Kudos to the provincial government for introducing a tax on foreign buyers of residential real estate in Metro Vancouver. The tax is significant enough, and targeted enough, to help cool the negative influences of foreign capital on local buyers.
However, the ham-fisted method of introducing the new tax indicates a distinct lack of understanding of how real estate transactions are timed.
The government’s one-week window for implementation of this new tax makes no allowance for the time period between the paying of the deposit and the time of the close (closing is the process of transferring title in exchange for the funds) and will end up hurting many local sellers.
Most residential sale transactions take place over an extended period. Once you list and sell your home, find a buyer, negotiate terms and take a deposit of five per cent or so, there is generally a period of several weeks or months before closing the sale. This period gives the seller time to find a new home, pack their belongings, move and more.
The new tax will negatively affect hundreds of sellers captured in this part of the sales cycle, where the deal is done but not closed. The government has retroactively and unilaterally changed the terms of their negotiated contracts by a significant amount.
For example, on the sale of a $2-million property that has been fully negotiated, offer accepted and deposit paid — possibly months ago — the new tax imposes an additional cost of $300,000 on buyers unlucky enough to have chosen a closing date after Aug. 2. In West Vancouver the additional tax would average closer to $600,000. This is after the buyer has made his best deal and has arranged his financing. Can you imagine having to come up with that kind of money on a deal already firm?
You may say, “Who cares? It’s only those nasty offshore buyers who are going to get caught in this.” But that misses the point on a couple of levels. First, what kind of responsible jurisdiction applies that kind of punitive taxation retroactively?
Second, and, more importantly, what about the local owner who sold that property? They are counting on the sale, counting on the money, probably have made other commitments to spend that money on another home purchase. They are packing dishes and sending address changes, ready to move to their next home.
But if the foreign buyer decides to walk away from the deal rather than come up with the extra several hundred thousand dollars, it’s the local seller who will be harmed. The foreign buyer will be long gone, but the local seller will be devastated — and quite likely sued if he cannot close on his contracted next home purchase. Worse, if the tax is successful in its goal of cooling the market, the local seller will not even have the option of quickly finding a new buyer to mitigate his damages.
Government jurisdictions based on the rule of law are built on the premise that the parties to a contract can count on the completion of that contract without external or whimsical changes.
This otherwise good tax was implemented in such as way as to retroactively and arbitrarily change the value of hundreds of negotiated contracts by 15 per cent with absolutely no recourse for the parties involved.
It may be a good tax. But the way it’s been done is not right. And it’s not fair.
Tom Dodd is a principal with Grantham Publishing, a consultancy providing design and research services for realtors.
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