Tax Alert Canada. BC introduces speculation and vacancy tax on empty residential homes

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1 2018 Issue N Octber 2018 Tax Alert Canada BC intrduces speculatin and vacancy tax n empty residential hmes EY Tax Alerts cver significant tax news, develpments and changes in legislatin that affect Canadian businesses. They act as technical summaries t keep yu n tp f the latest tax issues. Fr mre infrmatin, please cntact yur EY advisr r EY Law advisr. On 16 Octber 2018, Bill 45, Budget Measures Implementatin (Speculatin and Vacancy Tax) Act, 2018 received first reading in the British Clumbia legislative assembly. If enacted, Bill 45 will intrduce an annual speculatin and vacancy tax (SVT), payable by wners f residential prperty in designated taxable regins f British Clumbia. The SVT is effective beginning with the 2018 calendar year (i.e., the tax must be paid n a taxable prperty wned n 31 December 2018). The SVT, which will be impsed under the authrity f the Speculatin and Vacancy Tax Act (SVTA), is part f the Hmes fr BC plan, a 30-pint plan intended t imprve husing affrdability in British Clumbia, stabilize the husing market, prevent tax fraud, and imprve security fr renters. The SVT targets dmestic and freign speculatrs wh wn residential prperties in the prvince but d nt pay prvincial taxes. Bill 44, Budget Measures Implementatin (Emplyer Health Tax) Act, 2018 als received first reading in the British Clumbia legislative assembly n 16 Octber If enacted, Bill 44 wuld impse an emplyer health tax (EHT) r payrll tax n emplyers payrlls cmmencing in the 2019 calendar year. Refer t EY Tax Alert fr a summary f the prpsed EHT.

2 Overview British Clumbia is the first prvince in Canada t intrduce a speculatin tax n real estate investments. The intent f the SVT is t tackle speculatin in the husing market in BC s majr urban centres and encurage the cnversin f empty prperties int hmes fr BC residents. It is expected that the majrity f the tax will cme frm freign wners and satellite families (i.e., families having the majrity [mre than 50%] f their wrldwide incme nt reprted n a Canadian tax return) and that ver 99% f British Clumbians will nt pay the SVT. All wners f residential prperty in designated BC areas (see BC taxable areas, belw), including crprate wners, partnerships and trustees, must make an annual declaratin in rder t reprt their residential prperty and either claim an exemptin frm the SVT r pay the tax where applicable. In general, BC residents, excluding satellite families, shuld be entitled t claim the principal residence exemptin n their residential prperty, s that n SVT is payable in respect f the prperty. Hwever, where a residential prperty des nt qualify fr ne f the available exemptins, the SVT is payable at rates ranging frm 0.5% f the assessed value f the prperty fr BC residents t 2% f the assessed value fr satellite families and freign wners. Furthermre, certain tax credits, discussed belw, are available fr BC wners, satellite families and ther nn-bc Canadian wners. BC taxable areas SVT applies t residential prperties lcated whlly r partly within the fllwing areas in British Clumbia: Municipalities within the Capital Reginal District Municipalities within the Metr Vancuver Reginal District, excluding Bwen Island, the Village f Lins Bay and Electral area A, but including UBC and the University Endwment Lands The City f Abbtsfrd The District f Missin The City f Chilliwack The City f Kelwna and the City f West Kelwna The City f Nanaim and the District f Lantzville The abve areas are currently included in the definitin f a specified area in the SVTA. The prvince may als prescribe ther areas within British Clumbia as specified areas. An island that is within a specified area, but is nly accessible by air r water, is nt cnsidered t be part f a taxable area. Reserve lands, treaty lands and lands f selfgverning Indigenus natins are als excluded frm the applicatin f the SVT. BC SVTA 2

