New Rules Regarding the Principal Residence Exemption

Tax season is upon us.  Canadian tax residents must file tax returns for 2016 income with the Canada Revenue Agency (CRA) before the end of April 2017.  Who is a Canadian tax resident?  In principle, anyone for whom Canada is a home base is regarded as a tax resident.

In reporting income, Canadian tax residents also have to report any capital gains earned during the year, HOWEVER, unlike other income (such as income from employment, interest payments, rent, etc.) only ½ of capital gains are treated as income.  In effect, therefore, the tax rate on capital gains is only ½ the tax rate on regular income.   Moreover, there are a few types of capital gain that are entirely exempt from taxation.  For most taxpayers the most important exemption from capital gains tax is for the capital gain earned on the sale of a family home known as the “principal residence exemption”.

Some of the key issues surrounding the principal residence exemption as follows:

  • Q: Does a taxpayer have to report the capital gain on the sale of a principal residence?
    Yes, the new policy requires the gain to be reported when tax returns are filed with CRA.   This is a new requirement.  The gain is only reportable for the taxation year in which the property is sold.  If the property has, throughout the period it was owned by the taxpayer, been a principal residence then no tax is payable.
  • Q: Who can claim the exemption?
    The exemption is only available to Canadian tax residents who must declare world-wide income and capital gains when filing tax returns.
  • Q: What type of property can be a principal residence?
    Only “capital property” can be a principal residence.  Property bought to “flip” is not “capital property”; it is inventory in a trading business where the profit from the sale of such property is treated as ordinary income, not even a capital gain.  100% of such gains are taxable.  Only properties that were “ordinarily inhabited” by the taxpayer are eligible for the exemption.
  • Q: Can different family members each own a “principal residence”?
    There is only one residence that can be claimed by a family unit as a principal residence.  Of course, adult children living apart from their parents are regarded as having their own family unit and are thereby entitled to claim an exemption for their own principal residence.
  • Q: Are there penalties for failing to report?
    If the sale is not reported in the tax return then CRA can, without any time limitation, audit the taxpayer at any time in the future. Moreover, taxpayers who have failed to designate the home as their principal residence could be subject to a late designation penalty of up to $8,000. It is expected that the new policy will give CRA auditors new audit leads and give rise to many more homeowner audits and re-assessments in the future.

In summary, anyone who sold their principal residences in in 2016 would be well-advised to report the sale and any associated capital gains in their tax returns for the 2016 fiscal year.  Any questions concerning this new policy should be directed to experienced tax advisors.


Written by Peter Scarrow, former immigration lawyer, currently is the Director of Asian Business at Macdonald Real Estate Group.

New Exemptions to the 15% Property Transfer Tax

EXEMPTION FROM THE 15% TAX

The original announcement that work permit holders would be exempt from the 15% additional property transfer tax was made on January 29, 2017.

On March 17, Premier Christy Clark finally introduced the details of the new exemption to the 15% property transfer tax applied to certain “foreign nationals” who purchase residential properties in the Greater Vancouver Regional District.  As we expected the devil is in the details.  There are a number of categories of work permit holders.  Just as we expected, it turns out that not all holders of work permits will be treated equally.  Most work permit holders will still have to pay the 15% tax.

The exemption from the tax will only apply to Provincial Nominees under the B.C. provincial nominee program (“PNP”).  They have to be “nominated” by B.C. so that other holders of work permits such as international students, executive transferees, or individuals nominated by other provinces will not qualify for the exemption.  Moreover:

  • The exemption only applies to provincial nominees who treat the property as a principal residence;
  • The exemption may be claimed only once. It the provincial nominee buys another GVRD property he must pay the 15% tax;
  • Evidence of provincial nominee status has to be provided at the time the documents are filed at the Land Title Office.

REFUNDS OF THE 15% TAX FOR CERTAIN INDIVIDUALS

The new rules also provide that the following buyers who have already paid the tax will be entitled to refunds:

  • Foreign nationals who held B.C. PNP certificates or were confirmed as provincial nominees and purchased GVRD residential property between August 2, 2016, and March 17, 2017;
  • Individuals who became permanent residents or Canadian citizens within one year of the date the property transfer was registered in the Land Title Office

Refunds for permanent residents and citizens can only be claimed:

  • in respect of only one property;
  • where the property has been used as a principal residence;
  • where the owner moved into the residence within 92 days of property registration; and
  • continued to live in the property for one full year after the date the property transfer was registered.

