Own BC Property? Consider these Tax Rules

When owning property in British Columbia (BC), especially when it involves periods of vacancy, there are several tax considerations that property owners must be aware of. These considerations are crucial for ensuring compliance with tax laws and optimizing tax outcomes. This blog delves into the specifics of vacancy-type taxes, including the Speculation and Vacancy Tax (SVT) and the Empty Homes Tax (EHT), along with other related tax implications for property owners in BC.

Vacancy Type Taxes and Rental Income

For property owners in BC, earning rental income from vacant land is a possibility. However, it’s important to understand the tax implications associated with such income. Operating expenses can be deducted from this income, but there are limits on the deductions available for interest on borrowed money and property taxes. These deductions are limited to the amount of rental income remaining after all other expenses have been deducted. It’s crucial to note that creating or increasing a rental loss or reducing other sources of income through these deductions is not permissible. Moreover, mortgage interest and property taxes for vacant land cannot be deducted if no income is being earned from the land. These rules ensure that deductions are only taken against actual rental income, preventing the misuse of tax deductions to artificially reduce taxable income.

Speculation and Vacancy Tax (SVT)

The Speculation and Vacancy Tax is a provincial tax in BC aimed at targeting foreign and domestic speculators who own residences in BC but do not live in them. The SVT is part of the government’s plan to tackle housing affordability in major urban areas by encouraging property owners to rent out their vacant homes. For properties deemed vacant more than six months of the year, the SVT is applicable at varying rates depending on the owner’s tax residency and citizenship. The tax rate for foreign owners and satellite families is 2% of the property’s assessed value, while Canadian citizens and permanent residents face a lower rate. There are exemptions available, such as for properties under renovation, or if the owner or tenant is undergoing medical care.

Empty Homes Tax (EHT)

In addition to the provincial SVT, the City of Vancouver has implemented its own Empty Homes Tax, also known as the EHT. This municipal tax is aimed at encouraging the conversion of empty or under-utilized properties into rental housing to help alleviate the city’s rental housing shortage. Properties that are not the principal residence of the owner or are not rented out for at least six months of the year are subject to the EHT. The tax rate for the EHT is 3% of the property’s assessed taxable value for the applicable year. Similar to the SVT, there are specific exemptions and scenarios where the tax may not apply.

Deductibility of Rental Expenses

The deductibility of rental expenses during periods of vacancy is another important consideration. According to the Income Tax Act, expenses incurred for the purpose of gaining or producing income from a property are generally deductible. This includes periods when the property is vacant, provided the owner is actively seeking a new tenant and the property is held for the purpose of earning rental income. This means that expenses such as heating, water, and electricity can still be deductible during vacancy periods, as long as the intention to generate rental income remains.

Withholding Tax on Rental Income for Non-Residents

Non-resident property owners earning rental income from Canadian real estate must be aware of the withholding tax obligations. Rental income is subject to a 25% withholding tax under Part XIII of the Income Tax Act, unless a section 216 election is made. This election allows the non-resident to file an income tax return and pay tax on the net rental income at the same rates applicable to Canadian residents. This option can potentially result in a refund if the withholding tax exceeds the actual tax liability on the net rental income.

Principal Residence and Disposition of Property

Non-residents disposing of Canadian property, including BC property, may qualify for an exemption on the gain from the sale if the property qualifies as their principal residence for the years they were resident in Canada. However, the period of non-residence may reduce or eliminate the availability of this exemption. It’s essential for non-residents to understand these rules to accurately assess their tax obligations upon the sale of Canadian property.

Conclusion

Owning property in BC comes with various tax considerations, especially concerning vacancy-type taxes such as the Speculation and Vacancy Tax and the Empty Homes Tax, along with rental income. Property owners must navigate the rules around deductibility of expenses during vacancies, understand the implications of withholding tax for non-resident owners, and be aware of the tax treatment upon the disposition of property. Properly managing these tax considerations is key to ensuring compliance and optimizing tax outcomes. Property owners may benefit from consulting with tax professionals to navigate the complexities of tax laws related to property ownership in BC.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.