3 Rates f SVT if the residential prperty is nt exempt SVT is levied n wners f taxable residential prperty lcated in a specified area wh wn the prperty n 31 December f each year (unless the wner qualifies fr ne f the available SVT exemptins, as discussed belw). Fr the purpses f the SVTA, residential prperty generally means all residential prperty cvered under prperty class Class 1 residential as set ut in the Prescribed Classes f Prperty Regulatin t the Assessment Act (British Clumbia). Buildings n farm land (ther than farm utbuildings) are als cnsidered residential prperty. The SVT will be levied at the fllwing rates in 2018 and subsequent tax years: Fr prperties wned n 31 December % f the assessed value f the residential prperty n 1 July 2018 BC residential prperty wners can claim an annual tax credit up t $2,000 per prperty n secndary prperties that are subject t SVT. Fr prperties wned n 31 December 2019 and nwards 2% fr freign wners and satellite families 1% fr Canadian citizens and permanent residents wh are nt resident in BC fr incme tax purpses 1 (and nt members f a satellite family) 0.5% fr British Clumbians wh are Canadian citizens r permanent residents (and nt members f a satellite family) Tax credits t ffset the SVT payable will be available as fllws: BC wners An annual $2,000 tax credit per wner r $2,000 tax credit per prperty in the case f multiple wners The credit cannt be carried frward r transferred t a spuse. Freign wners and satellite families An annual tax credit equal t 20% f the persn s incme earned in r attributable t BC (BC incme) The credit cannt reduce the tax belw the 0.5% rate applicable t BC wners. Unused credits can be carried frward up t tw years r transferred t a spuse. The credit is pr-rated in 2018, as the tax rate is 0.5% fr all wners. 1 Hwever, in a news release dated 18 Octber 2018, British Clumbia annunced it wuld intrduce three amendments t the prpsed SVTA, including a reductin t the tax rate fr Canadian citizens and permanent residents wh reside utside British Clumbia frm 1.0% t 0.5%. BC SVTA 3

4 Other Canadians Nn-BC resident Canadians An annual tax credit equal t 10% f the persn s BC incme The credit cannt reduce the tax belw the 0.5% rate applicable t BC wners. Unused credits can be carried frward up t tw years r transferred t a spuse. Any SVP payable by an wner f residential prperty must be paid by 2 July f the fllwing calendar year. Nte that in the City f Vancuver, the 1% empty hmes tax previusly intrduced by the municipality cntinues t apply, in additin t any SVT that may be payable in respect f same prperty. Exemptins Certain exemptins frm the SVT are available fr individuals, crpratins, partnerships and trustees. Crpratins, partnerships and trustees may qualify fr exemptins based n the residency status f the individuals wh are crprate interest hlders, beneficial wners and partnership interest hlders. Principal residence exemptin The main exemptin frm SVT that will apply t mst residential prperty wners resident in British Clumbia is the principal residence exemptin. Under the SVTA, residence means any f the fllwing: (a) a detached huse, cttage r ther single family dwelling; (b) a dwelling that is a strata lt; (c) an apartment in (i) a single family dwelling, (ii) a dwelling that is a strata lt, r (iii) a duplex r ther multi-family dwelling. The term principal residence is defined in the SVTA t mean the place in which an individual resides fr a lnger perid in a calendar year than any ther place. In the case f spuses wh each have separate principal residences in a calendar year, the SVTA deems the cuple t have nly ne principal residence, unless the cuple s particular situatin falls under the exclusins prvided within the SVTA (e.g., medical, wrk r business purpses). In rder t qualify fr the principal residence exemptin, an wner must be a Canadian citizen r a permanent resident f Canada (as defined in subsectin 2(1) f the Immigratin and Refugee Prtectin Act (Canada)), a BC resident fr Canadian incme tax purpses and nt part f a satellite family. Where the residential prperty is wned by a crpratin, partnership r trust, but is the principal residence f an individual wh is a crprate interest hlder, beneficial wner r BC SVTA 4

