The BC GVA Tax

July 28th, 2016 by Potato

Hard to miss the news out of BC this week as a surprise tax on foreign purchasers of Vancouver-area real estate was launched, along with new data showing that foreign money in BC real estate is actually quite substantial.

It’s hard to say what this will mean in the near-term: will foreign money find a loophole and keep pouring in? Will Vancouver crash while the firehose of hot money shifts to Toronto and Victoria? Will 15% prove to be no kind of barrier considering that prices have gone parabolic this last year, and how desperate some of the hot money is to leave? Indeed, that last point had been made often enough before this news on the high prices and risk of a crash in Vancouver — “so what if it crashed even 75%, walking away with $500k clean is better than losing all $2M” people would argue.

No Grandfathering

The tax takes effect next week — a good move so we don’t see a spike in sales looking to beat the change, as we have with long-anticipated CMHC changes in the past. However, one strange aspect is that there’s no grandfathering in: deals that were already in the works that close after Aug 2 will have the tax applied.

For some people, that’s going to be exceptionally painful: not all foreign purchasers are wealthy oligarchs skirting capital controls. A newly recruited UBC assistant professor coming up from the US who happened to buy a place at the wrong time is going to have a huge cash call at closing soon, or will have to forfeit their deposit to walk away from the deal if their lawyer can’t argue force majeure.

Normally when a tax such as this is put into place there’s a grandfathering provision, where people who had already made deals under the old rules get taxed according to the old rules. Whether this lack of grandfathering is a bug or oversight from the rushed nature of this tax or a deliberate feature is another question.

How could it be a feature, you ask? Well, this tax is not so much about raising revenue or equalizing opportunities in the market so much as it is a psychological message. I even saw (though I didn’t keep the article to link) a BC official say that if this tax succeeds in its mission it won’t collect a single dollar — it’s intended to run foreign money out of Vancouver, not just tax it. And it does this in a flashy, surprising, attention-grabbing way. By sucker-punching a few deals in progress it will sacrifice a few innocent bystanders and create huge resentment and awareness amongst foreign buyers (and their local realtors) that BC is not a place to be making deals you can’t afford to have go sour. It will help address that sticky notion that Canada is a safe place to park (or in the parlance, launder) money, with stable, reasonable government that is gun shy on meaningful interventions.

Indeed, if there’s any good to come out of this, it will be the anecdotes from this (and from the Urbancorp mess in Toronto) reminding buyers that there is significant risk to “investing” in real estate, especially with long-duration pre-construction contracts at massive multiples of rent where anything can happen between when you sign and when you take delivery. Hopefully this pain will resonate for a generation, like Nortel did for reminding equity investors in Canada that risk exists. Your grandchildren will start saying that “real estate can only go up” and the neighbour will over-hear and shout over the fence “the BC tax on foreigners! Fly, you fools!”

And yes, there’s also the “they should’ve” arguments that draw away from the impending martyrdom — no “regular” person should be buying pre-construction, that’s a playground that by all rights should be restricted to accredited investors who can afford the risks and delays (of which a 15% surprise tax is actually not the worst thing that could have happened). And junior UBC profs and other people coming in to actually live in the city should have waited until they got their permanent residency status before buying (and rented even then, given the price-to-rent insanity in the city). But that’s cold comfort to people who face a large, surprise tax because of a lack of a simple grandfathering clause (and a tax that’s a cash call at that — no word yet that they will be able to roll this into a mortgage).

A Clear Message
"Get Out" scene from Terminator

What Next for the Bubble?

At the same time as the tax was in the news, CMHC finally woke up and labelled BC as having “problematic conditions.”

What effect will all this have on the bubble? Hard to say. Bubbles are driven by the madness of crowds. On the one hand there are reports of locals trying to back out of deals on the news of the tax — the existence of the tax has shattered their confidence in the meme that rich foreigners will continue to drive the price of property up to something on par with Monaco or New York. If confidence in “infinity” as the upper bound to GVA house prices has indeed been shattered, then that alone may help the market come back to earth regardless of what happens with HAM and whether the tax actually changes anything on that side of the equation. However, Vancouver in particular has been astoundingly immune to the forces of reality (WMAGNFARB), and eschatology is a scary and imprecise business. Plenty of bubbles have caught second and third winds (and the GVA is at least on its third wind now); some have “melted” while others were “like someone flicked off the lights.” Even that second type takes time to appreciate as it plays out in real time — RE does move very slow, and even what we call a “hard stop” in the history books is still several months of uncertainty in the present.

