TAX ALERT

November 9, 2018

B.C. Speculation and Vacancy Tax – Exemptions for Rented Residential Property

When the B.C. government tabled its 2018 provincial budget in February, it included a new speculation tax intended to reduce foreign and domestic demand for residential property in the province and increase housing affordability for B.C. residents. In October 2018, the B.C. government released draft legislation to enact the new Speculation and Vacancy Tax (the Speculation Tax) that would begin applying in 2018. MNP recently posted a summary of the draft legislation detailing information for owners of residential property in B.C. (SEE https://www.mnp.ca/en/posts/bc-introduces-draft-speculation-and-vacancy-tax-legislation).

Exemptions for Tenanted Residential Property

Owners of residential property may be exempt from the Speculation Tax if their property is occupied by a tenant under an arrangement that meets certain criteria described in the draft legislation.

What can be Rented?

Property assessed as Class 1 property under the B.C. Assessment Act that includes one or more self- contained residences may be eligible for an exemption if at least one residence is rented. For example, if there is a duplex with two separate residences on a property that is a single land title assessed as Class 1, the entire property could be exempt if at least one residence of the duplex is rented. The same exemption may apply if a single detached house contains a separate self-contained apartment with cooking, sleeping, bathroom and living room facilities that is rented. There is no guidance available on whether such a self-contained apartment would need to be compliant with municipal bylaws in order to obtain the exemption in respect of the property.

Multiple Owners and Joint Tenancy

Each owner must evaluate whether their respective interest in the residential property is subject to the Speculation Tax. If there is co-ownership and one co-owner is a tenant of the property, the co-owner who is the landlord could seek a tenancy exemption whereas the tenant co-owner could seek the exemption available for a principal residence. For example, a son lives in Vancouver in his own house. The father and son equally co-own a house in Surrey and the father lives in this house.

In this case, the son might undertake planning to obtain a rental exemption with respect to his 50 percent interest while his father might seek the principal residence exemption with respect to his 50 percent interest.

Duration of Tenancy

For 2018, a tenant must occupy the residence for at least three one-month periods for the tenancy to be eligible for the exemption. In 2019, this threshold will be increased to at least six one-month periods.

Who Can be a Tenant?

Tenants must be individuals and may not be corporations or other legal entities. Tenants may deal with the owners at either arm’s length or not at arm’s length. The conditions for a tenancy to be exempt from the Speculation Tax depends on the relationship of the tenant to the owner.

Arm’s Length Tenants

Arm’s length tenants are generally individuals who are unrelated to the owner of the residential property. Arm’s length tenants must occupy the residence under a written tenancy agreement and it must be the place that the tenant makes their home. The term “home” is not defined in the legislation, but this requirement may be important if, for example, the tenant is using the residence as a place of business.

As noted above, each owner must evaluate their eligibility for the tenancy exemption. If the property has more than one owner, then the relationship and applicable tests must be evaluated with respect to each owner and the tenant. Each owner must report the exemption that applies to them.

Non-Arm’s Length Tenants

Tenants may be individuals who are related or do not deal at arm’s length with the owner provided certain other conditions are met. However, the following related persons may not be tenants:

1. The owner of the property;
2. The spouse of an owner, or
3. A child of the owner who is has not reached the age of nineteen years old at the end of the year and living with the child’s parent or guardian in the residence.

There are specific look-through rules if the residential property is owned by a corporation, partnership or trust. The relationship between the tenant and the individual who is the ultimate owner of the shares, partnership interest, or trust interest must be evaluated. For example, a residential property is owned by a corporation and its residence is rented to the spouse of an individual who owns 25 percent of all the corporation’s shares. In this case, the look-through rules in the legislation would apply and the tenancy may not exempt the property from the Speculation Tax. If the residential property in the above example contains other residences that were rented to arm’s length or qualifying non-arm’s length tenants, then the property could still be eligible for the tenancy exemption.

Non-arm’s length tenants do not require a written tenancy agreement, but they must have permission from one of the owners to occupy the residence. There is also a requirement that the non-arm’s length tenant resides in the residence for a longer period in the month than any other place. Essentially, it must be the principal residence of the tenant for the month in question.

If the owners are Canadian citizens or permanent residents and they file Canadian income tax returns, then there is no minimum rental rate. However, there may be adverse income tax consequences, such as the shareholder benefit rules for corporate owned property, that need to be considered when setting a rental rate. The principal residence exemption under the income tax rules is another consideration to discuss with your tax advisor before renting a personally held property.

For example, a B.C. resident who is a Canadian citizen purchases a condo in Vancouver and rents it to their adult child to stay in while attending university. This is the child’s only residence for more than six months of the year. In this case, the property could be eligible for the tenancy exemption from the Speculation Tax. It would be wise to document the use of the property in any given year to support the exemption claim.

Non-Arm’s Length Tenants – International Owners

If the owner is neither a specified Canadian citizen nor a specified permanent resident of Canada, a non-arm’s length tenancy will be exempt from the Speculation Tax only if the following two conditions are met:

1. The non-arm’s length tenant must be a resident of B.C. at the end of the last day of the calendar year, and
2. Each non-arm’s length tenant must have B.C. income for the calendar year equal to or greater than three times the fair market value rent for the entire residential property.

The above test will be difficult for some international families to meet as the tenant must be a Canadian resident or permanent resident at the end of the year in question. Furthermore, they must file a Canadian income tax return as a B.C. tax resident for federal and provincial income tax purposes. Each tenant must also report income on their Canadian income tax return for the year in question that is at least three times the market rent for the residential property. If the residential property contains more than one residence, then the market rent for all residences is basis for the test. The test is applied to each tenant, so the income of all tenants can’t be combined to meet the test.

Tenancy Exemption for Widely Held Owners

There is a special exemption for residential property owned by a widely held entity such as a corporation that is listed on a public stock exchange and certain trusts including a real estate investment trust, a mutual fund trust and a specified investment flow-through (SIFT) trust. These owner entities must only meet the rental duration tests so consequently, the relationships of the tenants to these owner entities do not need to be reviewed.

Temporary Exemption for Properties Subject to Strata Rental Restriction

Temporary exemptions have been put in place for properties where a covenant or strata bylaw prevented the property from being rented out in a way a rental exemption could take place – if the restriction was in place on or before October 16, 2018. All owners of a property in those circumstances can claim a rental exemption for the 2018 and 2019 tax years.

Conclusion

Landlords with residential properties in a specified area should review whether their rental arrangement is eligible for the tenanted property exemption. In some situations, the review and conclusion will be straight forward. In others, particularly with complex ownership and family use, assistance from a tax professional may be required to navigate the complex legislation.

HOW MNP CAN HELP

Our tax advisors can help you better understand these changes and how to minimize the impact in respect of your property ownership. When the time comes, we can also help with your annual declaration and related filings to ensure your ongoing compliance with this new tax. For more information, please contact an MNP Tax Specialist in your region.