5 partnership interest hlder, special rules will apply t determine whether the prperty will qualify fr the principal residence exemptin. Rental exemptin tenanted residential prperty A residential prperty may be eligible fr exemptin frm the SVT if it is ccupied by tenants fr at least three mnths in 2018 (in increments f at least ne mnth r lnger) and at least six mnths (in increments f at least ne mnth r lnger) in 2019 and subsequent years. There are a number f specific cnditins that must be met in rder fr an wner t be able t claim the rental exemptin fr a particular prperty. These cnditins differ depending n whether the prperty is rented t an arm s length tenant (i.e., a business-nly relatinship) r a nn-arm s length tenant. In the case f arm s length tenants, wners shuld generally be eligible t claim the rental exemptin prvided the prperty is rented fr the prescribed perid, there is a written tenancy agreement in place in accrdance with the Residential Tenancy Act, and the tenant resides at the prperty. In the case f nn-arm s length tenants, wners wh are Canadian citizens r permanent residents f Canada, except satellite families, shuld generally be eligible t claim the exemptin if the prperty is the tenant s principal residence. In limited situatins, freign wners may be able t claim an exemptin, but nly if specific cnditins relating t the tenant s residency and incme earned in BC are satisfied. Additinally, special cnditins must be satisfied where the rental prperty is wned by widely held wners, such as crpratins listed n a designated stck exchange, real estate investment trusts, SIFT trusts and mutual funds. Other exemptins frm the applicatin f SVT The SVTA includes numerus ther exemptins frm the applicatin f SVT, which may be applicable under certain cnditins. These exemptins include: Vacant land exemptin (2018 tax year nly) Exemptins fr residential prperty under cnstructin r substantial renvatin Exemptin fr vacant new inventry residential develpers Exemptin fr vacant heritage prperty cnservatin Additinal principal residence exemptins (e.g., individual departing BC, additinal netime exemptin fr BC residents, persns with disabilities) Exemptin fr hazardus r damaged prperty Year f acquisitin exemptin, if prperty transfer tax was paid n the purchase, r if the transactin was exempt frm prperty transfer tax fr specified reasns Licensed daycare exemptin BC SVTA 5

6 Exemptin fr strata accmmdatin unit (2018 and 2019 tax years nly) Exemptin fr prperties with cvenant r strata by-laws rental restrictins (2018 and 2019 tax years nly) Exemptin fr testamentary trusts fr minrs Exemptin upn death Bankruptcy exemptin Spusal separatin exemptin Exemptins fr certain entities and prperties including: prperty wned by registered charities; prperty wned by c-peratives; prperty wned by nt-fr-prfit crpratins using the prperty fr specific purpses; prperty wned by municipalities; prperty wned by Indigenus Natins, r held in trust fr an Indigenus Natin; prperty wned by gvernments and related entities; prperty wned by reginal districts; prperty wned by similar bdies as defined in legislatin; and Imprtant dates prperty with an assessed value under $150,000. January mid-february 2019 Speculatin and vacancy tax declaratin letters fr the 2018 tax year will be mailed t wners f residential prperty in BC taxable areas. 31 March 2019 Deadline fr filing the cmpleted declaratin. April 2019 Mst tax ntices will be mailed. 2 July 2019 Tax payment due. Actins fr prperty wners Cmplete and file the declaratin nline by 31 March 2019 and pay any tax due by 2 July Where there are multiple wners f a hme, a declaratin must be cmpleted by each wner. Nte that if a declaratin is nt cmpleted and filed by the due date, the BC SVTA 6

7 prperty wner will be assessed the SVT at the maximum tax rate applicable fr the tax year. Fr BC families wning mre than ne prperty, determine which prperty shuld be designated as the principal residence fr purpses f claiming the principal residence exemptin, taking int cnsideratin incme tax implicatins as well. Landlrds may qualify fr an exemptin frm SVT if they rent the residential prperty fr at least three mnths in 2018 and six mnths in 2019 and subsequent years. Landlrds f empty hmes may wish t cnsider reducing the asking rent price in rder t be able t meet the required rental perid and avid paying the SVT. Crprate wners wh wn residential prperty in BC taxable areas shuld review the make-up f their interest hlders in rder t determine the SVT implicatins. Residential prperty develpers shuld cnsider the SVT implicatins at the time the residences becme available fr sale. Fr 2019 and subsequent years, residential prperty develpers shuld cnsider purchasing vacant land and cmmencing the building activity in the same calendar year if pssible, in rder t avid the SVT n vacant residential land. Learn mre Fr mre infrmatin, please cntact yur EY r EY Law advisr r ne f the fllwing prfessinals: Lkesh Chaudhry lkesh.chaudhry@ca.ey.cm Katherine Xilinas katherine.xilinas@ca.ey.cm Dalbir Rai dalbir.s.rai@ca.ey.cm Perry Yuen perry.yuen@ca.ey.cm BC SVTA 7

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Canada: British Columbia introduces speculation and vacancy tax on empty residential homes

25 October 2018 Indirect Tax Alert News from Americas Tax Center Canada: British Columbia introduces speculation and vacancy tax on empty residential homes NEW! EY Tax News Update: Global Edition EY s