07 Jun Overview of Provincial and Federal New and Enhanced Tax Measures
This article provides a high-level overview of several new and enhanced tax measures introduced by the BC and Federal governments. Each of the measures discussed below is intended by the government to address challenges in the real estate sector, including housing affordability, supply, and investor speculation.
Federal Measures:
Underused Housing Tax (“UHT”)
The UHT legislation received Royal Assent in June of 2022 and was effective retroactively from January 1, 2022. The UHT assesses a penalty of 1% multiplied by the greater of the current assessed value and the most recent purchase price of vacant and underused residential properties owned directly or indirectly by non-resident owners.
While the intent of the UHT legislation was well founded, it presented several issues, including a requirement for all corporations, partnerships, and trusts that held residential property to make a filing, regardless of whether they were subject to the tax.
The penalties for failing to file a declaration were originally the greater of $5,000 for individuals and $10,000 for corporations, partnerships, and trusts, and the total of 5% of the UHT, plus 3% of the UHT for each calendar month the declaration was late.
However, on November 21, 2023, the Department of Finance Canada released legislative and regulatory proposals to relieve certain taxpayers from filing a UHT return and reduce the penalties for non-compliance. However, as of May 15, 2024, Parliament has not introduced legislation to enact these changes.
The government has expanded the definition of “excluded owners” to include Canadian corporations, partnerships, or trusts for the 2023 calendar year. This removes the burden of filing for these excluded owners, who were not the intended target of the legislation. Those still subject to filing a UHT return were required to file by April 2024 for the 2023 calendar year.
The penalties have also been reduced from $5,000 to $1,000 for individuals and $10,000 to $2,000 for corporations.
Bare Trust Filing Requirements
The Government of Canada passed amendments to the Income Tax Act in 2022, which impacted the Trust’s requirements to file a T3 Trust Income Tax and Information Return (“T3 Return”). Starting in 2023, all “express trusts” (family trusts, alter ego or joint partner trusts, and bare trusts) are expected to file a T3 Return even if they are inactive or were previously exempt from filing.
A Bare Trust is where a trustee holds the legal title of an asset, but a beneficiary has the beneficial ownership of the property. It is effectively a principal-agent relationship, which means that the trustee has no independent power, discretion, or responsibility over the property, as the beneficiary controls the trustee’s actions. Bare trusts are quite common in everyday situations, and there can be both documented and undocumented bare trusts.
Express trusts were required to file a T3 Return for the 2023 year by the end of March 2024, even if there was no activity or they were exempt from filing last year.
The penalties for late filing or non-filing can be significant. The penalty for late filing is $25 per day to a maximum of $2,500 per year. In case of gross negligence, there is a penalty equal to the greater of $2,500 and 5% of the highest fair value of the Trust’s assets.
However, on March 28, 2024, the CRA announced that it would not require bare trusts to file a T3 Return, including Schedule 15 (Beneficial Ownership Information of a Trust) for the 2023 tax year unless the CRA directly requests these filings.
The CRA has not provided an update since its March 28 announcement on future bare trust filings, and no proposals were announced in the 2024 Federal Budget.
Short-Term Rental Regulations
In the 2023 Fall Economic Statement, the Federal government proposed new measures (in addition to those proposed provincially) to deny expenses to short-term rentals (i.e., the tax would be paid on gross income rather than net income) which are non-compliant with municipal and/or provincial regulations effective Jan. 1, 2024.
Federal Flipping Tax
Effective for the 2023 year and subsequent tax years, new rules were introduced to ensure that profits from the sale of homes within a specific time frame would be treated as business income and not as capital gains, i.e., an inclusion rate of 100%.
A “flipped property” is considered a housing unit located in Canada that is not already considered the taxpayer’s inventory and was owned by the taxpayer for less than 365 consecutive days before disposition. However, certain exemptions apply to exclude a property sold within the 365-day parameter if certain conditions are met.
