Non-resident speculation tax: What does it mean for you?

On April 21, 2017, the Ontario government introduced a new Foreign Home Buyer Tax – otherwise known as the Non-Resident Speculation Tax (“NRST”). This tax measure is intended to limit speculative real estate investment from foreign buyers and is currently restricted to real estate within the Greater Golden Horseshoe region.

Why is the government trying to limit speculative real estate investment?

Speculation can lead to serious fallout within the real estate industry, including potentially undesirable and/or unsustainable market swings and volatility. This can disorient the true value of the property, and if left uncontrolled, can cause a housing catastrophe. A recent trend of speculative buying/selling has created an imbalance in supply and demand, leading to an overall shortage of supply and escalated home prices that may not be tenable over the long-term period of a housing loan.

So, what is the purpose of the Non-Resident Speculation Tax? 

Introduction of the NRST is a direct effort to:

• Discourage speculative real estate investment and thereby avoid a potential housing crisis;
• Differentiate speculative investment from true home ownership (which is not subject to the NRST), and normalize home valuations and affordability; and
• Limit the sudden rising of real estate prices which, in many respects, are not considered to be reflective of the “true” value of the property/asset.

Note that in its current form, application of the NRST does not appear to reflect a motive to raise revenue, as the taxes are intended solely for foreign buyers.

Who is impacted by the NRST, and how?

The NRST is applicable to foreign entities and consists of an additional 15% tax levied along with the current provincial and municipal land transfer tax. The new tax is applicable for real residential property that is located within the Greater Golden Horseshoe area.

The impacted entities are non-resident individuals and corporations which are either:

• Not incorporated in Canada; or
• Controlled by a foreign national as per section 256 of the Income Tax Act; or
• A taxable trustee (a trustee with at least one foreign entity or a beneficiary who is a foreign entity) who is engaged in receiving real estate either via a transfer or acquisition.

Some exclusions apply, and an occupancy test/requirement is required in order to be considered an excluded individual – the purchaser must occupy the property as a principal residence. To be certain, the rules of exclusion can be complex.

CRA administrative measures

In response to speculative real estate activity across the country (particularly in Vancouver), CRA introduced widened audit and compliance measures to address the purchase and sale of real estate in Canada, effective January 1, 2016. In particular, individuals are now required to disclose the sale (or deemed disposition) of their principal residence. Non-compliance in disclosure can lead to penalties of up to $8,000. Additionally, CRA has also increased audits of Ontario real estate transactions, with the intent to crack down on tax evasion and continued speculative real estate investment.

Furthermore, CRA has targeted pre-sale transactions of condo units which are being flipped for profit prior to full construction. In such cases, CRA has determined that any gains generated will be treated as income and the seller can not expect to benefit from a capital gain exemption. The rules for tax determination can be complex and it is advisable to contact a professional tax consultant.

Next steps

At this point, there is no indication that CRA or the provincial government will lower the scrutiny of home purchases within the Greater Golden Horseshoe region. On the contrary, they may even consider extending the geography if deemed necessary.

To avoid significant penalties, we recommend full compliance by ensuring that any sale transaction for real estate is under full disclosure to CRA. In addition, we also recommend using the voluntary disclosure program available with CRA, in cases where a sale transaction after April 21st, 2017 was not reported. Finally, depending on the individual situation, there may be additional tax deferral planning and reorganization opportunities available when real estate is transacted.

Don’t take chances. Consult with a Tax Professional at Fuller Landau, Today.

Navigating the rules and exclusions of the new Non-Resident Sales Tax is a complex matter. Fuller Landau’s team of expert tax advisors are available to consult with you and provide professional advice on your specific situation. Please contact partner Gordon Jessup for further information.