This year the British Columbia Government proposed a significant change to how it taxes real property, specifically dealing with the use and ownership of residential land.
The new progressive property tax has been introduced, the Provincial Transfer Tax on high value homes has been raised, the definition and meaning of the Foreign Buyer Tax has been greatly expanded, and, most significantly, a new type of "speculation tax" (the "Spec Tax") has been introduced. The Spec Tax's stated purpose is to ensure that British Columbians can afford to live in their own province. It will push speculators out of the housing market, and help turn vacant and underutilized properties back into homes for people live and work in our province, in specific regions. The tax will work to increase the supply of available housing in designated urban centres, helping to ensure BC residents can live where they work.
In this article I will cover the Spec Tax and what it means for you.
While the province has budgeted for the next three years of income generated by the Spex Tax, they haven't actually written the bill that would levy the tax yet. For that reason, this is based off of what's been announced by the government, and should be taken with a grain of salt. To repeat, this is all subject to change.
What We Know So Far
While many journalists, columnists, and letters-to-the-editor have debated this topic hotly until they're blue in the face, unfortunately we know very little for certain at the moment. What we do know roughly looks like this:
- the government wishes to tax "speculation", which they define as residential housing that is not being used as a primary residence for the owner or a long term tenant (defined as occupying the unit for at least 6 months of the year);
- the tax will be based on the Assessed Value of a residential property (the BC assessment that happens during the summer which is currently used for property taxes);
- the first tax bills will be sent out in the fall of 2018;
- the rate will likely be 2% of assessed value per year in 2019 (and 0.5% this year);
- the tax will only apply in some of BC's metro areas (Vancouver, Victoria, Nanaimo, Fraser Valley and the Okanagan);
- in the Okanagan, the municipalities of Kelowna and West Kelowna will be included for the time being;
- the government has budgeted to receive approximately $200,000,000.00 (about one third of one percent of the total budget for 2019). By way of comparison, that's around the same as:
- the new 5% Property Transfer Tax bracket for homes over $3,000,000.00; PLUS
- the higher Tobacco Tax (up 2.8 cents per cigarette); PLUS
- collecting PST on online accommodations (IE AirBNB)
Tax Rates and Credits
In the first year of the tax the rate will be 0.5% of Assessed Value for all owners. After the first year, the tax rate will be different depending on one's residency. BC residents (those who file in BC, with one exception below) retain the 0.5% rate. Owners who are Canadian, but not British Columbians, (called "foreign investors" by the government), will have their rate doubled to 1%. Lastly, all others will have their rate quadrupled to 2% of Assessed Value. Owners who are part of a "Satellite family" are taxed at the 2% rate. A "Satellite family" has been defined so far as one with a high worldwide income but low BC income.
To help BC taxpayers, a non-refundable tax credit of $2,000.00 will be applied directly to the Spec Tax bill. The tax credit only applies to one property, so if a BC resident owned two properies in the speculation region worth $400,000.00 that they kept empty, or did not comply with any exemptions, one would have a tax bill of $0.00 and the other would have a tax bill of $2,000.00.
Examples with Math
So let's do some math using an example: The year is 2019, and a new small condo development has been built in downtown Kelowna, with six units valued at $600,000.00 each. Here are the owners and how they use the property:
- Amy lives in the condo full time and works in Kelowna.
- Brad lives in Toronto. From September to April he rents it out to a student, and in the summer he vacations in the unit or rents it out short term on an online accommodation platform.
- Calvin lives in Vancouver, and uses the unit when he's in Kelowna on business, about 12 weeks a year.
- Derrick lives in Edmonton, and uses the unit during the ski season or for wine tasting in the summer, also about 12 weeks a year.
- Eunice lives in the United Kingdom. Hearing about the runaway real estate market, she thinks she can make a few bucks by waiting for the unit to increase in value, but otherwise leaves it empty.
- Fred is living in Vancouver, trying to make a career as an artist. His parents, wealthy German industrialists, own a condo in Kelowna that both they and Fred occasionally use. After the Spec Tax was announced in 2018, they changed the name on title to Fred to try and get the lower rate.
So how are these six taxed?
- Amy uses the condo as her primary residence, so she is exempt from the tax - it doesn't matter if she's a citizen or not.
- Brad rents his condo out to a long term tenant for more than half the year, so he is also exempt from paying the tax.
- Calvin, Derrick and Eunice all do not use it as their primary residence or rent it out long term, so they are liable to pay the tax, however, the amount owed is very different. Calvin pays 0.5% of the value ($3,000.00) minus a credit of $2,000.00 for a total bill of $1,000.00. Derrick pays 1% of the value ($6,000.00) and gets no credit. Eunice must pay 2% of the unit's value, a total of $12,000.00.
- As for Fred? We can't answer his yet. While he might fit in under the definition of "Satellite family" due to his parents' high worldwide income and his low personal income, or he may count as his own household. So far the government has released no details on how they would define a Satellite family. For Fred, that's the difference between a $12,000.00 tax bill and $1,000.00.
The Spec Tax will affect a very small number of homeowners, but it will have a large impact on those it does affect. Little has been released in regards to specifics, including any anti-avoidance rules. This may be of some concern to anyone who owns property in Kelowna and West Kelowna who want to know what their options are - whether they can use a BC trust or corporation (like for some taxes) or whether the law will look through those to find a foreign owner (like the foreign buyer's tax).
If you're considering leaving property in your Will to someone who may be caught under this new tax, you may want to review and redraft your estate plan, if necessary. If you've decided to buy or sell and property subject to the tax, you'll need a notary or lawyer to do the conveyance. In either circumstance, or for more information, please do not hesitate to contact us.
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250) 762-0318 or email Jaime at firstname.lastname@example.org
Tags: real property, speculation tax, taxes