This article provides a high-level overview of several new and updated tax measures introduced municipally, provincially, and federally to address housing affordability, supply shortages, investor speculation, and other challenges in the real estate sector. Property owners in BC need to keep current with these legislative changes to stay onside of the rules and avoid triggering adverse tax consequences.
Federal measures
Underused Housing Tax
The Underused Housing Tax (UHT) legislation, which received royal assent in June 2022 and took effect retroactively from January 1, 2022, assesses a 1% penalty on the greater of the current assessed value or the most recent purchase price of vacant and underused residential properties owned by non-resident owners.
Initially, all corporations, partnerships, and trusts holding residential property had to file, regardless of whether they were subject to the tax, and penalties for non-filing were considerable. On November 21, 2023, the Department of Finance sought to redress this by releasing proposals to relieve certain taxpayers from filing and reduce the penalties for non-compliance. Specifically, the proposals expanded the definition of “excluded owners” to include Canadian corporations, partnerships, and trusts for the 2023 calendar year (recognizing that they were not the intended targets of the legislation), and reduced the penalties to $1,000 for individuals and $2,000 for corporations, partnerships, and trusts.
However, at the time of this writing in May 2024, these changes have not yet been legislated. Property owners uncertain of where they stand should contact their CPA tax advisor for guidance.
Bare trust filing requirements
The federal government passed amendments to the Income Tax Act in 2022 that updated the requirements for trusts to file a T3 Trust Income Tax and Information Return (T3 Return). Starting in 2023, all “express trusts” (family trusts, alter ego/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 one in which a trustee holds the legal title of an asset but a beneficiary has the beneficial ownership of the property. Bare trusts are effectively a principal-agent relationship, which means the trustee has no independent power, discretion, or responsibility over the property, as their actions are controlled by the beneficiary.
The penalties for late filing or non-filing can be significant, with a daily penalty of $25 (up to a maximum of $2,500) per year and—in cases of gross negligence—the greater of $2,500 or 5% of the highest fair value of the trust’s assets.
On March 28, 2024, however, the CRA announced that bare trusts do not need to file a T3 Return for 2023 unless requested. There have been no updates on future filings or related proposals since then.
Short-term rental regulations
In its 2023 fall economic statement, the federal government proposed new measures (supplementary to those proposed provincially) to deny expenses to short-term rentals (i.e., tax would be paid on gross income rather than net income) that are non-compliant with municipal and/or provincial regulations, effective January 1, 2024.
Federal flipping tax
New rules introduced and enacted by the federal government in 2022 are meant to ensure that profits from home sales within a certain time frame are treated as business income, not capital gains. A “flipped property” is defined as a housing unit in Canada owned by a taxpayer for less than 365 consecutive days before disposition, with exemptions for certain conditions.
These new rules, which are effective for 2023 and subsequent tax years, also apply to the right to own or acquire a housing unit in Canada. The holding period resets once the taxpayer who enters into a purchase and sale agreement secures ownership of the property (this differs from the provincial flipping tax discussed in the next section). Any losses resulting from the sale of a flipped property are deemed to be nil.
Enhanced GST/HST rental rebate
On September 14, 2023, the federal government announced an enhanced GST/HST residential rental property rebate to encourage the development of new rental housing. The 100% rebate (up from 36%) is intended for qualifying new rental housing projects and does not apply to individually owned condominium units, single-unit housing, duplexes, triplexes, housing co-ops, owned houses on leased land, or sites in residential trailer parks. Substantial renovations of existing residential complexes are also excluded.
Projects that convert existing non-residential real estate into residential real estate are eligible for the enhanced GST/HST residential rental property rebate assuming all applicable conditions are met.
Municipal and provincial measures
Empty Homes Tax
Since 2017, Vancouver property owners have had to submit an annual declaration to confirm whether their property is subject to the Empty Homes Tax (EHT). Initially set at 1% of the property’s assessed value, the EHT was increased to 1.25% in 2020 and then to 3% in 2021. Notably, in April 2022, the City of Vancouver proposed increasing the EHT to 5% for the year ending December 31, 2023, but the rate continues to sit at 3% (for now).
Among the available exemptions, properties used as principal residences or tenanted for at least six months in a calendar year are not subject to the EHT.
