Developers are grappling with what the new 15 per cent tax on foreign purchases of Metro Vancouver residential real estate could mean for their projects where a non-Canadian company is a partner or investor.
They are concerned that even when a foreign entity represents a small fraction of the ownership group, the entire transaction would be subject to a 15 per cent levy.
So, if a developer was to buy six homes in a land assembly deal with the end goal of building condos, and one of its investors, with, say, a 20 per cent share, is based outside Canada, the entire transaction would be subject to the new 15 per cent tax.
“This is our understanding,” based on seeking legal opinion, said Anne McMullin, president and CEO of the Urban Development Institute, a development industry group.
McMullin said the worry is that this higher cost would then be passed on to end buyers of multi-family units.
“I recognize that some of our members would be happy to have non-local developers have to pay a higher price for their development sites, but there are also a number of members (and some very significant members) who have the potential to be caught by this legislation, and to have their sources of investor funds capped by this” new 15 per cent tax.
McMullin declined to specifically name such projects, but estimated 10 per cent of current projects in Metro Vancouver could have a limited partnership with an international entity.
B.C. companies of all sorts from mining to agriculture seek tranches of investment by foreign companies for new projects rather than go to banks for loans, said McMullin.
At the same time, there are also local developers registered in Canada, run by principals who are citizens and permanent residents that are backed by foreign cash. These, however, would not be effected.
“People want an easy solution for a complex situation,” said McMullin. “It’s a global marketplace and it’s far more complicated.”
With land prices increasing, many developers simply require some international investment to make purchases, said Michael Ferreira, principal at Urban Analytics, which collects real estate data. He added some foreign developers also “recognize the resentment toward foreign ownership” and are looking to work with Vancouver developers who also have local know-how and understand the infrastructure.
In an e-mail sent to the The Vancouver Sun on Wednesday, the B.C. Ministry of Finance said the new tax will be applied depending “on who controls the corporation.”
If it’s controlled by a Canadian citizen or resident, the tax does not apply, but if it’s controlled by a foreign entity, then “the full amount of the tax is payable on the value of corporation’s purchase.”
“It would depend on the situation, but, for example, if six out of 10 directors are foreign citizens, that corporation could be considered foreign controlled and the tax would apply.
When two (or more) corporations are purchasing a property and one of those is foreign owned, the foreign corporation would pay the full 15 per cent on the portion of the property they own.”
The issue is further fodder for armies of lawyers and accountants to decipher because of differing definitions of what is a residential real estate purchase.
Last week, NDP housing critic David Eby asked in the legislature about a “displacement of international capital into large rental buildings, potentially resulting in a spike in rent beyond the spikes we’ve already seen in Metro Vancouver.”
Finance Minister Mike de Jong replied that the new 15 per cent tax will be applied to all so-called Class 1 residential property, which includes some rental buildings, but not all. In addition, some buildings have split classifications and are only partially residential, in which case only the value of that area would be taxed.
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