In an effort to deal with the ongoing challenges of housing affordability in much of the province, the government of British Columbia announced, as part of its budget on February 20, 2018, its intention to implement a new speculation tax on residential properties (the “Speculation Tax”). This annual tax is to be imposed on owners of residential properties within certain parts of the province. Generally speaking, homes that are not primary residences or that are not being rented out are subject to the tax. However, a tax credit mechanism is also to be introduced to reduce the impact of the tax on persons who report BC income.
The rationale of the law makers is that foreign and domestic speculators who hold vacant properties in major urban centres have contributed to the runaway real estate prices that make it difficult for many British Columbians to afford a home. Further, it is believed that the Speculation Tax will provide an incentive for people who own multiple properties to rent those properties out, thereby increasing the rental supply.
As few specific details of the tax were given, the budget announcement sparked immediate public debate and outcry. On March 26, 2018, Finance Minister Carole James announced further refinements to her proposals in an attempt to address the initial concerns. Actual legislation implementing the Speculation Tax is expected in the fall sitting of the provincial legislature.
Based on the announcements to date, the proposed key features of the Speculation Tax are as follows:
Who is affected?
If you own a residential property in certain parts of the province and the property is not a primary residence or a “qualifying long term rental” (discussed below), you are likely to be affected by the Speculation Tax. The applicable areas of the province are as follows:
a) Metro Vancouver (excluding Bowen Island);
b) The Capital Region District / Greater Victoria (excluding the Gulf Islands and Juan de Fuca);
c) Kelowna and West Kelowna;
d) Nanaimo-Lantzville (excluding Parksville and Qualicum Beach); and
e) Fraser Valley (Abbotsford, Chilliwack and Mission only).
Initially, the tax was to apply to areas of the province where many local British Columbians owned vacation homes, such the Gulf Islands, Parksville and Qualicum. In the March 26 announcement, the government scaled back the affected areas to remove most rural and island areas from the catchment boundaries of the tax.
How much is the tax?
In 2018, the tax rate for all properties subject to the tax is 0.5% of the property value. In 2019 and subsequent years, the tax rate is determined by the residency of the owner of the residential property as follows:
a) 2% for foreign investors and “satellite families;”
b) 1% for Canadian citizens and permanent residents who do not live in British Columbia; and
c) 0.5% for British Columbians who are Canadian citizens or permanent residents.
It is unclear at this stage how the government will exactly define a “satellite family.”
Based on current announcements, it is important to note that this Speculation Tax is in addition to the empty homes tax levied by the City of Vancouver through its Vacancy Tax By-law No. 11674 (the “By-law”). The City of Vancouver tax is 1% of the taxable assessed value on residential properties in Vancouver that are unoccupied for more than 180 days, subject to exemptions listed in the By-law.
What are the exemptions for the Speculation Tax?
Primary residences of British Columbians are exempt from the tax. In addition, “qualifying long term rentals” are also exempt. To be a “qualifying long term rental,” in 2018, the property must be rented out for at least three months and from 2019 forward, the property will need to be rented out for a minimum of six months, in increments of 30 days or more. Other expected exemptions include where:
a) the owner or tenant is undergoing medical care or residing in a hospital, long term care or supportive-care facility;
b) the owner or tenant is temporarily absent for work purposes; and
c) the registered owner is deceased and the estate is in the process of being administered.
Additional exemptions are anticipated when the implementing legislation and regulations are introduced.
How will tax credits work?
The government is proposing a tax credit for British Columbians who are Canadian citizens or permanent residents, and not part of a “satellite family.” The tax credit will offset a total of $2,000 in Speculation Tax payable for one property. Therefore, a British Columbian who pays tax on a second home valued up to $400,000 should have an off-setting tax credit. If the value of the property is in excess of $400,000, then there would be no relief for the Speculation Tax applied to the value in excess of $400,000.
For non-BC residents, as the tax rates for non-residents are higher, non-refundable tax credits would apply to offset a portion of the Speculation Tax if the non-resident reports income in British Columbia.
When will we see the implementation details?
Legislation for the Speculation Tax is expected to be introduced in the fall of 2018. The actual mechanics of reporting and the wording of exemptions will be critical. The provincial government may look to the existing City of Vancouver By-law for some guidance as to other possible exemptions and implementation. However, after its first year of imposing property status declarations on owners for the purposes of its vacancy tax, the City of Vancouver is facing challenges in auditing and verifying compliance with the By-law and exemptions.
Will this work?
The Speculation Tax is just one of several measures announced by the provincial government aimed at cooling the hot housing market in urban centres in BC. In addition to the Speculation Tax, the British Columbia government introduced an increase to the property transfer tax for homes valued at $3 million or more with the rate moving from three per cent to five per cent. As well, the additional property transfer tax applied to transfers of property to foreign nationals was increased from 15% to 20% and the geographic areas in which the foreign buyer’s tax is applied was expanded to the Okanagan, Fraser Valley and Nanaimo. Lastly, increased school taxes will apply to homes valued over $3 million. The province will level a tax of 0.2 per cent on the assessed value of a home that exceeds $3 million, but does not exceed $4 million. A tax rate of 0.4 per cent will also apply to the portion of a residential property’s assessed value over $4 million.
The additional property transfer tax applied to sales or transfers of properties to foreign nationals came into effect in August 2016. Since that time, in Vancouver, there have been decreases in the volume of sales for single family dwellings especially at the high end of the market. However, the trend for housing prices continues to be upward year over year. The jury is out as to whether these additional measures will have a material impact on housing affordability in the province.