TORONTO — The federal government is taking aim at slowing Canada’s overheated housing market with new measures, including closing a tax loophole used by foreign buyers and stress testing more domestic mortgages.
Finance Minister Bill Morneau announced the changes during a conference Monday, describing them as a way to ensure that the country’s housing market remains stable and affordable for Canadian buyers.
Morneau also said that the federal government is now in consultation with “market participants” about finding ways for lenders to take on more of the risk in the current mortgage market.
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The sweeping broad changes, targeting foreign buyers and over-leveraged Canadians, are a clear indication that the government remains uncomfortable with the current trajectory of overheated housing markets such as Toronto and Vancouver.
“Across the country, many middle class families looking to buy their first home see prices climbing, often out of their reach,” Morneau told reporters Monday. “Some are taking on high levels of debt in a rush to buy before it’s too late.”
During the press conference, Morneau avoided referring directly to foreign buyers, but a tax loophole that had allowed some to avoid paying capital gains taxes as their homes appreciated in value is also being closed.
“If it captures speculators who were using that tax rule inappropriately, that’s what we were hoping to do,” Morneau told the Financial Post in an interview.
Under the new rules, foreign buyers who were not residents at the time a home was bought will no longer be able to claim a principal residence exemption, and families will only be able to designate “one property as the family’s principal residence for any given year.”
The principal residence exemption means homeowners in Canada who designate a property as their principal residence do not have to announce the sale of that property, nor do they have to pay capital gains taxes if the value of the home has increased from the time of purchase to the time of sale.
Capital gains must be paid when secondary properties, such as cottages and homes that are used as a rental property to generate income, are sold.
The federal government will also be implementing “mortgage stress tests” for all insured borrowers. Morneau said that low-ratio insured mortgages — homebuyers who make a downpayment of at least 20 per cent of the property purchase price — will begin facing the same stricter eligibility requirements as homebuyers with lower down payments.
The stress tests will include seeing whether homebuyers can afford their mortgage payments if interest rates rise. While many buyers are currently qualifying for five-year mortgages at around two per cent, they will now have to prove that they can make mortgage payments at the Bank of Canada posted rate of 4.64 per cent — which, in markets such as Toronto or Vancouver, can add tens of thousands of dollars a year in interest charges.
Morneau said that the new rules will go into effect on Oct. 17, though the changes will not affect Canadians with existing mortgages.
The Finance Minister also said that the government will release a consultation paper in the coming weeks, to solicit views from mortgage lenders about how they can take on more risk in the market. Because many mortgages are guaranteed by the Canadian Mortgage and Housing Corp., Morneau said that too much of the responsibility is currently placed on the government and taxpayers.
“Anything we do will be gradual and take into the account market participant’s point of view,” he said in an interview.
The federal intervention in the housing market comes on the heels of an additional property tax on foreign buyers in Vancouver, which went into effect on Aug. 2.
A number of economists have voiced support for the idea of taxing foreign home buyers. Last month, CIBC World Markets said that Ontario has “no choice” but to soon announce a similar tax on overseas buyers, given the B.C. tax.
Last week, Bank of America Merrill Lynch warned that there were plenty of signs that foreign buyers were warping the Canadian housing market and that it would likely lead to increased policy action.
“Evidence of a large foreign presence is abundant,” the economists wrote. “For example, resale house prices fell by 19 per cent (month-over-month) in Vancouver in August, the first month of a new foreign real estate transaction tax.”
http://business.financialpost.com/personal-finance/mortgages-real-estate/federal-government-closing-tax-loophole-used-by-foreign-home-buyers