This also applies to a right to own or acquire a housing unit in Canada. The holding period resets once the taxpayer who entered into a purchase and sale agreement secures ownership of the property (this is different from the provincial flipping tax discussed below).
Any losses resulting from the sale of a flipped property are deemed nil.
Enhanced GST/HST Rental Rebates
On September 14, 2023, to encourage the development of new rental housing, the Prime Minister announced that the government will significantly improve the GST/HST Rental Rebate, now offering a 100% rebate (increased from 36%) for qualifying new rental housing projects. This substantial incentive is expected to stimulate the development of long-term rental accommodations.
Projects that convert existing non-residential real estate into residential real estate would be eligible for the enhanced GST/HST Rental Rebate, assuming all applicable conditions are met.
The enhanced GST/HST Rental Rebate will not apply to individually owned condominium units, single-unit housing, duplexes, triplexes, housing co-ops, owned houses situated on leased land, and sites in residential trailer parks. It will also not apply to substantial renovations of existing residential complexes.
Provincial Measures:
Empty Homes Tax (“EHT”)
Implemented in 2017, Vancouver property owners must submit a yearly declaration to determine if their property is subject to the EHT.
In 2023, properties subject to the EHT tax will be subject to an additional tax of 3% of the property’s 2023 assessed taxable value. However, in April 2023, the city of Vancouver proposed increasing the tax from 3% to 5% for the year ending December 31, 2023; however, it maintained the tax at 3%.
Properties will not be subject to the EHT if they are used as a principal residence by the owner or are tenanted for at least six months of the year. There are several other exemptions due to life events, and special exemptions are available for properties tenanted for less than six months of the year.
Speculation and Vacancy Tax (“SVT”)
The SVT was initially introduced by the B.C. government in 2018. The SVT is an annual tax based on how homeowners (1) use residential properties in specific areas in B.C., (2) the property owner’s residency status, and (3) where property owners earn and report their income. The SVT tax applies based on ownership as of December 31 each year.
Owners in designated areas must complete a declaration each year, due by March 31 of the following year, to declare their residency status and how their property has been used. Failure to complete a declaration could result in a penalty of 2% of your property’s assessed value.
In January 2024, residential property owners in the following areas will make declarations for the first time:
- City of Duncan
- District of North Cowichan
- District of Squamish
- Town of Ladysmith
- Town of Lake Cowichan
- Village of Lions Bay
For January 2025, Coldstream, Comox, Courtney, Coldstream, Kamloops, Lake Country, Parksville, Peachland, Penticton, Salmon Arm, Summerland, Vernon, and Qualicum Beach will be added as designated areas.
The SVT tax rate varies depending on an owner’s tax residency. Furthermore, the tax rate varies depending on whether the owner is a Canadian citizen or permanent resident of Canada or an untaxed worldwide earner. For 2019 and subsequent tax years, the tax rate is:
- 2% for foreign owners and untaxed worldwide earners
- 0.5% for Canadian citizens or permanent residents of Canada who are not untaxed worldwide earners
If a residential property has multiple owners, each owner must complete a declaration, and the associated tax, if any, is to be divided amongst the owners based on their pro-rata ownership percentage.
The SVT tax rate for a corporation, trustee, or business partner will be the highest rate applicable to any corporate interest holders, beneficial owners, or business partners if they individually hold residential property.
Land Owner Transparency Registry (“LOTR”)
Effective November 30, 2020, the Land Owner Transparency Act (“LOTA”) requires that when an application is made to register an interest in land, a transparency declaration must be filed with the LOTA administrator.
The LOTR is a public provincial registry database about individuals deemed to have a direct or indirect (beneficial interest in any way, shape or form) interest in land (defined term).
Pre-existing “reporting bodies” (a defined term) with interest in the land were required to file a transparency report by November 30, 2022.
New reporting bodies must file a transparency report by two months after acquiring an interest land.
A reporting body that fails to file a transparency report or provides inaccurate information may be subject to a fine of not more than the greater of:
- $50,000 for a corporation or other entity, or $25,000 for an individual; or
- 15% of the assessed value of the underlying property to which the declaration applies.
