Guide to the BC Speculation and Vacancy Tax Act

By Michelle Seidel and Spencer Evans

In 2018, the Government of BC was under pressure to respond to the skyrocketing housing prices in British Columbia. Many residents found the prospect of home ownership slipping away from them as the average real estate prices increases far outstripped wage growth.  In response, the government introduced the Speculation and Vacancy Tax Act (the “Speculation Tax”), with the intention that it would “turn empty homes into good housing for people who live and work in BC”. The basic idea was that the Speculation Tax would reduce profits made by those trading in real estate, which would cool the market and create a new revenue stream for the government to apply to more affordable housing initiatives. The execution has fallen somewhat short of the strategy, and the Speculation Tax has created both loopholes and (apparently) unintended consequences.

The purpose of this article is to provide some background information as to some current issues in the application of the Speculation Tax. Please note that legislation is always subject to change, and that each case depends on its own specific facts. Our real estate lawyers remain available for phone & video consultations for those facing issue with the Speculation Tax, or any other real estate law issue. Contact us now!

Exemptions

There are legitimate ways to avoid paying the Speculation Tax. The Speculation Tax does not currently catch quick property flips done the same year, for this tax does not apply in the year a property is purchased. If you buy a home in Oak Bay on February 1 and sell it for a profit on September 30 the same year, you are not subject to the Speculation Tax. Alternatively, if you buy a home in Saanich on February 1, 2019 and sell it for a profit on November 30 of 2020 you are exempt from the Speculation Tax in 2019 and it would not be subject to the Speculation Tax in 2020.

Properties that are accessible only by air or water and which are not part of designated areas are not subject to the Speculation Tax, nor are reserve lands, treaty lands and lands of self-governing Indigenous Nations. The tax is not paid on principal residences lived in by owners or are rented out to tenants. There are limited exemptions for some members of the Canadian military and their spouses. There is a temporary exemption until the end of 2021 for strata properties subject to rental restrictions if the property was purchased before October 16, 2018.

Claiming Your Exemption

In order to avoid paying the Speculation Tax, each owner on title must file a Declaration with the Province of BC every year. The declaration form is mailed every February to people listed as registered owners as at December 31 and is due by March 31. Be sure that your address is up to date and that you ensure that you get your mail well before the due date for filing. You are liable to pay this tax if you miss filing your Declaration in time.

Places Where this Tax Applies

Currently, the designated areas where the Speculation Tax applies are:

• The Capital Regional District (includes Victoria, Saanich, Langford, Oak Bay, Esquimalt, Colwood, Central Saanich, Sooke, Sidney, North Saanich, View Royal, Metchosin, and Highlands but excludes the Juan de Fuca Electoral Area, Salt Spring Island and the Southern Gulf Islands).
• The Metro Vancouver Regional District (other than the Village of Lions Bay and Bowen Island).
• The University of BC and University Endowment Lands.
• The City of Abbotsford.
• The City of Chilliwack.
• The City of Kelowna and the City of West Kelowna.
• The City of Nanaimo.
• The District of Lantzville.
• The District of Mission.

When You May Need Help From a Lawyer

Complications may arise in three common areas: tenancies, co-ownership, and satellite family arrangements.

Tenancies

To qualify for the rental property exemption, the rental property must be rented to tenants for at least six months in the calendar year. Short-term rentals of less than one month do not count towards the calculation of the six-month total.
The tax differentiates between an arm’s length tenant and a non-arm’s length tenant. To qualify as an arm’s length transaction, there must be a written tenancy agreement and the tenant must live on the property.

One potential issue with this legislation is that whether the owner pays the tax or not may be entirely dependent on the actions of their arm’s length tenant, which is not generally within a landlord’s power or control. The law requires that the tenant make the residence his or her home in a particular month; if they do not, the owner loses the exemption. It may be prudent to include a provision in any tenancy agreement relied on for this exemption requiring the tenant to actually make the residence their home as a condition of the tenancy (rather than simply giving them the right to occupy the residence).

