BC Speculation and Vacancy Tax: Surprises for Non-Residents and Trustees

March 31, 2019 marked this year's deadline to file declarations pursuant to the Speculation and Vacancy Tax Act (British Columbia) ("the SVT Act"). The SVT Act imposes an annual tax (of 0.5 percent for 2018, increasing to 2 percent for some taxpayers in 2019) on residential property in specified areas of British Columbia, subject to various exemptions. Notwithstanding the Speculation and Vacancy Tax (SVT) website's assertion that claiming an exemption is "easy to do," some owners found it to be quite the opposite.

Non-Residents

Many owners were surprised to learn that a Canadian citizen or permanent resident is liable for SVT on his or her principal residence if the owner and the owner's spouse collectively reported less than 50 percent of their income on a Canadian tax return in the previous year. Notably, Canadian-source passive income (including rent, unless the owner elected under section 216 of the ITA) is not considered "reported income," even if tax was remitted through withholding. This is a result of the SVT Act's definition of "reported total income," a term that, when applied to a non-resident taxpayer, generally requires the filing of a return in Canada or the issuance of an assessment under part I of the ITA.

Moreover, a non-resident individual will not be able to claim a tax credit against the SVT unless the non-resident or his or her spouse earned income derived from an office or employment in British Columbia or a business carried on through a permanent establishment in British Columbia. This is because the credit is based on BC income, and the SVT Act uses the provincial income allocation rules in ITA regulations 2600 to 2607 to determine BC income.

Trustees

The declaration required trustee owners to determine the beneficial owners of the property. A "beneficial owner" includes a person who "has a beneficial interest in respect of the interest in the residential property." However, it is uncommon for a beneficiary to have a vested interest in a specific asset held by the trust. Therefore, many trustees lacked sufficient guidance to make this determination and faced considerable uncertainty in completing the declaration.

The potential adverse consequences of this ambiguity are particularly serious for trustees of life interest trusts described in paragraph 104(4)(a) of the ITA, which are commonly used for end-of-life planning in wills or as will substitutes. The terms of such trusts preclude anyone other than the settlor or the settlor's spouse from obtaining any income or capital of the trust during the settlor's or spouse's lifetime. It is common for these trusts to own the settlor's or spouse's home. Since the SVT Act's principal residence exemption requires that all beneficial owners reside in British Columbia, the ambiguity in the definition of "beneficial owner" calls into question whether many British Columbians whose homes are owned by a trust may be subject to SVT on those homes.

The purposes of the beneficial ownership provision, to the extent that they can be gleaned from the minister of finance's remarks in debate, include identifying the "actual owner" and ensuring that taxpayers receive "an exemption they should be receiving." Therefore, it seems improbable that a beneficiary who is named in the post mortem distribution provisions of the trust should be considered a beneficial owner in a year in which he or she cannot influence the use of the property or receive any benefit from it. This would be inconsistent with the stated purposes of the legislation, since it would impose SVT on many homes that are occupied by British Columbians who are not members of a "satellite family" (an individual or spousal unit, the majority of whose total worldwide income for the year is not reported on a Canadian tax return). However, clarification would no doubt provide welcome relief from the uncertainty faced by many British Columbians.

Laura Peach
Legacy Tax + Trust Lawyers, Vancouver
lpeach@legacylawyers.ca



Canadian Tax Focus
Volume 9, Number 2, May 2019
©2019, Canadian Tax Foundation