A few months ago, BC announced a new “speculation tax” that will apply to certain residential properties in the province. The tax is intended to capture foreign and domestic speculators, “satellite families” who live in BC but pay little BC income taxes, and owners holding vacant property in designated areas. The goal is to improve housing affordability for people who live and work in the province’s major population centres.
This might sound simple in concept. But like any dramatic new tax initiative the details are critical. From a legal perspective, the implementation of the tax matters more than the intention behind it. A tax requires legislation to give it life. If there are flaws with that legislation or with how that legislation is introduced, then the tax as a policy instrument will suffer.
This is what appears to be happening with the speculation tax. A large part of that is because of BC’s current implementation process: it wants the tax to apply immediately (i.e. for the entire 2018 calendar year), but it does not want to put a tax bill before the Legislature until the fall.
With respect, this is not how new taxes are introduced. Conventionally, the process begins with a bill. The bill is discussed and often adjusted to address specific preliminary issues. Only once any adjustments are made does the first tax period begin. Subsequent adjustments might be made to certain details of the tax, but those will be relatively minor. This process was followed, for example, when Vancouver’s vacancy tax was introduced. The bylaw imposing the tax for 2017 was enacted in late 2016 and then tweaked months later.
While BC’s rush to impose the speculation tax is perhaps understandable from a political perspective, it raises two significant legal concerns.
First, the conventional tax implementation process supports the rule of law. A central principle in our legal system is that we are entitled to know the law that applies to us. We need legal certainty. In this case, if the precise conditions for the application of the tax during a year are told to an owner only close to the end of that year, then the owner is denied a meaningful ability to predict how the tax might impact them. This will generally not be a personal concern for most British Columbians. But the rule of law has always been about protecting the minority from the arbitrary exercise of state power, no matter how those impacted might be viewed politically by the majority.
Second, the conventional process is needed to minimize the risk of unintended consequences. Here, scrutinizing a bill before the imposition of the tax would assist stakeholders in identifying and addressing any unexpected issues. Taxes can have far-reaching consequences for families. BC’s desire to do something quickly about affordability could be undercut by unforeseen implications that run contrary to the policy objectives of the tax.
In a previous post, we identified uncertainties surrounding the tax. They will need to be clarified in a bill. But for the time being those uncertainties have created legal concerns for some who are not the intended targets of the tax. For example, BC has refused to identify whether the tax will apply personally to a seller who might have used the home in a manner that triggers the tax, or alternatively whether it will run with the property, like property tax, and possibly become a liability inherited by the buyer.
This is concerning, partly because buyers are not the intended targets of the tax. To complicate matters, discovering the tax liability of the seller may not be easy. For instance, BC has referred vaguely to several “special exemptions” from the tax. What if the seller is the executor of an estate and the deceased occupant died a few years ago? Or if the seller is incapacitated and has lived in a residence for who knows how long, and their children are conducting the sale? How is the buyer supposed to figure out whether an exemption applies without knowing the precise legal conditions that would need to be met? Additionally, what information or documentation should they obtain before closing to be able to address any future speculation tax audit, or perhaps to be able to truthfully file any required speculation tax declaration or return that might only become due later in the year?
Similarly, how is a buyer supposed to know whether the seller is a member of a “satellite family”? BC has thus far explained that satellite families are “households with high worldwide income that pay little income tax in B.C.” But that description is immensely subjective. It could apply very differently depending on who you ask. As well, it might involve homes that are lived in year-round and in every respect look nothing like an investment property. Should all buyers now be asking to see all sellers’ income tax returns in order to minimize the risk of inheriting a speculation tax liability?
The speculation tax is indeed a serious risk for anyone buying a home in the designated areas in the province. It could be the case that an offer being accepted now, with the closing scheduled for the summer, might put the buyer on the hook for the seller’s tax liability. Unless BC changes course, this might occur even without buyers having a meaningful ability to try to address it. Realtors and real estate lawyers, among others, must be keenly aware of this issue and do what they can to protect the interests of their clients.