Speculation tax more political than practical

The Ontario government’s recently announced policy changes won’t have a significant impact on the real estate market.

Non-resident speculation tax
The government’s 15 per cent tax on the purchase price of all property in the Greater Toronto Area by non-residents of Canada is intended to curb the influx of foreign money into the market, which some believe is fuelling the rise in the value of residential real estate.

Because the tax is subject to a long list of exceptions, some doubt it will have a major effect. The purpose of the tax seems to be both political and psychological. With an election looming in 2018, the government needs to be seen as doing something to make it possible for young people to enter the housing market.

There is a frenzy that’s telegraphing the message, “Get in now before it becomes impossible to get in.”

Huge rises in price also lead to speculation. If the psychology of frenzy persists, there will inevitably be a bust once something unexpected occurs in the economy. The province hopes to change expectations with the tax. The government chose not to introduce a land speculation tax, which would affect everyone in the Toronto area because most speculators vote.

If Vancouver’s experience provides any lessons, the immediate impact may be a slowing of activity along with an increase of listings. Once the new tax is factored into the real property calculations, foreign investment will rebound as Toronto properties are still seen as a good deal from an international perspective.

Unless and until something significant happens — such as a substantial rise in interest rates or a tax on real estate profits — the Toronto real estate market will continue to flourish.

Rent controls
When Ontario’s former NDP government exempted all new rental construction built after 1991 from rent control, the intent was to encourage the construction of new rental housing.

That didn’t happen. Instead, what we saw was a vast increase of condominium construction, a significant part of which has been used as rental accommodation, especially in the downtown Toronto area.

The current government now plans to legislate rent control for all rental buildings, including those built after 1991. The intent is to stop the significant — and in some cases outlandish — increases imposed by many landlords in the newer buildings.

The argument that the market for rental accommodation should be left alone and will sort itself out is not politically palatable with an election about one year out. Tenants vote and are more numerous than local landlords. Also, the development industry did not respond very enthusiastically to the 1991 incentive.

Special fund for rental construction
New construction of rental housing depends on government incentives. The construction of new rental properties dried up when policies directed to that sector were eliminated. That’s why the current government is dedicating $125 million in new money to rental accommodation. Whether that sum is enough to have an impact remains to be seen.

Meanwhile, existing tenants will be protected. New construction of condominiums may be affected to a degree because developers have relied on a portion of the construction being taken up by purchasers — foreign or local — who intended to rent out the units. With rent controls, the new construction will produce fewer rentals than expected.

Solicitors are now required to ask clients about their connections to this country and to make the appropriate responses in the tax statement on the transfer. Where the purchaser is truly a non-resident, the new tax will need to be paid in addition to the land transfer tax and remitted, either through Teranet or directly to the Ministry of Finance.

Lisa Laredo is a Toronto real estate lawyer and principal of Laredo Law.