Speculation and vacancy tax
Introduced in 2018, the speculation and vacancy tax (SVT) is an annual tax based on residential property use, owner residency status, and income reporting in specific BC areas. It applies based on ownership as of December 31 each year. The SVT rate is 2% for foreign owners and untaxed worldwide earners, and 0.5% for Canadian citizens or permanent residents not classified as untaxed worldwide earners.
Residential property owners in designated areas must declare annually by March 31. Failure to do so could result in a penalty of 2% of the property’s assessed value. Note: A number of new areas will be included for declarations in January 2024 and 2025.
Land Owner Transparency Act
Effective November 30, 2020, the Land Owner Transparency Act (LOTA) requires that transparency declarations are filed when registering an interest in land with the Land Owner Transparency Registry (a public registry of individuals with direct/indirect interests in land). Pre-existing “reporting bodies” (a defined term) had to file a transparency report by November 30, 2022, and new reporting bodies must file a report within two months of acquiring a land interest. The maximum non-compliance fines are the greater of the following: $25,000 for individuals and $50,000 for corporations or other entities, or 15% of the underlying property’s assessed value. Other offences under the LOTA could be subject to a fine of up to $50,000 for individuals and $100,000 for corporations.
Short-term rental regulations
In the fall of 2023, the provincial government announced new measures aimed at restricting homeowners in specified areas of BC from offering their homes to the public as short-term rentals. These new measures, which took effect on May 1, 2024, limit short-term rentals to the host’s principal residence plus one secondary suite or accessory dwelling unit on the same property. They 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 new measures do not apply to hotels and motels, reserve lands, recreational vehicles, or other temporary shelters.
Additionally, there are exempt communities and land where the principal residence requirement does not apply, including municipalities with populations under 10,000 that are not within 15 kilometres of a larger municipality, mountain resorts, and some farm land. For a complete list of exempt areas, visit the provincial government website.
It’s expected that municipal governments will start sharing data with the BC government sometime this summer, and that a provincial registry will be launched in early 2025. Once this registry is up, platforms will be required to remove any listings without valid provincial registry numbers.
Note that the maximum fine regional districts can set for prosecutions of bylaw offences under the Offence Act has increased from $2,000 to $50,000 under the new rules, and the maximum municipal ticketing fine has increased from $1,000 to $3,000 per infraction.
A side note about GST/HST:
Property owners who convert housing units from short-term rentals to long-term rentals will no longer be required to collect GST (among other indirect taxes). Note, however, that converting a short-term rental to a long-term rental may constitute a “change in use” under the Excise Tax Act, in which case it may trigger a deemed disposition for GST/HST purposes at the fair market value and an immediate reacquisition thereafter. Also, owners of short-term rentals who choose to sell their property instead of converting the unit to a long-term rental property may be required to charge the purchaser GST/HST on the sale. Given the complexity of the legislation, property owners should consult their CPA tax advisor for guidance.
BC home flipping tax
Effective for property sales after December 31, 2024, the new flipping rules under the Residential Property (Short-Term Holding) Profit Tax Act (which takes effect on January 1, 2025) aim to deter speculators. Income earned from property sales may be subject to the new flipping tax measures if the property is held for fewer than 730 days before the sale.
The BC home flipping tax is calculated by multiplying your net taxable income (taxable income less primary residence deduction) by your tax rate. Taxable income is calculated as proceeds from your sale of the property, minus your cost base and any capitalized, acquisition, and selling costs. The tax rate is 20% of income earned from a property sold within 365 days—at 730 days, the tax no longer applies (between 366 days and 730 days, the tax is pro-rated on a declining basis).
The new rules are nuanced, and various deductions and exemptions are available. Visit the provincial government website for details.
It’s complicated
The legislative landscape for real estate ownership in Canada is ever-changing. Property owners in BC need to stay aware of the evolving municipal, provincial, and federal rules to ensure continued compliance and make informed decisions.
Bilal Kathrada, CPA, CA, is a principal with Clearline CPA, where he focuses primarily on tax and succession planning for Canadian owner-managed businesses in various industries. Bilal thanks Gurbir Rai, CPA, senior manager with Clearline, for his contributions to this article.
This article was originally published in the July/August 2024 issue of CPABC in Focus.