Clearly most work permit holders are still subject to the 15% tax.  It seems that the exemptions are designed primarily to accommodate the PNP holders working in B.C.’s growing high technology industry, the fear being that the high cost of housing may be an impediment to economic growth in this critically important sector.

Meanwhile, work permit “status” issues can be somewhat complex.  Foreign national buyers holding work permits and their realtor advisors who are uncertain about whether an exemption would apply should consider consulting their immigration and conveyancing lawyers before entering into a binding agreement to purchase GVRD residential property.


Written by Peter Scarrow, former immigration lawyer, currently is the Director of Asian Business at Macdonald Real Estate Group.

Applying for the BC Home Partnership Program into 5 EASY STEPS!

BC Home Partnership

5 Steps to Your Application

 

  1. Get a pre-approval from your mortgage broker.
  2. Apply to the Program and receive confirmation of eligibility.

The BC Home Partnership applications takes about 15 minutes to complete and about 5 business days for confirmation. Supporting documentation is as follows.

Provide one of: Canadian Citizenship Card, Permanent Resident Card (must have PR for at least 5 years), or Canadian Birth Certificate.

Also one piece of Government ID, proof of income by way of Notice of Assessment and the pre-approval from your mortgage broker.

  1. Find your home – make an offer “Subject to Financing”.
  2. Apply back to the program and lender with your accepted offer. This should only take at the most 2-3 days.
  3. Upon funding, the lawyer/notary will register the loan as a second mortgage.

 

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First Time Home Buyers’ Program

On Monday the BC Government launched their First Time Home Buyers’ Program.  For assistance in determining if you qualify read their program information below (copied from their website) or speak to a Mortgage Adviser.  Click here to view a search of all lower mainland homes under $750,000 that qualify for this new program.

BC Home Partnership

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Opinion: The true cost of the new real estate tax

This week, the B.C. government introduced a new 15-per-cent tax on all non-citizen and non-permanent-resident buyers of residential real estate in Metro Vancouver. Macdonald Realty opened its first office in the Kerrisdale neighbourhood over 70 years ago. Though we now have 20-plus offices and 1,000 staff and agents, the heart of our organization is still in Vancouver.

We understand that the government felt the need to take concrete action to curb speculation and related price inflation. We understand also that the increase in real estate prices over the last few years is a topic of much concern to many Metro Vancouver residents. That said, we do take strong issue with the retroactive nature of this new tax. Specifically, that it applies to all transactions that close after Aug. 2, regardless of when those contracts were entered into. This will have profoundly negative consequences for many Canadian families, who weren’t the intended targets of the tax.

To highlight the consequences, let us give you a few real-life examples.

One of our clients is a new immigrant family in the process of moving to Canada. They have both children registered for school — their daughter will be studying English literature at the University of B.C. in the fall. They have already entered into a firm deal to buy a resale home priced at $765,000 (from a Canadian seller), but since the sale closes after Aug. 2, they are now looking at a sudden $114,750 increase in their cost — on a firm and binding contract. This is neither just nor reasonable.

Op-Ed by Jonathan Cooper

Op-Ed by Jonathan Cooper

Our second example involves a Canadian family who recently listed their home for sale in Surrey. They have a firm deal with an immigrant family for $480,000; however, that deal is now in peril, because the buyer’s cost just went up by $72,000. The sellers, as Canadian citizens, weren’t meant to be the subject of this tax, but now it has placed their financial lives in jeopardy.

The Canadian sellers in both examples point to a broader reality: the knock-on effects of this tax throughout the Vancouver real estate market that could be immensely damaging for many Canadians. Real estate is traditionally a linked economic activity. Once they have a firm deal on their property, many sellers promptly go on to buy their next home. If foreign buyers begin defaulting en masse, we could see a contagion scenario wherein a single default by a foreign buyer will result in many more defaults by Canadian buyers. In addition, the resulting flood of lawsuits from these defaults could overrun the court system. We believe that the government has not anticipated this very likely scenario.

There is a prevailing impression that all foreign buyers are big-moneyed cash buyers. But the reality is that there are many more hardworking, middle-class immigrant families who are stretching themselves in order to get a foothold in the Vancouver market and give their families a better life. It is very reasonable that some of these families will not be able to afford an additional 15-per-cent tax that was neither anticipated nor budgeted for. For many, their only option will be to default on their purchase and lose their deposits.

