Financial investors and money launderers look at homes as illiquid, stable assets. They expect that they can extract their millions with a few week’s time, perhaps with gains from continued inflation. If they lose a significant portion of that value over the duration they hold the asset, it stops making sense.
A punitive tax like this should be pegged to some other “safe” asset. Perhaps a basket of national bonds from the G20. Ensure that taking residential inventory off the market produces a substantially worse return than those other options.
If you don’t want to kill domestic land lords, make it trivial for a citizen to apply for a waiver. Just know that the investor types will be motivated to subvert this system. Strongly recommend you have real jail time penalties for doing so. Financial folks hate real prison.
First, as you mention, taxing clamps down on demand.
Second, taxes bring revenue.
You are worried that the first effect won't kick in. But that's not a problem at all: just keep jacking up taxes either until it does kick in, or you can afford to make everyone in Canada a billionaire from the second effect.
(Incidentally, this is very similar to worries that a central bank won't be able to create inflation.
That also is a good problem to have: keep purchasing assets with newly printed money until you either have the desired inflation, or you managed to buy the rest of the world for the cost of some ink and paper.)
And honest question: why do we want foreign investors buying homes anyway? I understand buying commercial locations, but not residences.
Taxes also provide revenue.
And they allow people to make their own choices.
If you think that having a foreign investor own a house causes Canadians to feel a collective 1 million CAD of pain per year, then it's only fair to give the foreign investor the chance to pay off the Canadian pain.
(Also gray areas around bans are annoying: you have to draw the line of eg who qualifies as a foreigner and what qualifies as owning somewhere. And there's bound to be some weird corner cases and loopholes that people with expensive lawyers can work around.
The reward for finding the loopholes is immense, because there's a discontinuity in the law.
If you have a tax, you have a finer grained instrument. So you can eg charge people in proportion to how much time they spent out of Canada. Instead of going 51% out: you are banned to 49%: everything is fine, the tax can vary gradually.)
Alternatively, the tax could be targeted at negating profit from value increase, so that you pay higher tax on profit from sale of property (possibly with a deduction you can apply when buying another one within some reasonable timeframe, so that normal homeowners aren't affected).
Also don't tax transactions: you don't mind if people are buying and selling property. What you mind is foreigners (or others) _holding_ property. So tax that.
Transaction taxes are economically inefficient, because they impede the re-shuffling of assets to the best use.
Look into 'land value tax' for more detail.