As for the GTA, it would not surprise me if enough people will believe that HAM will flood the 416 instead, driving the parabola for another year or so to apogee.

These things take time to sort out, and in the meantime my core message remains to rent and avoid the whole mess.

Liberal Win and Pestering my MP Early

October 20th, 2015 by Potato

I like to write my MP and MPP whenever a big topical issue comes up that I’m passionate about. Some things aren’t topical, but could still use attention. Now that we have ousted the Conservatives, I think it’s as good a time as any to just congratulate my new MP on his win, and send him a letter to know what’s on the mind of one of his constituents as he plans out the next ~5 years of his life. Please feel free to pull whatever parts of this letter out that you like and write your own MP.

Dear Dr. Tan

Congratulations on your victory! I’m very happy to be represented by a fellow scientist in my riding, and to hopefully see some positive change from a Liberal majority in Parliament.

As you plan out your priorities for creating new legislation, I wanted to share my thoughts on issues that weren’t central planks of the election platform. I am myself trained as a scientist, and in addition write as an expert on personal finance, so those fields are my primary areas of interest.

The election platform included a promise to roll back the TFSA contribution limit to $5,500/yr with indexing to inflation, which I agree with. I believe that inflation-indexing is a key component of good policy. Many of our government programs are indexed to inflation so that they continue to remain relevant and fair without the need for constant tinkering by the government. However, the Canada Education Savings Grant and the Canada Learning Bond for low-income families are not indexed, and have not increased in value since their introduction. Adjusting these programs to include inflation-indexing would help keep them relevant for the future.

The Canada Learning Bond could use additional improvements. The current take-up rate of this program is embarrassingly low. There is a group here in Toronto (the Omega Foundation) whose sole mission is to help people who are eligible for the CLB apply for it. Given that low-income Canadians often face challenges in navigating bureaucracy, changing the CLB to include automatic enrollment with a turn-key default investment (that individuals could opt out of) would go a long way to improving the usage of this program, and help better position the children of low-income Canadians to enroll in post-secondary education.

I have been a proponent for a higher marginal tax rate beyond the current top bracket, and I was glad to see the Liberals include that in the election platform. However, the highest effective marginal tax rate is not on Canada’s wealthiest, but on our poorest: an individual on GIS faces a 50¢ clawback in their benefits for each dollar of income earned, on top of any income taxes. Finding exactly the right balance between clawing back the benefit as it no longer becomes necessary and not overly disincentivizing work or drawing from an RRSP/RRIF is difficult, but I believe that 50% is too steep. I would suggest altering the initial clawback level to a slightly lower income level, and decreasing the degree of clawback to something more like 35-40%. Contrarily, OAS recipients face a clawback of just 15¢ per dollar of income earned above a very generous threshold.

Along the same lines, CMHC could use many reforms to make the availability and cost of high-ratio mortgages more counter-cyclical. One suggestion in particular would be to add regional price-to-income or price-to-rent adjustments to the minimum down payment to help prevent future housing bubbles, and ensure that CMHC is able to serve those regions that most need it while sparing those regions with functioning rental markets or escalating prices the self-defeating aspect of high-ratio mortgages.

As someone trained as a scientist, who currently supports researchers, I also want to express my belief in the importance of basic and health research, and to stress that funding for the Tri-Council agencies (NSERC, CIHR, SSHRC) has not kept up with inflation under the former Harper government. It sounds as though you and your colleagues do believe in the importance of science and evidence, and will be making moves to help in this regard, but do remember that there is a lot of “back-filling” to do before we can begin to make research a renewed priority for Canada.

