Canada: What The New Speculation And Vacancy Tax Act Means For B.C. Real Estate

British Columbia's Speculation and Vacancy Tax Act (Bill 45) (SVTA) recently received royal assent. As announced in the 2018 provincial budget, the SVTA introduces a tax on residential properties left vacant for six months or more within a calendar year (Speculation Tax).

APPLICATION OF TAX

The Speculation Tax applies on the basis of an owner's interest in a residential property and is calculated based on a property's assessed value. In general, "residential property" will be property classified as residential by BC Assessment for annual property assessment purposes.

In 2018, the Speculation Tax applies at a reduced rate of 0.5 per cent for all property owners. For 2019 onward, the rate will be 0.5 per cent for B.C. residents and Canadians citizens or Canadian permanent residents outside B.C. (who are not untaxed worldwide earners), and two per cent for foreign owners or individuals (or spousal units) who are untaxed worldwide earners. An "untaxed worldwide earner" is an individual with unreported income for Canadian tax purposes, earned or realized inside or outside of Canada, which is greater than income reported for Canadian tax purposes.

PROPERTY HELD IN A CORPORATION, PARTNERSHIP OR TRUST

Interests in property held through corporations, partnerships or trusts are generally subject to the Speculation Tax, as if the property was held directly by the corporate interest holders (individuals, directly or indirectly controlling 25 per cent or more of the votes or value of the corporation), partnership interest holders or beneficial owners. However, for an entity to qualify for the 0.5 per cent rate, after 2018, all corporate interest holders, partnership interest holders or beneficial owners, as applicable, must each be B.C residents or Canadians (citizens or permanent residents) from outside B.C. A corporation without corporate interest holders, such as one where the shareholding is widely held, is subject to the two per cent rate.

GEOGRAPHIC AREAS AFFECTED

The Speculation Tax only applies to properties in the specified area, namely: Metro Vancouver (excluding the University Endowment Lands and Lions Bay), the Capital Regional District (excluding the Gulf Islands and the Strait of Juan de Fuca), Kelowna, West Kelowna, Nanaimo-Lantzville, Abbotsford, Chilliwack and Mission. Reserves and treaty lands do not form part of the specified area, and as such, properties thereon are not subject to the Speculation Tax.

ANNUAL REPORTING REQUIREMENTS

All persons owning residential property in the specified area are required to complete an annual declaration to obtain any relevant exemption from the Speculation Tax. In the case of multiple owners, each owner is required to file an annual declaration. In addition, persons owning multiple properties are required to file a separate annual declaration for each property. The deadline to file the annual declaration for a given calendar year is March 31 of the following year. Failure to file the required annual declaration, in addition to the possible application of penalties and interest, will result in an owner being subject to the Speculation Tax at a rate of two per cent for the year in question.

EXEMPTIONS

Principal Residences

In general, principal residences located in the specified area are exempt from the Speculation Tax. Corporations, partnerships and trusts are also eligible for the principal residence exemption where their corporate interest holders, partnership interest holders and beneficial owners, respectively, qualify for the exemption as individuals.

Certain Types of Owners

Registered charities, municipalities, government and government entities and Indigenous nations are exempt from the Speculation Tax. Owners (or trustees) in bankruptcy and not-for-profit corporations are also exempt.

Certain Residential Properties

There is a general exemption for hazardous or damaged residential property, which becomes uninhabitable for at least 60 consecutive days, as well as property from which a licensed child daycare is operated and strata accommodation property.

Long-Term Tenanted Residential Property

In general, property occupied for a period totaling at least six months in the calendar year is exempt from the Speculation Tax. Foreign owners or untaxed worldwide earners renting out their property for a period totalling at least six months in the calendar year may also be eligible for this exemption, subject to certain additional conditions where the tenant is non-arm's length with the owner.

Long-term tenanted residential property owned by a corporation, whose shares are listed or traded on a designated stock exchange, and certain trusts such as a mutual fund trust, a real estate investment trust (REIT), a specified investment flow-through trust (SIFT) and a trust whose investments are listed or traded on a designated stock exchange, are also exempt.

