. Different lenders apply different standards, but for the most part, there is an income test which is pretty much standard from an "A" lending institution for applicants seeking less than 80% loan to value, or conventional mortgages.That formula is often akin to limiting the amount of financing available to payments which will not exceed approximately 40% as a total debt service ratio to monthly income.

I submit that any non-resident applicant who cannot produce a notice of assessment showing Canadian income equal to or greater than the qualifying amount necessary to obtain notional financing on a property sought to be purchased should not be able to purchase residentially zoned, occupancy permitted Canadian real estate. They can invest in its construction, but they cannot either own own it or domestically finance it unless they file sufficient income tax in Canada in a similar way that a Canadian resident would be restricted from doing so for financing purposes. It would be simple to apply an average lending formula to determine qualification.

The above would eliminate the scenario where an offshore wealthy person can deposit the rest of his family in Canada as residents while maintaining international business interests beyond the grasp of Canada's taxation system. The rest of his family may be residents for tax purposes, but if they have not reported sufficient income in Canada for a qualifying period, say 5 years, as a Canadian would have to, then they cannot qualify to own a residence here.  We could even consider this for designated municipalities only.

2. Those non-residents who have purchased residential pre-construction property will have 1 year to dispose of same from the date of occupancy permit if they do not qualify for the income tax test above, failing which property taxes will increase to an amount calculated against the assessed value to yield an amount equal to the notional taxes that would be payable on income required to qualify for a mortgage on such a property as in 1 above. This type of property tax should fall under provincial jurisdiction.

3. The principal residence exemption would no longer apply to persons who have not filed the above notional minimum Canadian income tax for a period of no less than 5 continuous years. Hence foreigners who enter Canada, buy a property, build a large house, claim to have lived in it "ordinarilly", and then sell it, will not have any of the gain on such property sheltered from tax. In fact, I would argue that not having each member of the family become Canadian residents would be indicative of the family's intention to view the property purchase not as a capital investment for a lasting and enduring benefit, but as a form of inventory and as "an adventure in the nature of a trade", therby causing call of the gain on its sale to be taxable. But enforcement and collection seems to be the problem here.  Often homes are sold, residency is declared as being in Canada and the funds disappear.

Lawyers and notaries acting as the conveyancers could be required to withhold and remit 50% of any gain on the property failing receipt of a letter of confirmation from Canada Revenue Agency, similar to that required by an estate. This would stop the uncontrolled tax leakage from those who abuse the generous tax exemption, designed for Canadian families that live together, but granted to those "newcomers" who split families across international borders and who do not generate income tax at all payable to Canada. It is time we stopped this "tax giveaway" to everyone, and started to view it more as a form of birthright than an absolute right.

4. It is time we recognized that Canadians have come to view their homes as their nest eggs. That being the case, and more often than not, such investment having outpaced those in the stock market, tax deductibility should be an option for interest payments on principal residence home loans for Canadian resident taxpayers, like for RRSP deductions, for up to say,  20% of their taxable income to assist with the goal of home ownership.
Why should tax policy favour stock market and fund investments instead of home ownership when each one is arguably as effective as the other and the second seems to be a higher priority for Canadians?

I submit, that some combination of the above 4 methods would substantially affect home ownership in a very positive way.  Foreign investors seeking access to Canada are going to have to come up with better ways to invest their funds than to park same into Canadian residential properties (single family homes, that is).  I suggest that they be encouraged to invest in job-creating ventures and entrepreurial projects instead, in order to obtain the kind of incentives that they have come to enjoy and which are available from the residential housing market.

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This post is continued on my June 5, 2015 post.