Non-arm’s length tenants (such as friends and family) do not require written tenancy agreements, but they must reside in the residence for more days in the same month than any other place. Foreign owners with non-arm’s length tenants have more restrictions in being considered tenants. This tax appears to have been written to catch non-Canadian families who may purchase a home in BC for their child who attends university, or the classic “satellite” family where the wage earner is a non-Canadian who lives abroad while his or her family lives in a home in BC.

In order to qualify for an exemption for a foreign-owned property with a non-arm’s length tenant, the tenant must:

1. be a Canadian citizen or permanent resident,
2. be a resident of BC for income tax purposes at the end of the last day of the calendar year,
3. not be a member of a satellite family, and
4. have a B.C. income for the calendar year that is equal to or greater than three times the annual fair market rent for the entire residential property.

Spouses and minor children of owners may not be tenants of the owner. An owner cannot be his or her own tenant, but as discussed below, he or she may be the tenant of a co-owner.

Co-Ownership

When more than one owner is on title to a residential property, each owner must qualify for and claim their own exemption, if applicable.

A common scenario might be that of an elderly parent adding his or her adult child on title for end of life planning. Assuming the parent lives in the residence and the child does not, the parent should be able to claim the principal residence exemption and the child should be able to claim the non-arm’s length tenant exemption.

Satellite Families

Families are considered satellite families when the majority of the combined spousal income of registered owners is earned outside of Canada and is not reported on a Canadian tax return. For example, if a husband works and pay taxes in the United States, while his wife lives with their children in British Columbia, Speculation Tax will be payable unless the couple have other income reported on a Canadian tax return which is greater than the income reported in the United States. This will mean they are considered “untaxed worldwide earners” and they will not be exempt from the tax even if only one spouse is on title and that spouse lives in the home.

A tax credit of up to $2,000 is available to BC residents, which effectively erases the tax that is assessed on properties valued up to $400,000 as long as they are Canadian citizens, permanent residents, or confirmed BC nominees.

Anti-Avoidance Rules

Under the federal Income Tax Act, there is a general anti- avoidance rule that empowers the tax authority to deny a tax benefit to a taxpayer who has engaged in abusive tax avoidance.

The equivalent rule of the Speculation Tax, however, does not have this critical “abuse” requirement. What this means is that any transaction or series of transactions that reduces the tax payable may be deemed an avoidance transaction if the authorities believe it does not have a bona fide (non-tax-related) purpose, whether or not it amounts to an abuse or misuse of the tax provisions.

Unfortunately this rule may end up being applied to transactions that further the stated purposes of the legislation, such as sales made before the end of the year, or tenancies of underutilized residences.

Tax On Homes That Do Not Yet Exist

Some commercial tenants have found that they are liable to pay the Speculation Tax because their landlords had classified their commercial properties as residential with the understanding they would develop residential housing in the unbuilt space above their buildings.

This meant that tenants under triple-net leases (where tenants are also responsible for property tax) and owners of such properties had to pay the tax.

Both owners and tenants were given the opportunity to apply for a remission, if they meet certain qualifications, but only for the year 2020. This relief does not apply to new leases.

Returning Canadians

Canadian citizens and permanent residents who have been residing abroad may find themselves liable to pay the Speculation Tax. If in the year preceding his or her return a person does not file a Canadian tax return (or if their income reported to Canadian tax authorities is less than their unreported income), they will be considered an “untaxed worldwide earner” for the year and they may be subject to the increased tax rate of 2%.

If a returning Canadian buys a new home in the year they return and pays the Property Transfer Tax on that transaction (or if they qualify for another exemption), they will be exempt from the Speculation Tax for that year. After that year they will qualify for the principal residence exemption if they live in that home for a longer period than any other place for that year.

If a Canadian citizen or permanent resident is returning to a home which they acquired prior to the year of return, however, the exemption in year of acquisition will not apply. They will need to qualify for the principal residence exemption, which requires them to live in the home for a longer period than any other place. The only way to guarantee that this exemption will apply is by moving into the home prior to June 30.

Speculation Tax Summary

Tax laws are subject to interpretation and court challenges. If you need assistance, our firm is pleased to be of service. Please do not rely upon this brief note as legal advice, as everyone’s situation is unique and needs independent assessment. Contact us now!