Furthermore, this tax damages our province’s credibility as a place to do business in the eyes of the world. If our government is willing to drastically and retroactively increase costs in one major sector of the market, a reasonable investor would have to conclude that they might be willing to do so in any sector. Do we want to be known as a place where legally binding contracts can be, without recourse, altered after the fact by the government? And in a country built by immigrants, do we want to be known as a place where we impose severe, retroactive costs on families merely because of their country of origin?

Once again, while we do not necessarily agree that the government’s move to implement a foreign-buyers’ tax is the most effective means of addressing affordability, we do understand the immense public pressure to respond to Vancouver’s escalating house prices. However, the punitive nature of the tax’s implementation will cause immense — and completely unnecessary — damage to Canadian families, with no discernible benefit.

Premier Christy Clark expressed concerns that grandfathering would create a run on the market, but this could easily be avoided by only including contracts that were agreed to before July 25, the date on which the tax was announced. Imposing a 15-per-cent tax while exempting existing contracts will achieve the government’s goals without financially imperiling blameless Canadian sellers. In the strongest possible terms, we urge the government to reconsider their position.

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This op-ed by Jonathan Cooper was published in the Vancouver Sun on Friday, July 29th 2016.  Jonathan Cooper is vice-president of Macdonald Real Estate Group Inc.

BNN interview about the Vancouver housing supply problem

Business News Network (BNN) speaks with Jonathan Cooper, Vice President of Operations at Macdonald Real Estate Group about David Rosenberg of Gluskin Sheff + Associates comments on policymakers and housing supply constraints and how they would relate to the Vancouver real estate market.  What change are needed to address the Vancouver housing supply problem?

 

Best policy levers to address Vancouver’s housing supply constraints


(To view the video on mobile devices, please click here for direct play on BNN.)

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B.C. takes aim at shadow flipping in the real estate market

Business News Network (BNN) speaks with Jonathan Cooper of Macdonald Real Estate Group on the BC government’s new regulations aimed at what is called “shadow flipping”. While the aim is to further protect sellers in residential real estate transactions, just how much of an effect will this move have on the hot housing market?

Click the video to watch.

(To view the video on mobile devices, please click here.)
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What Changes to Immigrant Investor Program Means for Vancouver Real Estate | by Dan Scarrow, Macdonald Realty

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Last month, Canada announced the cancellation of the Immigrant Investor Program along with its 65,000 applicant backlog. Some analysts have predicted that this will have a negative effect on our housing market and the media has picked up on this sensationalist narrative. We here at Macdonald Realty have been following the situation closely as there is certainly some merit to the theories that these analysts have.

To start, the immigration investor program was introduced in mid 1980s by the federal government to promote the immigration of business people and their families. Quebec subsequently negotiated with the federal government to have its own, parallel program. The investor program enables qualified investors to obtain permanent resident status in Canada and are then eligible to obtain Canadian citizenship after residing in Canada for a number of years. To be qualified for this program (prior to the cancellation), applicants needed to have at least two (2) years of business management experience, have minimum net worth of CDN$1,600,000 and make an investment of CDN$800,000 (interest free loan to the government for 5 years), and meet certain health and security requirements. The federal government admitted about 2500 families per year (with Quebec admitting a similar number) under this program. For the past 8 years the main source of investor applicants are multi-millionaires business people from China and most of these immigrants purchased properties in some of Macdonald Realty’s market areas.

But let’s put some things in perspective first:

  1. In the most recent set of data available (2012), Canada admitted 257,887 immigrants
  2. Of these 257,887 people, 2,616 families, representing 9,350 people, entered via the Immigrant Investor category (3.6%)
  3. Quebec continues to run a parallel Investor Immigrant category that (as of now) continues to process applicants at roughly the same number as the now-discontinued Federal Program (roughly 2,500 families/year)
  4. Canada now has a 10-year, multiple entry VISA that many immigrants in the queue may find even more attractive than citizenship
  5. Canada has announced that they will be replacing the discontinued program with a new one (but apparently not the Quebec one), although details have yet to be announced

So if that’s it, why all of the fuss?

  1. The vast majority of applicants in this category were from mainland China and have large fortunes
  2. The majority of these applicants were likely planning on residing in the Lower Mainland, specifically Richmond, West Vancouver, and the Westside of Vancouver
  3. Most of these applicants would have (or already have) bought a substantial house/condo in these areas
  4. If, for example, 2,000 families each buy a $1 million house, that’s $2 billion in foregone investment in a relatively small market area. Every year.

