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December 21, 2017 | The Wrong Stuff

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

How should we be taxed? The nuts who live in Vancouver are leaning heavily towards the taxing of stuff – property, real estate – in the mistaken belief this is ‘fair’ to the people who covet it. Thus Van has a tax on non-residents and a tax on under-used homes, as well as a tax for owning real estate itself. The locals want more, including a new housing speculation tax, while the socialists in power are considering raising all the existing taxes.

But taxes on stuff are the unfairest of all. They bear no relation to the income someone makes, their net worth, ability to pay or consumption. For example, in leafy, desirable parts of both YVR and the 416 reside many old wrinklies who bought there decades ago, eke out on CPP and OAS, and couldn’t possibly afford to pay more property tax. To compensate, BC lets them defer this. But how fair is that to struggling young families who have to pay full freight?

Scarier still is the level of debt homeowners now shoulder. Because you own a piece of real estate doesn’t mean that, well, you actually own it. With $1.5 trillion in outstanding mortgages, Canadians occupy houses with scant equity and yet pay property tax as if they possessed 100% of the value it represents. Sucks.

Of course, as property values increase it doesn’t mean the guy owning land gets richer. He doesn’t actually have any more cash to pay an increased property tax bill, nor can he sell off 5% or 7% of the holding in order to meet that obligation. Residential real estate is normally indivisible and sometimes illiquid. Unlike an ETF, you can’t dump a bunch of units with the click of a mouse.

So taxing houses based on the money they’re worth at any one time in a fluid market, regardless of who lives there, is ridiculous. It’s feudal. The lefties running BC are out of control with this thinking, as are the bicycle-riding, Bernie Sanders-worshipping moisters who elected them. Tax what people make, not what they have. Better still, tax what they spend and stop screwing the frugal.

Well, this brings us to another reason real estate in Vancouver is doomed (relatively speaking).

The empty homes tax is toxic – a timebomb with the potential to hurt innocent people who are finally able to achieve home ownership in our most delusional city. As mentioned here before, it’s really just a tax on the wealthy who already pay a disproportionate share of the freight in Canada. It disregards those who legitimately need and use second residences for business reasons, making Van look even more provincial than it is. But worse, as a tax attached to a thing instead of a person, it poses a serious risk to the entire, inflated market.

Law firm Thorsteinssons gets the credit for blowing the whistle on local politicians who should stick to parking meters instead of tax legislation. “A flaw in the scheme of the tax makes it a serious risk for virtually anyone who buys a home in Vancouver after 2017,” the lawyers say. “This should also alarm local realtors and real estate lawyers, all of whom need to be aware of the issue.”

You bet. What a potential swamp Van city hall has created.

Anyone who, in the view of bureaucrats, does not live in their house enough days a year will be slapped with a tax equal to 1% of the value of the property. In a city where the average detached is $1.6 million that’s a helluva load. Failure to file paperwork costs an extra $10,000 a day. Wow. Registered owners must make a declaration as to the use of their property and the city has the power to accept or reject it, or even go back a couple of years later and assess the tax in full.

But it’s agnostic. It’s tied to real estate, not the owner who must pay it. And owners change. So when you sell a piece of land the regular property tax – which is known and pre-determined – can be apportioned between buyer and seller. The empty house tax, in contrast, is utterly confused. “There is nothing in the bylaw that specifies, in the event of a sale during the declaration period, which owner has the filing obligation,” say the lawyers.  “Similarly, the city is entitled under the bylaw to require a “registered owner” to provide information at any time and for up to two years after a taxation year. Again, does this mean an owner in 2019 can be requested information about the individual who occupied the property in 2017, with whom they might have absolutely no connection? And who is entitled to dispute an assessment? How would that work?”

A property might have been taxable in the hands of the seller for a period of ownership, but not as the buyer intends to use it. Yet, as registered owner, the buyer would have to pay the levy, depending on the closing date. As the legal beagles state: “After the sale, the city might conduct an audit and disagree with the seller’s declaration. Or the city might agree originally with the seller’s declaration but then re-consider and assess within two years.  Disputing the assessment might be impossible, and the tax would become payable by the buyer, even though it involves the seller’s period of ownership.”

Of course, given the highly political nature of the law, the moonbeams running City Hall and the hammer-&-sickle gang in the Legislature, anything’s possible. In Vancouver real estate is a religion, emotions are stretched and entitlement runs rampant. Tax is the weapon of the masses. Invest at your peril.

As the lawyers correctly state, anyone buying in Van these days is accepting a ton of risk. After all, 77% of houses changing hands last month went for less than the asking price, as the market starts to wobble and degrade. Buyers are often overreaching, hideously indebted and stretched financially. “The possibility of them inheriting a seller’s vacancy tax liability after the purchase is not only unfair – it might also be too much to bear.”

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December 21st, 2017

Posted In: The Greater Fool

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