As of January 1, 2023, Canada has implemented new legislation that affects how homes are purchased in Canada.  Let’s get one thing straight right away, the objective of these new pieces of legislation is simple: make homes more affordable to Canadians.  It’s a work in progress, and some of these changes may really help – some may not in my opinion.  Remember, please speak to an Accountant or Lawyer for all these matters personally, as this is just a guideline and not legal or accounting advice.

Non-Canadian Real Estate Purchasing

As of right now there is a two-year ban on non-Canadian citizens purchasing residential real estate, with a few exemptions.

Some of those exemptions include temporary workers, refugees, and international students (and parents of those students) who meet, what I keep reading as, “certain criteria”. With respect to that “certain criteria”, I couldn’t find exactly the information I was looking for, but it seems to be as long as the student is physically in the country and does have proof of enrolment to the university or college they are attending in person.  However, note this international students (and parents of those students), you’re still going to be paying a 20% for non-resident speculation tax which was introduced last year for most all regions in the country (even if it’s really your parents buying it).

But where, geographically, does this ban take effect?  ANY municipality over 10,000 census residents are under this umbrella. Another consideration is the types of homes and vacant land. This applies to semi-detached homes, detached homes, strata units, and any other property along the lines of residential use, but does not include rental properties, recreational properties, potentially multi unit highrise buildings (it’s not perfectly clear) and residential properties located in urban areas of less than 10,000 people. As for vacant land, this ban applies to residential and mixed-use, but not to commercial and ICI.

Challenges Nationally and Locally

Nationally, from what I gather in water-cooler conversation, international purchasing is mainly through students (hence the thinly veiled hints above). The 20% tax will be stiff, but will it keep foreign investment away?  I remember living in Toronto and seeing newly developed units, fully purchased, and mostly vacant. Perhaps we address that?   Granted, that was some time ago.

The challenge I see in our region of Southwestern Ontario is while we do have some purchasing internationally, that doesn’t seem to be the main concern which I believe is ownership and flipping.  However, that concern is addressed as well, as you will read soon. I do agree that having some sort of legislation to block international purchasing of homes is important, but I believe this ban will have little effect on the cost of homes for people to buy, especially first time buyers – but I truly hope I’m wrong on that.  

Reason being is the fact that building is still expensive, the cost of production which includes labour and materials, is still very high.  The base “bottom-line” price of homes has increased exponentially and people are still refusing to sell for anything less than certain amounts. There simply are no homes that are decently liveable for less than $250,000.  Well, I hope this legislation moves that needle a little bit, but call me a skeptic at this point.l

Those who break the rules there can be heavy fines and for those purchased and could be forced to sell. The realtors or people who work with nine Canadians for their purchase can also be fined, up to $10,000.

Canada’s New Anti-Flipping Law

Big changes came to the flipping world for Canadian real estate and it’s taken effect as of the beginning of this year. But I’m going to start with this – you need to consult your Accountant for full details – but I’ll touch on them here.

Capital Gains vs Business Income Change

Here is the first big change, and it applies to the difference between Capital Gains versus Business Income.  Simply put – if it’s Capital Gains your tax bracket is 50% – if it’s Business Income you move to 100% taxable bracket.  

The main point here:  Any homes bought, regardless if it’s “Principal Residence Exemption” or not (with some exceptions, which will be shown), IF SOLD in less than 365 consecutive days from ownership, will NOW be considered Business Income and not Capital Gains.  

Old way: Capital gains – home was sold less than 365 days ownership (flipped), taxed on 50% of the profits.

New way: Business Income – home was sold in less than 365 days ownership (flipped), taxed on the entirety of profits. 

Some examples to be allowed in order to apply Principal Residence Exemption are:

  • Changes in life circumstances;
  • Births of children;
  • New Job;
  • Divorce;
  • Death;
  • Disability; or
  • Other circumstances not yet known (the new legislation may or may not contain a detailed list).

And as described by Leading Canadian Tax Lawyers Rosen Kirshen: “Where any of the above apply, it would be a question of fact as to whether the property sale resulted in business income, a capital gain, or a capital gain that was eligible for the Principal Residence Exemption. This question of fact will be reviewed by an auditor in a property sale audit. These have been going on for years and because of the exceptions provided, they will likely continue for many years to come.” https://www.rktaxlaw.com/canadas-new-anti-flipping-tax/

Rental Properties

So, how does this apply to all those who invested and are looking to invest into the housing market as landlords?  I can try and write it better, but the experts at Source Accounting CPA summed it up pretty good:

“Currently, a taxpayer can purchase a property for rental purposes, reporting the rental income, which is taxable. The rental income can be offset by deductions for expenditures, such as mortgage interest, maintenance, property taxes, utilities, insurance, and management fees. Under current law, generally, if this non-principal residence is sold, any profits are taxed as capital gains, resulting in only 50% of the gain being taxed while the other 50% is received tax-free. 

But this is also changing under new anti-flipping laws. If the rental property is sold in less than 12 months, any profit will be treated as a business income and will be 100% taxed.”

Non-Capital Loss & Burden of Proof

Simply put, you cannot report a Business Income loss on a sale just because it meets the criteria of a “flipped property”.  That’s a big piece. 

Another big piece that may scare away some investors: if you hold the property longer than the 365 consecutive days, you still may be audited and seen to be flipping if the scrutiny of the CRA deems so. Also, if you sell less than 365 days, it’s automatically considered a flip, and the burden of proof is no longer on the CRA to prove otherwise, it’s on the investor.  You will pay 100% tax on the profit, unless you can meet criteria otherwise. 

Homebuyer Protection In British Columbia

While this doesn’t affect us here at Southwestern Ontario, it’s worth taking a note about a new legislation that took effect as of January 3 this year, applying a mandatory three day consumer protection. Real estate purchases in order to give home buyers opportunity to secure financing and arrange home inspections,

While it’s not currently enacted, it’s not otherworldly to believe this may be something coming in the future for Ontario.

Hope this breakdown helps – there’s more to come surely, and I truly hope it helps the affordability crisis. Remember, please speak to an Accountant for all these matters personally, as this is just a guideline and not legal or accounting advice.

References