Finally, as a Torontonian and daily commuter, I appreciated the promise to work with the city to develop more transit infrastructure. The ability to move people around has lagged far behind the population growth the city has experienced, and it will take a lot of work to not only catch up, but get ahead and build spare capacity for the future. So when presented with options, build all of them. Downtown relief. Sheppard and Queen subways. Light rail, heavy rail, high-speed regional rail. All of it is needed now or will be soon enough.

Sincerely, Potato

And finally, a Harper-is-gone happy dance. I know the Liberals will screw up at some point, or we’ll disagree on something and I’ll get angry. But for now it feels good.

We Have TFSAs Now: Lose the HBP

September 18th, 2014 by Potato

A little while ago Rob Carrick idly wondered on his facebook page/discussion group if the home buyer’s plan (HBP) was a good idea. In case you’re not aware, the HBP is one of the few ways you can take money out of your RRSP without paying tax on it: you can pull up to $25,000 out as a first-time buyer, and repay it over the next 15 years. The HBP primarily accomplishes two things.

1. It lets people contribute to their long-term (retirement) savings with an “out” to use those funds for a down payment on a house/condo. This way they can save for the future without having to plan what will be house funds and what will be retirement funds.

2. It lets people get a tax refund on their down payment that they can also use on the house right away, effectively borrowing from their future selves. In the short term, it’s an incentive to buy.

On top of this, it has a psychological effect: home ownership and post-secondary education are the only sanctioned reasons for borrowing from your RRSP. Add how irrational people can be about taxes and tax deductions, and it’s a bit of a sacred cow. In the right light (octarine?) it looks like the government encouraging buyers to reach for as much real estate as they can, using everything at their disposal (including their RRSP).

With TFSAs in place now though the first point is well taken care of by that tax shelter: you can easily throw all your long-term savings in there as a young person, and if you need to raid them for a down payment (or whatever) then you can, even in excess of $25,000. Plus it’s already set up to be indexed to inflation so we won’t have to worry about future whining that the HBP isn’t big enough. As for point two, I really don’t think we need any more tax incentives or holiness attached to housing, so doing away with the HBP in favour of encouraging TFSA use would suit my politics just fine.

To be fair, this may need a few years for transition, and would present a bit of a savings conundrum to people who get employer RRSP top-ups, but I find it hard to feel that’s a major flaw in my plan. Let’s simplify the RRSP that one extra step, and phase out the HBP.

Conservatives and a Disdain for Data

June 17th, 2014 by Potato

I did not have the chance to follow the Ontario election in depth, and haven’t commented at all on it. Now that it’s over, there isn’t much to say.

Except one thing: Hudak’s “million jobs plan” was shown fairly early on to be based on flawed math. This was an excellent opportunity for him to take the race* by changing his platform based on the data and corrected information. Not only could he then have run on a sounder plan (though in the end that plan would likely have looked very much like the other parties’), but he could have distanced the provincial party from the federal cons and their well-known disdain for data.

Instead, the message was “well, in my heart and mind…” [it’s true]. For so long I have had so much trouble relating to conservatives — there is a perfectly valid basis for disagreeing with one another on how we should run the country, what roles the government should play, and whether that should be minimized or optimized based on various value systems and circumstances of the day. But some opinions and plans are so out there that I’m just left shaking my head. And now I know: the disdain for data goes so deep that — Hudak at least — lives in a fantasy world. That or the conspiracy version where he is so interested in appeasing the corporations/lobbyists he truly works for that it doesn’t matter if the thin veneer of reason for playing into their interests comes off, he’s sticking to that flawed plan.

I know the centre and left are far from perfect, and at both the federal and provincial level the Liberals have had their share of scandals and waste, but it’s the lesser evil in my mind. Hopefully Toronto at least has seen enough of reactionary leaps to the right — with Rob Ford, Mike Harris, Harper, and now a glimpse at a near-miss of the Hudak fantasy — to perhaps give us a generation or two of respite from the conservative fantasies.

* – Not that I was rooting for the provincial conservatives — I’m definitely a left-leaning centrist if anything — but as many commenters had said going into the election, with the sentiment against the Liberals and the illogical move by the NDP to trigger the election in the first place over a budget they should have been crowing about, it was his race to lose.