So on the face of it, it seems as though there is certainly the potential for a correction, but remember, this is foregone FUTURE investment. The money that has already entered the housing market will likely stay here. If there were rampant speculation happening in the lead up to this announcement, we would be worried, but our data shows that speculation has been at a relative low point for several years now after a flurry from 2008 – 2010.

The key question that everyone is trying to answer is how will this impact the housing market moving forward.

The reaction of our immigration consultant contacts in China has been surprisingly muted. Most have already diversified away from Canada and are now focused on the US immigration programs, although they say that, all things being equal, Canada (meaning Greater Vancouver) is still a preferred destination. Some of their clients who were in the Federal Program queue had, because of the long processing times, already given up on Canada and applied to other countries anyway. Others, whose hearts are set on Canada, may find different, admittedly constrained, methods to immigrate (the British Columbia “Provincial Nominee Program, as “international students” for children, 10-year multiple-entry visas, or the revamped federal investor program).  Surprisingly, few China-based immigration consultants express much concern about Vancouver’s housing market.

Our view therefore is that, while there will certainly be some affect from these changes, they will be only another variable in a host of factors that affect BC’s housing market.

This view is shared by others, including respected immigration lawyer, Dave Thomas:

“Will this affect the Vancouver real estate market?

I don’t believe it will.  Firstly, the Investor program has effectively been closed for almost 3 years now.  Quebec also has an Investor program but it had drastically limited its intake of new files.  So even though the immigration route has slowed, we have not seen the slowdown in the movement of capital out of China.  There are more “Chinese push reasons” than “Vancouver pull reason” for that capital to make its way here, regardless of current immigration programs.

Historically, the business immigration programs for “wealthy immigrants” only made up about 2-3% of the total number of immigrants coming to Canada each year. Admittedly, their presence in places like Vancouver was more apparent, especially when it came to high end real estate.

There are other ways to come into Canada. Younger people are coming as students, and then availing themselves of post-graduation work permits that lead to permanent residence.  Younger people with good English language skills and a job offer will have a good chance.

One negative trend, certainly, is that older immigrants with limited English skills will have more difficulty in immigrating to Canada, no matter how much money they have.”

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Happy Birthday to the Property Transfer Tax

This week the dreaded BC property transfer tax turns a quarter century old. For those who do not know, the Property Transfer Tax (PPT for short) was a tax brought in by Bill Vander Zalm back in 1987, the same Bill Vander Zalm who looks like a BC hero, who recently helped overturn the HST back to the traditional PST and GST models in BC.

The tax is 1% of the 1st $100,000 spent on a home, and 2% on the remaining balance, a considerable amount for most BC homes.  In 1987, the average price of a Vancouver home was a mere $187,000.  Today the average in Greater Vancouver is about $1,034,000, what a difference a quarter century can make. The tax was originally intended to tax speculation and wealth in our province, so high earners and those purchasing expensive homes paid a transfer tax on those purchases. The threshold was $200,000 in 1987 and approx. 95% of the homes in metro Vancouver were under that mark. Unfortunately for home buyers, times have changed.

Since 1987, BC home buyers have paid nearly 12 BILLION dollars in PTT since its inception, or about 900 MILLION dollars a year goes into the province. On the purchase of a $500,000 home in a suburb of Vancouver, a family would be looking at about $9,000 in PTT on top of all their other fees. This outdated threshold is something the BC Liberals are looking at and have suggested they would review the thresholds in the near future. The problem is, if you remove 900 million dollars a year from the system, what happens?

It is definitely time for a change to make it more affordable for families in BC to purchase a home. Be sure to speak your voice when the opportunity to be heard is there, and let’s see if we can adjust or extinguish this tax to make property ownership more affordable and attainable for more BC residents.

Contact Jordan Bateman of the BC Taxpayers Association and speak your mind, I know he would want to hear it.

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Blog post provided by Darin Germyn Personal Real Estate Corporation, a REALTOR® with Macdonald Realty in South Surrey / White Rock.   Visit Darin’s blog at Germyn.ca  

Renovating your Vancouver Condo – Restrictions and Permits

Due to the prices in Downtown Vancouver (& surrounding areas) I find a lot of people looking into buying older / more run down units to renovate. This way they can leverage the renovation to boost their property value.

