Americans Along Canadian Border Fume Over Ottawa's Housing Tax

© Ben Nelms/Bloomberg News

OTTAWA—Americans who own property and vacation homes in Canada are furious over Ottawa’s plan to tax real estate that is not occupied year-round.

Some Americans are considering selling their Canadian property. One member of Congress, representing western New York state, is pushing the Biden administration to file a trade complaint under the terms of the U.S.-Mexico-Canada trade treaty, or at least to persuade Canada to carve out an exemption for Americans.

Canadian officials first proposed in 2021 the underused-housing tax to target foreign-owned homes that sit vacant. Local officials said the problem was most acute in Vancouver, British Columbia, where foreigners—mostly from mainland China, according to local officials and real-estate agents—acquired homes last decade. In the 10 years ending in January of 2022, the price of the average detached home in Vancouver almost doubled to nearly 2 million Canadian dollars, equivalent to about $1.5 million. The most recent Canadian data indicate nearly 5% of residential properties in British Columbia are foreign-owned.

The annual tax is set at 1% of whichever is greater: the assessed property value per municipal authorities or the property’s most-recent sale price. 

The tax is meant to “help address concerns about the impact of foreign investment on housing costs and worries about Canadians being priced out of the housing market,” said a spokeswoman for Finance Minister Chrystia Freeland. 

The measure was formally adopted by Canada in June of last year, to be applied across the country starting in 2023. Canadian tax officials published details on the new measure in early February, ahead of the Canadian tax-filing deadline of April 30. Tax advisers in the U.S. and Canada say Americans affected were either unaware of the measure or alarmed by the paperwork involved. For example, the tax required Americans to undertake a roughly two-month process to obtain a Canadian tax identification number, which was required to file documents related to the vacant-home tax. The regulations said failure to file the paperwork before the deadline would trigger a fine of about $3,500.

The publication of those details “set off a great sense of panic, anger, frustration,” said Mark Fehrman, an accountant and owner of KIS Tax Services in the border town of Fort Erie, Ontario, across the Niagara River from Buffalo. Part of his practice involves cross-border tax issues. “Nobody knew where to turn or where to look.”

Some have opted to get out. Greg Boos, an immigration lawyer in the border town of Bellingham, Wash., bought a condominium unit in downtown Vancouver more than two decades ago, to spend weekends off and on in Canada’s third-largest city to enjoy amenities like the theater, opera and fine dining.

“We didn’t make an investment in Canada. It was a lifestyle decision,” Mr. Boos said. After learning about the tax, he said he is ready to sell. “If they’re saying that it’s an investment on my part, well, I can be a smart investor too.” Vancouver condominium prices have climbed 175% over a roughly two-decade period, according to local real-estate data. 

Patrick Whalen, from the Buffalo, N.Y., suburb of Amherst, sold his family’s lakefront vacation home in Head Lake, Ontario, roughly 100 miles northwest of Toronto, during the pandemic, in part because of the U.S.-Canada border shutdown. He owned the property for two decades, and he said it is where his family spent the bulk of the time between Memorial Day and Labor Day.

He said he was hoping to use the sale’s proceeds to acquire another Canadian summer property. “Now, obviously, I can’t, and, frankly, I don’t want to,” he said. “It feels like the current government doesn’t want us.”

Canadian officials have said they don’t aim to stifle tourism. The spokeswoman for Ms. Freeland pointed out exemptions under the vacant-house tax, such as recreational property in regions that rely on tourism to drive growth. For instance, some properties in Whistler, British Columbia, a popular skiing destination, are exempt, as long as the owners can prove they were in the residence for a total of 28 days. Renting the home to other tourists, or lending the property to friends and other family members, such as adult children, doesn’t count toward the 28-day period.

Mr. Fehrman, the tax adviser, said the exemptions seem scattershot. He noted there are instances where houses on one side of the street in Fort Erie are exempt while houses on the other side aren’t.

Partly in response to the outcry, Canadian officials paused implementation. In late March, Canada’s tax-collection agency, citing “unique challenges for affected owners” and a desire to give people more time to comply, said the deadline to file the appropriate paperwork for the 2022 tax year would be extended by six months, to Oct. 31.

The underused-housing tax kicked in Jan. 1, at the same time as a blanket, two-year ban on foreign purchases of residential real estate. Canadian officials this month proposed amendments to that ban, after realizing the prohibition, as set out in legislation, affected developers’ plans to purchase vacant land to build housing units and commercial properties.

Before the two-year ban, some regional Canadian governments had imposed taxes on purchases made by foreigners to deter offshore demand. Australia and New Zealand introduced policies last decade to limit foreign purchases of properties. 

Combined, the tax and foreign-buyer ban were designed to slow the growth in Canadian housing prices, which during the pandemic climbed at one of the fastest paces in the developed world. Housing prices started correcting in 2022, in response to the Bank of Canada’s rapid-fire increases in interest rates, and are now down about 16% from a year ago.

U.S. Rep. Brian Higgins, who represents the Buffalo area in Congress, said his constituents with lakefront and beachfront property in the Canadian province of Ontario are caught up in a measure that he believes is designed to target wealthy buyers from overseas. The properties his constituents own “are fully utilized for the purpose that they were built for,” Mr. Higgins said. “This is part of the fabric of life here, living on a northern border.”

Mr. Higgins said he and other northern-border lawmakers have reached out to Biden administration officials, among them U.S. Trade Representative Katherine Tai and the U.S. chief envoy in Ottawa, asking that the issue be addressed—possibly with a formal trade complaint. A U.S. official said Ms. Tai’s office is looking into Canada’s vacant-home tax. A State Department spokeswoman said diplomats in Ottawa have relayed concerns about the levy to Canadian officials. 

Ed Duchs, a former Buffalo resident who now splits his time between Naples, Fla., and Fort Erie, said he hopes Canadian policy makers reconsider.

“We are not trying to gobble up property away from Canadian residents. There shouldn’t be any kind of animosity toward us,” said Mr. Duchs, who intends to settle into his waterfront Fort Erie home in mid-May.

Write to Paul Vieira at Paul.Vieira@wsj.com