If you’re buying a property from someone who is, or may be, a foreign owner, there may be financial implications for you that you aren’t aware of. It’s no secret that foreign buyers consider Toronto as one of the safest havens for their real estate dollars, which has helped, at least anecdotally, to drive prices up over 13% in the last 12 months, and pushed the average price of a detached home past the $1,000,000 mark.
With the average price of a detached home over $2M in the Vancouver area, their new Non-Citizen purchase tax means an extra 15% is due on closing for anyone who is not a resident. This represents $300,000 for a $2M purchase, on top of the standard land transfer tax. Since the institution of this new tax, prices have slid approximately 10% in response. Many feel this was a desperately needed correction for buyers feeling the pinch in prices.
The CRA has also begun what they refer to as “lifestyle audits” in BC and across Canada, when assets and lifestyle do not match the income being reported, in an effort to ferret out shadow flips and unreported profits from real estate sales and other business ventures.
What does this mean for Toronto?
Non-residents can, at this time, purchase property for the exact same cost and tax implications as a resident. They are generally subject to a 35% down payment requirement for mortgage financing, but most of these buyers have cash, so that doesn’t really matter to them. They pay the same land transfer tax that residents pay.
Resident Buyers are struggling to compete with a cash market. Foreign investors seem more than willing to come in firm, without financing or inspection conditions. In most cases, they can also offer quick closings if the seller needs. This puts local buyers at a serious disadvantage. Foreign buyers are also not afraid of bidding wars, and massive deposits with offers, which can drive prices up and push house prices past the affordable levels of resident buyers.
You’ve heard of vacant investor units, and it’s not a rumour. Not only condos, but fully detached properties are often being carried vacant by non-resident owners once they’ve won the bidding war. In many cases, these owners buy cash, therefore do not have mortgage payments to worry about as an ongoing expense. Imagine how easy it would be to carry a property that was making $100,000 a year in value if all you had to pay was a $6k property tax, very minimal utilities and you’re the kind of chap that had $750,000 in the first place to buy that house outright. It’s pretty much not even worth their time and effort to rent it out, deal with tenants, maintenance issues, leases, rent collections, or to pay someone to manage those things for them. So they sit.
Foreign buyers that invest in pre-sale construction find it more profitable to keep a house or condo vacant for a year and ensure that they get their HST rebate as opposed to renting it out and netting much less after withholding tax and expenses. For those that DO rent out their units, they are subject to a 25% withholding tax of the gross rents that must be paid to the CRA and taxes filed.
Currently, there is no plan to institute a Non-resident tax here, but that doesn’t mean that it’s not coming in the future. Toronto is also experiencing a shortage of affordable properties and many buyers are being outbid time and time again because of budget restrictions while their foreign buyer competition has cash to burn. Right now, there are several standard ways that the current policy affects our own resident buyers, but a bigger danger is lurking in the background and no one is talking about it!
If the city of Toronto institutes a non-resident buyer tax of 15% as with Vancouver, we will certainly see a slide in prices as purchasing becomes less profitable for foreign investors, which will be a boon for those of us buying, and a disappointment for sellers who waiting too long but there are scary financial implications for resident buyers right now that no one seems to know about.
BUYING A PROPERTY FROM A FOREIGN INVESTOR
It would stand to reason that foreign buyers eventually become foreign sellers. But here’s the rub. They don’t live here! Outside of our country they are not necessarily subject to our rules, nor may they be aware of all of them. This issue of shadow flipping not only has an impact on the prices of properties, but ultimately could become a massive cost for a buyer who may, or may not be aware they are buying from a foreign investor or non-resident.
CRA legislation says that non-residents must notify the CRA of a sale within 10 days of closing and withhold 25% of the proceeds for tax purposes, and be issued a certificate of compliance for the sale. But a foreign owner engaging in shadow flipping, or just not disclosing their profit to the CRA could mean that YOU, as the buyer of the property, are liable for their taxes. Under section 116(5) a purchaser is liable to pay on behalf of the vendor, being 25% of either i) the total cost of the property or ii) the amount of the cost of the property that exceeds the certificate limit if it has been misreported. There are no time restrictions on this penalty, so if 20 years from now, the government realized it was a non-resident who owned your house before you, you’d better be ready to write a really big cheque. There’s no guarantee that these charges will be levied against you, but the exposure is there.
There are also situations where a buyer could be levied up to 50% of the purchase price. This tax must be paid in full within 30 days of closing or the interest penalties can be enormous (3% for 4 days late, and up to 10% and more for long periods of non-payment or in cases where they feel you have avoided paying deliberately).
That’s a lot of cash to pony up for someone else’s failure to report.
How do you protect yourself? The first step is to ensure that your Realtor is aware of these risks when you buy so they can ensure the proper clauses are in place for your protection. You’ll also want to ensure that your real estate lawyer is experienced and aware of foreign buyer legislation. With the right clauses in your Agreement of Purchase and Sale, your lawyer will be able to protect you, and to ensure that the right undertakings are included in your closing to ensure that foreign sellers are identified and taxes withheld for your protection.
A home is the biggest investment most of you will ever make. Watch your back.
Sara Hamilton is a negotiation expert and can be reached at:
Milborne Real Estate Inc. Brokerage
Office 416-928-9998 x 515