The best way to go about this is to hire a professional “specialist” Realtor (by this I mean an agent that actually knows the buildings “intimately” in your area of desire) who can get direct you towards buying into a building with “Good Bones”. By good bones I mean a building that has:

  • Good foundation
  • Good plumbing
  • Good roof
  • Good envelope
  • PROACTIVE STRATA (most important)
  1. Buy Real Estate in an up & coming area. When you buy in an area that is being built, as the community and local amenities around you grow as will your property value.
  2. Buy & hold! With this approach you must have patience & the financial means to HOLD ON for the ride. You must look LONG TERM as Real Estate does very much so follow cycles you must strategically pick your entry & exit points.
  3. Buy a property, Renovate & Sell. This must also be strategically assessed. You can not go into this plan thinking you can buy a condo for $300K, renovate for $200K and sell for $500K. Price to re-sale value varies with every room you renovate from bathroom to bedroom & kitchen… Its all individual.. Consult your Contractor & realtor to get that Cost to Value spectrum to give you a clear idea of what level of reno is worth proceeding with.

When renovating a condominium unit or townhouse in a stratified building / complex you need to not only comply with City bylaws but your own Strata bylaws. The most common example of this that I have seen is if you want to install Hardwood floor throughout your condo. You do not have to get permission from the City but you do have to consult & ask for permission from your Strata Council.

Once you have developed your plans for renovations now is the time to see if the right permission you are going to be needed will be granted.

NO PERMITS ARE NEEDED FOR (Condominium):

  • Replacing fixtures eg. refrigerator, stove etc (except gas fixtures, these always require permits)
  • Replacement of countertops, cabinets and flooring
  • Interior Painting

BUILDING PERMITS & APPLICABLE TRADE PERMITS ARE NEEDED FOR:

  • Removal of interior walls & partitions
  • Construction of new walls or partitions
  • Relocate or installation of new electrical, gas and plumbing lines (including moving a kitchen sink or adding a dishwasher)
  • Removal of a portion of a wall to install a door or create an archway
  • Replacement of a drain, waste and vent piping or the water distribution system
  • The upgrade, replacement or installation of a new fire alarm system or sprinkler system

BOTH DEVELOPMENT, BUILDING PERMITS & APPLICABLE TRADE PERMITS ARE NEEDED FOR:

  • Build an addition to increase floor area (Square Footage)
  • Add, remove or relocate a window, skylight or exterior door (9 times out of 10 you will not be allowed to touch the exterior of the building)
  • Install a gas fireplace that requires the installation of an outtake pipe (chimney)

** there are also slightly different restrictions on detached houses from the City of Vancouver.
If you are unclear or in doubt as to what type of permit is needed if any and why you may need it please contact:

City Hall –http://vancouver.ca/contact.htm

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Blog post provided by Jay McInnes Personal Real Estate Corporation, a REALTOR® with Macdonald Realty in Downtown Vancouver.  Visit his website jaymcinnes.com  for more information. 

 

 

CREA, the Competition Bureau, and BC Real Estate Commissions

Competition Bureau Won’t Lower BC Commissions

The Competition Bureau’s efforts to open up the MLS likely won’t have any significant effect on BC’s real estate commission rates. That’s because, in this province, alternative discount business models have been a part of the landscape for many years.

Matthew Lee, Sales Manager of Macdonald Realty Vancouver (Downtown), sees this as an Ontario issue, “The average commission in Ontario is significantly higher than here in BC. We’ve been in an ultra-competitive market for years now that has resulted in many alternative business models.

The Competition Bureau has used the United States as an example of a jurisdiction that has opened up its MLS® system to the benefit of the public. However, the average commission in the US is still 5.1% while in BC, the “typical” commission is less than 3%, meaning that most houses in BC have significantly lower transaction costs than houses in the more “open” US system.

Dan Scarrow, Vice President at Macdonald Realty, believes that the industry is already competitive, “I can’t think of a professional business that has lower barriers to entry. The median gross income for Realtors is only $37,000, and that’s before expenses.”

In BC, companies like erealty.ca and 1% have historically allowed for cheap access to the MLS®. This has resulted in more choice to consumers. However, despite their best efforts, erealty.ca is no longer in business and other discounters have limited market share.”The brokerage business is a hard business” says Scarrow, “as an industry, we’re about as efficient as we can get.”

Adds Scarrow, “If you’re going to pay for real estate services, you might as well hire a full-time professional.”

 

For more information, please contact:

Dan Scarrowdscarrow@macrealty.com 
Vice President, Strategy
Macdonald Real Estate Group