TAX ALERT

November 6, 2018

B.C. Speculation and Vacancy Tax - Exemptions for Developers

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. MNP recently posted a summary of the draft legislation detailing information for owners of residential property in B.C. (SEE LINK <https://www.mnp.ca/en/posts/bc-introduces-draft-speculation-and-vacancy-tax-legislation>> ).

Exemptions for Developers

The specific exemptions in respect of developers are described below. It is helpful to first understand the following relevant definitions provided for in the legislation:

Residential Property - Generally means a Class 1 property as assessed under the Assessment Act, which includes single-family residences, multi-family residences and condominiums. A parcel of bare land zoned as Class 1 will still be considered residential property for the purposes of the Speculation Tax.

Building Activity –Any of the following activities relating to construction, placement or substantial renovation of residence that is part of a residential property:

1. Applying for financing
2. Applying for a permit or other necessary approval
3. Entering into contracts for designing, building or engineering
4. Demolishing or removing existing improvements
5. Clearing or excavating the site
6. Constructing or placing the residence on the residential property or substantially renovating the residence
7. Any other activity necessary for the construction, placement or substantial renovation of the residence

Substantial Renovation – Renovation of an existing residence to the extent that the residence must be vacant.

Phased Residential Development – Development of five or more residences on two or more residential properties, if the development will be carried out in phases and every owner of the residential properties is the same person or is a related person within the meaning of subsection 251(2) of the Income Tax Act (ITA).

Residential Development – development of five or more residences on one or more residential properties.

Construction or Substantial Renovation

A residential property may be exempt from Speculation Tax for a particular year if all of the following conditions are met:

1. Building activity is started in the particular year in relation to the construction, placement or the substantial renovation of a residence on a residential property;
2. The owner takes reasonable steps to ensure that the building activity progresses without undue delay and if there is any undue delay in the progression of the building activity, the delay is caused by circumstances beyond reasonable control of the owner, and
3. Because of the stage of the building activity, the residential property does not yet include a residence or there is a period of at least 90 days in the particular year which the residence cannot be occupied.

Phased Residential Developments

A phased residential development may be exempt from Speculation Tax for a particular year if all of the following conditions are met:

1. The residential property is part of a phased residential development;
2. In the particular year, building activity is started or continued in relation to the construction or placement of a residence on one or more residential properties that are part of a phased residential development;
3. In the particular year, the owner takes reasonable steps to ensure that the building activity referred to in (b) above progresses without undue delay and if there is any undue delay in the progression of the building activity, the delay is caused by circumstances beyond reasonable control of the owner, and
4. A residence that is part of the residential property cannot be occupied for a period of 180 days or more in the particular year.

It is quite common for developers to structure and organize phases of a phased residential development into separate limited partnerships for certain commercial reasons. As described above in the definition of phased residential development, a condition is that every owner of the residential properties is the same person or is a related person within the meaning of subsection 251(2) of the ITA. With the legislation in its current form, this condition may be difficult to meet as subsection 251(2) of the ITA does not provide a manner for limited partnerships to be a related person.

Residential Developments

A residential development may be exempt from Speculation Tax for a particular year if all of the following conditions are met:

1. The residential property is part of a residential development;
2. A residence has been newly constructed or placed on a residential property;
3. The residence is not occupied as a residence at the end of the particular year and has not been occupied as a residence since it was constructed or placed on the land;
4. The residence was offered to the public for sale in the particular year, and
5. The owner of the residential property was the developer of the residential property.

Administration of the Speculation Tax

An owner of residential property in a specified area on December 31 of each year should receive a Speculation Tax declaration letter from the province in February. An annual declaration (the “declaration”) will have to be completed to claim any of the exemptions. The declaration letter will list all of the residential properties owned in the specified area and will include instruction on how to complete the declaration. The declaration should be completed even if you believe you may not be eligible for an exemption.

If you do not own a residential property in a specified area, you do not need to complete a declaration. The declaration will include two identification numbers, which match you to the residential property, which are required to complete the Declaration. An on-line declaration is expected to be available.

If you do not complete the declaration, you will receive a Notice of Assessment assessing the Speculation Tax at the maximum rate (0.5percent for 2018 and 2 percent for 2019 and subsequent years). The declaration must be filed on or before March 31 in the year following the relevant calendar year and any Speculation Tax owing is due on or before July 2 in the year following the calendar year.

The legislation contains an anti-avoidance rule and several penalty provisions in respect of matters that include incomplete information on a declaration, gross negligence and misrepresentation by third parties.

Conclusion

Developers with residential properties in a specified area intended for development should assess whether they are, or could become, eligible for one of the relevant exemptions and ensure that their eligibility for the exemption, if any, is sufficiently documented. If developers are eligible for an exemption, then they will need to ensure the annual declaration is completed and filed accordingly.

How MNP Can Help

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