The BC government has proposed to introduce a new residential realty tax, taking effect this year. While BC has provided a general overview of the new tax by way of information sheets and public announcements, the government has yet to provide a draft bill. Nevertheless, the tax is to apply for 2018.
As background, the government announced in the budget released a month ago a plan to implement a new “speculation tax” on the ownership of residential realty within the province. The tax would begin to apply during the 2018 calendar year. Despite the name, the proposal appears to involve an empty homes tax, similar in many ways to Vancouver’s vacancy tax. Rather than taxing gains from speculative transactions, the tax applies to homes not used for qualifying residential purposes. The tax base will thus catch many B.C. residents and others who own second homes for non-speculative purposes – such as personal use and enjoyment. A 3-page overview was provided on budget day (revised in March of 2018). Then, in response to demands for more clarity as well as an outcry for certain areas to be excluded from the proposed tax base, last week the government announced a handful of further details, including a few changes from the original proposal.
In substance, this is what has been announced so far:
- The tax will apply in the Metro Vancouver Regional District, the Capital Regional District (excluding the Gulf Islands and Juan de Fuca), Kelowna-West Kelowna, Nanaimo-Lantzville, Abbotsford, Chilliwack, and Mission.
- The tax will be effective for the 2018 calendar year, but only at a starting rate of 0.5% of the assessed property value. Rates for 2019 and onwards will be 2% for foreign investors and what the government refers to as “satellite families” (see the term’s description below), 1% for Canadian citizens and permanent residents who do not live full-time in BC, and 0.5% for British Columbians who are Canadian citizens or permanent residents (and not members of a “satellite family”).
- A British Columbian who is subject to the tax will be eligible for a BC income tax credit that can offset up to $2,000 of speculation tax. The credit can only be applied to one property. The stated purpose of the credit is to ensure that a British Columbian does not pay the tax on a second home worth less than $400,000 or, for more expensive properties, that the tax will not apply to the first $400,000 in value. The credit will be non-refundable.
- There will be several exemptions from the tax. First, “primary residences” of British Columbians will be exempt. Second, properties used as “qualifying long-term rentals” will be also exempt. For 2018, homes must be rented out for at least three months of the year for the exemption to apply. For 2019 and onwards, homes will need to be rented out for at least six months, in increments of at least 30 days, to qualify for the exemption.
- Other exemptions will be included for what the government refers to as “special circumstances,” such as where the owner or tenant is undergoing long-term medical care, where the owner or tenant is temporarily absent for work purposes, and where the owner is deceased and the estate is in the process of being administered.
Although the recent announcement was meant to provide “tax details,” critical specifics about the tax have not yet been made public and legally there is still considerable uncertainty. For example:
- The tax is purportedly designed to especially target “satellite families.” The government has described these families as “households with high worldwide income that pay little income tax in BC.”
The description leaves many questions unanswered, particularly since it does not necessarily suggest income tax evasion or other illegal activity. First, what constitutes a “family” or “household”? Does it encompass parent-child, sibling or common law relationships, or only married spouses? What about spouses who are separated but not divorced? Similarly, what constitutes “high worldwide income,” and what is the specific threshold for paying “little income tax in BC”? Will “high” and “low” in this context be determined in relation to the value of the property or, alternatively, based on some fixed, absolute standard that has no regard for an owner’s individual circumstances?
Private family arrangements can often be messy, unpredictable and dynamic. Given that “satellite families” are specifically targeted, the government should have described them with much greater precision.
- Certain exemptions from the tax are also poorly set out. For instance, the government says that the legislation will provide an exemption for the “primary residence” of British Columbians. The term “principal residence” applies for income tax purposes. It also appears in Vancouver’s vacancy tax bylaw and in BC’s Property Transfer Tax Act and Home Owner Grant Act. But it generally means something different in each context. Will the definition of “primary residence” in the speculation tax legislation follow one of these, or will a unique definition apply? Will a property in Vancouver possibly be the owner’s “principal residence” for vacancy tax purposes but not their “primary residence” for speculation tax purposes?
As another example, there will be an exemption provided for “qualifying long-term rentals”. For 2019 and onwards, this means that a property must be rented out for at least six months, in increments of at least 30 days. For 2018, the minimum rental period is three months. This is likely borrowed from Vancouver’s vacancy tax bylaw, which generally imposes the tax on a property that is “not occupied by a tenant or subtenant for a term at least 30 consecutive days” for a total period of more than 180 days during the year. Will BC adopt the same wording for its rental exemption? Likewise, will the exemptions apply on a parcel-by-parcel basis, so that renting out a basement suite or coach house will suffice?
Furthermore, what other exemptions will be included? Will the tax apply even if the property was sold in the calendar year? What if no habitable dwelling exists on the property? There are many reasons for a residential-zoned property being vacant that might have nothing to do with speculation. Will the government try to list them all? Or will it sit back and wait for stories in the media highlighting unintended victims of the tax before drafting additional exemptions?
- The government has provided very little information about the administration and enforcement of the tax. The only comment on the topic has been that the tax will be administered by the province outside of the normal property tax system, and that the province will send out notices directing individuals to electronic, paper, or by-phone filing. But this explains little. Will the tax be a personal tax (i.e. where the tax debt follows the owner even after they sell) akin to the personal entitlement to the homeowner grant or, like Vancouver’s vacancy tax, a tax that attaches to the property (i.e. whoever becomes the owner of the property becomes liable for the tax)? Also, will the tax operate by mandatory declaration or voluntary self-reporting? Similarly, if an owner disagrees with the province’s assessment, will the matter proceed through a specialized complaint and review process, or will the owner have to fight the province in court?
This brings us to the proposed effective period of the tax. Again, it is intended to apply to the 2018 calendar year, albeit with lower rates and a reduced rental requirement. The concept of the tax was first announced in February, with the promise of details to be “provided in the coming months, prior to the implementation of the tax.”
This is problematic for several reasons. First, it is self-contradictory. If the tax is to be effective starting January 1, 2018, then we are already past the time that is “prior to the implementation of the tax.” That happened a few months ago. Second, the government has suggested that draft legislation in the form of a bill will only be released in the fall. But tax implementation is a text-driven enterprise. Without a sense of the actual legislative text behind this proposal, many owners cannot reasonably ascertain whether they might be liable for the tax. All they have to go on are political statements and summary publications. That is not enough. With respect, the government should put out a bill for consultation before the start of any effective period.