The new B.C. speculation and vacancy tax – which for 2018 is based on a tax rate of 0.5% of a home’s assessed value – was designed to target domestic and foreign speculators that own residences in B.C. but do not pay income tax in the province.
The majority of B.C. residents who own only one home should be exempted. All owners of residential property in the designated taxable regions of B.C. must complete an annual declaration for an exemption or they will need to pay the tax. Some owners are being caught off guard by finding out they do not fit into one of the exemptions.
“If someone had to pay the speculation tax for 2018, they really need to look to see if there are steps to be taken in order to get them into one of the available exemptions for 2019 – if not, whether the annual tax is something they can bear,” says Manning Elliott LLP senior tax manager and chartered professional accountant Michael Ronse.
If the person cannot abide by the tax, he or she will need to look at disposing of the property.
Principal residence exemption issues
The two most common exemptions are the principal residence exemption and the tenancy exemption. Some of Ronse’s clients have had confusion with the principal residence exemption, thinking that – as with income tax – they have the ability to choose one of their two homes as their principal residence.
The speculation and vacancy tax principal residence exemption requires homeowners to claim the place where they reside for a longer period in a calendar year than any other place as their principal residence. Some people with a vacation home in B.C. and a home in the suburbs, who may also spend time down in the U.S. during the summer, may end up spending more time in their vacation home, says Ronse.
“Instead of what they would ordinarily think of as their principal residence, being their more expensive home that is in a suburb of the Lower Mainland, they must claim their vacation home instead” as their principal residence for speculation tax purposes, Ronse says.
One of Ronse’s clients lives in Vancouver, is a Canadian citizen and spends over six months a year living in his home in Vancouver. But his spouse, a U.S. resident, works in the U.S. and declares the majority of their income there, and does not file a Canadian tax return. The speculation tax doesn’t allow foreign owners or members of a satellite family to claim a principal residence exemption.
“Because our client’s spouse earns more money than our client, for speculation tax purposes they are considered to be an untaxed worldwide earner, meaning they’re considered to be a member of a satellite family,” says Ronse.
The client’s spouse is looking at immigrating to Canada, getting citizenship and filing Canadian income tax returns so the spouse would not be treated as a member of a satellite family, hopefully fitting into a principal residence exemption for speculation tax purposes for 2019.
Company structure issues
In a case in Vancouver, a corporation owned by a family trust owns residential property. Two brothers affiliated with the company are beneficiaries of the family trust, and one occupies the home as his principal residence. But, due to the ownership structure, they were hit by the speculation tax.
One brother is a non-resident of Canada. The speculation tax looks through to the beneficiaries of the trust and to the corporate interest holders. If not all of the corporate interest holders of a corporation are Canadian residents, the person who lives in the home can’t get a principal residence exemption, says Ronse.
“For 2019, we have to look at that overall ownership structure and change the corporate interest holders if we’re going to get the result that should have happened in 2018.”
Because the property is being occupied and used, from a policy perspective, this property shouldn’t count as a speculation, says Ronse. He cautions companies to get tax advice if they have similar ownership concerns.
“To me, what this really amounts to is a wealth tax,” says Ronse. “It’s not really a speculation tax because speculation to me is transactional in nature and the amount of speculation tax someone’s going to pay is an annual tax. The longer a homeowner owns a home, the more speculation tax they’re going to pay on that home if they don’t have an exemption available.”