Other offences under the LOTA could be subject to a fine of up to $100,000 or $50,000 for corporations and individuals, respectively.
Short-Term Rental Regulations
In the fall of 2023, the B.C. government announced new measures aimed at short-term rentals. These new measures restrict people from using their homes (unless it is their principal residence) in specified areas as short-term rentals offered to the public. This will apply to short-term rental listings on platforms where people reserve and pay for accommodations, short-term rental offers on other web listing forums, and listings in classified newspaper ads. The restrictions will not apply to hotels and motels, reserve lands, a vehicle (RVs), and a tent or other temporary shelter.
However, the short-term rental restrictions will not apply to some smaller communities and tourist destinations:
- Municipalities with populations under 10,000 and not within 15 km of a larger municipality
- Mountain resorts, including regional/destination resorts, BC Parks resorts, private ski resort areas, and community ski resorts
- Resort Municipality Initiative communities
- Regional district electoral areas, except the University of British Columbia and the University Endowment Land
- Trust area under the Islands Trust Act
- Farmland (BC Assessment farm class 9)
The remaining restrictions will be applied through a phased approach:
- May 1, 2024: Principal residence requirement (including exempt areas and accommodations), changes to legal non-conforming use protections, and the requirement to display valid local government business license numbers, where business licenses are required
- Summer of 2024: Data sharing between the Province and local governments
- By early 2025: Provincial registry launch and platforms will be required to remove listings without valid provincial registry numbers
The maximum fine that regional districts can set for prosecutions of bylaw offences under the Offence Act has increased from $2,000 to $50,000. The maximum municipal ticketing fine a local government may set has increased from $1,000 to $3,000 per infraction.
GST Implications:
Perhaps an oversight, but with no relief yet available, property owners who convert housing units from short-term to long-term rentals will no longer be required to collect GST (amongst other indirect taxes). However, a conversion from a short-term rental to a long-term residential rental may result in a “change-in-use,” triggering a deemed disposition for GST/HST purposes at the fair market value at the change-in-use date and an immediate reacquisition after that. This change in use may be a triggering event that may result in owners having to pay GST upon the conversion to a long-term rental property.
Furthermore, should owners of short-term rentals choose to sell their property and forego converting to a long-term rental property, they would be required to charge the purchaser GST/HST on the sale.
Provincial Flipping Tax
The B.C. government recently tabled legislation aimed at speculators who use housing to turn a quick profit. This new tax is intended to disincentivize speculators or “housing flippers.”
The new flipping rules impact property sales after December 31, 2024. Income earned from the sale of that property may be subject to the new provincial flipping tax measures if that property was held for less than 730 days before the sale.
The tax is calculated by multiplying your net taxable income by your tax rate. Net taxable income is your taxable income minus the primary residence deduction. Taxable income is calculated as proceeds of the disposition less your cost base and any capitalized, acquisition, and selling costs (an inclusion rate available on capital gains will not apply, i.e., the income is 100% taxable).
The tax rate is 20% of income earned from a property sold within 365 days. At 730 days, the tax no longer applies. The tax rate between 366 days and 730 days is pro-rated on a declining basis.
If you sell your primary residence and you owned the property for less than 730 days, you may be able to claim a deduction of up to $20,000 from your taxable income if you meet the following conditions:
- You owned the property for at least 365 consecutive days before you sold it,
- The property includes a housing unit that you lived in as your primary residence while you owned it.
Furthermore, you may be eligible to pay the tax if an exemption applies.
Suppose you enter into a presale contract to purchase a property under construction, and you complete that property for the purposes of the 730-day window of the tax. In that case, you will be considered to have acquired it on the date you entered into the presale contract (different from the federal flipping tax discussed above).
If a person is assigned a pre-sale contract and then closes on the built property, the acquisition date is the date they were assigned the contract.
When you assign a presale contract to another person within 730 days of entering the presale contract, you will pay tax on any income received from the assignment.