Regulatory Burden

March 30th, 2014 by Potato

In the comments to the first post on regulating financial advisors someone brought up the issue of regulatory burden: the extra paperwork and delays imposed on businesses. Nicole went so far as to call it “onerous” and “strangling” — and that’s just for the regulation already in place, which we’ve criticized as not providing enough protection.

There are lots of examples of regulatory burden out there, for many stakeholders. I regularly suggest that people go with TD Waterhouse to be able to invest in e-series funds over TD Mutual Funds because of the extra steps and forms needed to fill out and mail in to convert an account and the possible limitations of the KYC forms. I never got my CFP/CSC because it’s just not worth my time to take the courses and exam for what the designations would bring me; if something like that were to be a mandatory requirement to talk to clients about investing and their financial plans that would keep me and several other part-time educators/planners/coaches/DIY-support people out of business.

But a certain amount of form-filling, records-keeping, and education overhead should be expected in any business. The correct amount of regulatory burden is highly unlikely to be zero, and if it brings important consumer protections then that’s a good thing.

However, the way regulations and reporting are structured can have huge impacts on the eventual regulatory burden. Consider for example something I have some experience with: applying for a grant to do some medical research. You could apply to the US National Institutes of Health (NIH) and or to the Canadian Institutes of Health Research (CIHR). In both cases the basic document outlining the experiment you’re looking to fund would be say 13 pages. On top of that you’d have a detailed 5-year budget and a justification for the funds you were seeking, a half-page lay summary for the funding agencies to release to the press or the elected government representatives, and some kind of CV to demonstrate that you had the experience and ability to carry out the research you proposed.

Now both funding agencies take very seriously the protection of research participants and have fairly similar rules and regulations in place for that protection, but the implementation and regulatory burden is night and day in my mind. In Canada, your grant would now basically be complete: CIHR’s protection of research subjects rules are separate from the grant process, and all institutions sign on to it before they can enter a competition. They know that any research is going to be reviewed by a research ethics board that meets their standards, and will get a copy of the approval before releasing funds (if you’re successful in the first place). If the experiment calls for anything terribly out of the ordinary, then it’ll have to be explained in the proposal anyway. Compare this to the US, where the proposal part of the grant submission is almost like an afterthought to the stacks of appendices and tables that have to be filled out — including some that no one really seems to understand (including the NIH help staff I’ve spoken to), where you have to predict the racial breakdown for any proposed study (how many whites, blacks, asians, etc. will you recruit), but then also the “latino/non-latino ethnic breakdown” (how many latino asians vs non-latino asians will you include in your study??). It’s stressful and confusing (Spain and Portugal aren’t included in the countries of origin for people considered hispanic?) and totally bizarre (why do they care about this stuff? Will they really reject my grant over this?). For basically the same mandate and ultimate protection of research subjects, the regulatory burden is quite different between the agencies because of how they approach the problem and where they place the reporting requirements. By having so much paperwork up at the application stage it creates a lot of work for the ~80% of NIH applicants who will not get their grants funded because the scientific component wasn’t competitive enough for the severely limited funds.

Also, some protection comes with virtually no on-going regulatory burden. The Residential Tenancies Act sets out many protections for tenants, but aside from modifying what you can put into a lease there is no paperwork for landlords or tenants to fill out in the regular course of business beyond what you’d need anyway. Indeed, you get some of that for better than free: by standardizing certain terms, responsibilities, and practices they don’t have to be separately negotiated and drawn up in a lease. Everything is handled on an enforcement basis: only after a problem arises does someone end up having paperwork to fill out. Now at that point it can be very onerous (dealing with the LTB is no picnic, especially for landlords), mostly due to the delays involved. But for most people most of the time, it’s reasonably strong regulation with little overhead cost.

So I think that implementing a better model for financial advice and regulation thereof can be done in a way that minimizes the regulatory burden. It’s something that can and should be kept in mind as a new regulatory framework is thought out (especially the implementation aspect), and kept in balance with the benefits.