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Non-residents have been sidestepping capital gains taxes when they sell a home simply by declaring it as their primary residence, but today, Canadian Finance Minister Bill Morneau announced an end to this.
“We will ensure that the principal residence exemption is available only to Canadian residents, and that families are able to designate only one property as the family’s principal residence for any given year,” he said during a news conference in Toronto.
The federal government tabled today a notice of ways and means motion — which is how new tax bills are introduced — in the House of Commons, Morneau said at the event.
BMO Senior Economist Sal Guatieri says that closing this loophole — together with BC’s 15-per-cent tax on non-resident homebuyers in Metro Vancouver and a possible empty-homes levy — is a move geared towards curbing foreign investment in real estate.
“It will discourage pure investment inflows to the housing market,” Guatieri writes in a research note about the minister’s decision.
Morneau, who first tightened mortgage rules in December 2015 when he increased the minimum downpayment on certain mortgages, revealed two more changes to lending regulations that will be rolled out in the near term as well.
As of October 17th this year, all new insured mortgages will face tougher stress testing, meaning mortgage applicants will have to qualify for a loan using a higher interest rate than before.
Then, on November 30th, eligibility requirements for both low and high ratio insured mortgages will be standardized. The maximum amortization period for both will be 25 years, and the minimum qualifying credit score will be 600, BMO notes.
Neither of these measures will be imposed on current mortgages.
The government has also vowed to launch consultations on how to provide more protection for taxpayers “by ensuring that the distribution of risk in the housing finance system is balanced.”
Ultimately, the measures are “designed to reinforce the Canadian housing finance system, to help protect the long-term financial security of borrowers and all Canadians, and to improve tax fairness for Canadian homeowners,” according to a government news release.
Guatieri, the BMO economist, expects the measures to be effective from a risk-reduction standpoint.
“The measures announced today should help to reduce the risk of a housing market correction in Vancouver and Toronto and a broader retrenchment in Canadian household spending arising from elevated debts,” says Guatieri.