Residential Property Under Construction or Renovation

Of particular interest for developers is the broad exemption applicable to residential property under construction or renovation, and conservation work on heritage property. Residential property where "building activity" is started or continued in a calendar year, and where the owner takes reasonable steps to ensure that such activity progresses without undue delay, is exempt from the Speculation Tax. While no guidance has currently been provided concerning what would constitute "reasonable steps" for the purpose of the exemption, "building activity" is broadly defined to include any of the following activities:

  • Applying for financing
  • Applying for a permit or other necessary approval
  • Entering into contracts for designing, building or engineering
  • Demolishing or removing existing improvements
  • Clearing or excavating the site
  • Constructing, substantially renovating or placing the residence on the residential property
  • Any other activity necessary for the construction, placement or substantial renovation of the residence.

The exemption extends to phased residential development, provided such property cannot be occupied for a period of at least 180 days in the calendar year. It also applies to vacant, newly constructed residential property that is part of a residential development, provided such property is offered to the public for sale and has not been, and is not, on the last day of the calendar year occupied as a residence.

Certain Special Circumstances

The SVTA contains limited exemptions, generally only intended to apply in respect of the calendar where the special circumstances arise, including: (i) an owner receiving medical treatment in a medical facility in close proximity to his or her residence; (ii) the death of an individual owning residential property; (iii) property held as part of a testamentary trust and for the benefit of a minor; (iv) property acquired in the year; and (v) the breakdown of the marriage or common-law partnership.

AVAILABILITY OF NON-REFUNDABLE TAX CREDIT

Where the Speculation Tax applies, and an exemption is not otherwise relevant, a tax credit may be available to certain owners.

B.C. resident owners may be eligible a non-refundable and non-transferable tax credit of up to C$2,000 per owner per property. The amount of the credit will be applied against the amount of tax payable (if any) for a given year, and cannot be carried forward or backward.

Canadian citizens and permanent residents residing outside of B.C., as well as foreign owners and untaxed worldwide earners, may also be eligible for a tax credit based the income they report in B.C. However, for foreign owners and untaxed worldwide earners, this tax credit is limited to 20 per cent of their B.C. income and cannot result in a Speculation Tax of less than 0.5 per cent.

ASSESSMENTS AND REASSESSMENTS

Based on the information contained in the annual declaration, a notice of assessment will be issued stating the Speculation Tax payable, if any. The amount of tax payable is due by July 2 of the following year or 30 days after the date indicated on the notice of assessment, whichever is later.

Owners may be reassessed on the amount of tax payable in respect of a given calendar year any time within a six-year period. However, this period is extended indefinitely where an owner fails to file the required annual declaration, or makes a misrepresentation or commits fraud in respect of such declaration. In such circumstances, an owner may be issued an arbitrary assessment of the Speculation Tax payable.

ANTI-AVOIDANCE PROVISION

The SVTA contains an anti-avoidance rule, which is broadly defined and intended to target arrangements or transactions made specifically and primarily to avoid the payment of the Speculation Tax.

ADMINISTRATIVE PENALTIES AND OFFENCES

Failure to pay the Speculation Tax within the deadline may result in a late penalty equal to 10 per cent of the unpaid tax. In addition, an owner failing to file a declaration or include and/or provide any information required under the SVTA, is liable to a penalty, up to a maximum of C$2,500. In circumstances involving gross negligence, significantly higher penalties may apply.

In addition, certain conduct, such as, but not limited to, making false or deceptive statements in a declaration or other required filings, willfully failing to comply with the SVTA, and willfully evading or attempting to evade the payment of the Speculation Tax, may constitute an offence that may subject an owner to:

  1. A maximum fine of the amount evaded, plus C$100,000 (C$200,000 for a corporation)
  2. Imprisonment of less than 10 years
  3. Both the aforementioned fine and imprisonment.

Where the interest in residential property is held by a corporation, an employee, officer, director or agent is also considered committing an offence where they authorized, permitted or acquiesced in such conduct.

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© 2018 Blake, Cassels & Graydon LLP.

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