Retroactive nature of new tax on foreign owners threatens rule of law, investment in B.C.

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Appeared in the Vancouver Sun, Aug. 5, 2016

Mike de Jong, B.C.’s finance minister, recently and unexpectedly announced an additional property transfer tax of 15 per cent on foreign nationals purchasing residential property in Metro Vancouver. Whatever the merits of this policy, many have overlooked a troubling element of its implementation—that it will be effectively imposed retroactively.

The tax applies to property sales agreed to before the August 2 deadline but not yet registered with the Land Title Office. This means that some contracts forged under one set of rules are now affected by a new set of rules (the new tax) even though these transactions occurred before the tax was announced. This tax will add roughly $140,000 to a typical Greater Vancouver real estate transaction, closed before the imposition of the tax. This is particularly problematic given that de Jong had previously stated strong opposition to such a policy.

The retroactive nature of the tax is especially problematic when it comes to pre-sale homes, which often involve the signature of contracts well before these units can become occupied. The Urban Development Institute estimates that the tax could jeopardize as many as 3,000 pre-sale deals involving foreign nationals, hurting local sellers as much as foreign buyers. Every transaction has two parties, and both sides will be harmed by this measure. For instance, a family that has sold their home, having already bought a new home, might find themselves scrambling to re-sell, and possibly at a lower price than originally budgeted for. Indeed, there are already early signs of sellers discounting home prices to blunt the tax’s effect.

Moreover, imposing a tax on already signed agreements demonstrates a worrisome indifference to the rule of law. The rule of law, which includes respecting contracts, is a central tenet of liberal democracies such as Canada and a key contributor to prosperous societies. Retroactively changing the terms of a legally binding contract is a breach of that tradition.

Beyond these important ramifications for the rule of law, failing to grandfather in existing transactions injects uncertainty into British Columbia’s investment climate. After all, if the provincial government has retroactively interfered with existing contracts once, how can foreign investors and their local counterparts—be they homebuyers or investors in B.C.’s other industries—trust that the provincial government will follow due process in the future? Accepting this kind of retroactive action in principle sets a dangerous precedent.

Concern over investment uncertainty isn‘t just an abstraction. Research shows that investors react to uncertainty by pushing prospective new investments elsewhere. Limiting uncertainty should be a priority for government, and if this surprise tax causes a sudden shift it could have unpredictable consequences domestically and with our trading partners.

While there are reasons to oppose the new tax on foreign transactions in general, it’s particularly worrying that the province plans to retroactively interfere with existing contracts. At the very least, existing transactions should be grandfathered in. Doing so is not only a matter of upholding the rule of law, but is crucial to avoid sending the wrong signal about doing business in B.C.


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