The British Columbia government introduced the Speculation and Vacancy Tax (“SVT”) legislation in 2018. The SVT is an annual tax based on how owners use residential properties in major urban areas in BC. The SVT is intended to tax speculators and foreign owners, in an effort to improve affordability of local housing markets. The tax is applicable to every residential property owner, with specific exemptions available that exempt most British Columbians from paying the tax. However, the tax has had unintended tax consequences for some British Columbians, specifically satellite families or new residents of BC.
SVT Issues – Satellite Families and New Residents of BC
There are a number of exemptions from the SVT available to BC taxpayer’s including the first year exemption and the PRE exemption.
The first year exemption referred to as the purchase exemption applies to all property owners from the SVT in the year the owners pay the Property Transfer Tax. After the initial year of purchase, the property owner’s must claim one of the other available exemptions.
The main exemption from the SVT used by BC residents is the principal residence exemption (“PRE”). Typically, an owner of a residential property uses the property as their principal residence, thus they would qualify for the exemption. To be eligible for the PRE, the individual must:
- Be a Canadian Citizen or Permanent Resident
- Be a BC resident for income tax purposes
- Cannot be a member of a satellite family
For many individuals who move to BC, either for the first time or returning after a few years in another country, the issue is the individual could meet the definition of a satellite family.
A satellite family (or untaxed worldwide earner) is an individual whose income not taxed in Canada is greater than their income taxed in Canada. Of note, an individual’s income is combined with their spouse’s income for the purposes of this calculation. Finally, the income used for the calculation is the income from the previous tax year (i.e. for a 2020 SVT year, the satellite family test is based on the individual’s 2019 income). An example of this calculation may be found below.
Example – Satellite Family
George and Shelly are married Canadian citizens who have been living in California for the last five years. In November 2020, they decided to move back to BC to be closer to their family and purchased a home before arriving in Canada. In 2020, $90,000 of George and Shelly’s income was taxed in California, with the remaining $10,000 taxed in BC.
- George and Shelly may claim the purchase exemption in 2020 to be exempt from the SVT
- For 2021, the purchase exemption is no longer available, but they may qualify for the PRE as they live on the property year round.
- Satellite Family Test – Untaxed Worldwide Income > Income Taxed in BC
- Satellite Family Test – $90,000 > $10,000
- George and Shelly are considered a satellite family for the 2021 SVT
- Looking forward to 2022, as George and Shelly are now residents of BC, their 2021 income would have been taxed in BC, and therefore they would no longer be considered a satellite family.
The above problem results in SVT taxes payable by a family, despite the fact that they are paying their share of taxes in BC for 2021 as residents of BC and are not speculating on BC real estate. Some relief is available as satellite families are eligible to claim a tax credit equal to the lessor of:
- The individual’s tax payable for that property
- The individual’s tax credit balance (BC income balance x 10 x tax rate = 20% tax credit)
For 2019 and subsequent tax years, the tax rate applicable to satellite families is 2%. It is a non-refundable credit therefore can only reduce the SVT taxes owing to NIL. Depending on the value of the property, and the individual’s income for the year, the tax credit may offset the SVT liability completely. Continuing the previous example:
George and Shelley purchased a property for $1,000,000 in Greater Victoria which they own as joint tenants. As Victoria property owners are subject to the SVT, each of them would be required to declare no exemption on their 2021 SVT form. They will be issued a tax assessment for the SVT owing of $10,000 each.
After George and Shelly complete their 2020 personal income tax returns they may claim BC tax credit from their assessment of the SVT equal to 20% of their income. Assuming George and Shelley’s income is $50,000 each, they will receive a tax credit of $10,000 each, allowing them to fully recover the taxes paid under the SVT.
Should Shelly and George’s incomes vary, the BC government allows spouses to transfer income to each other to maximize the tax credits available to the family. Specifically the SVT rules state:
An individual can combine their BC income balances with their spouse to increase an individual’s tax credit amount. This is called a “spousal transfer of income”. This transfer can happen regardless of if the spouse is on title or not. In order to use their spouse’s income for the tax credit, they must:
- Provide a copy of their Notice of Assessment from the Canada Revenue Agency when you apply for the tax credit.
- They must each complete and sign the Spousal Transfer of Income Authorization (FIN 561).
If an individual’s BC income is not sufficient to eliminate the SVT liability, they may wish to consider altering the property to qualify for a separate exemption such as the long-term rental exemption. More information on the various exemptions available BC property owners may be found here (List of SVT Exemptions).
If you or your family might be subject to the Speculation and Vacancy Tax, please contact your tax advisor at Cameron Izard Snell LLP for more information.