Last week the BC government tabled Bill 45, which seeks to implement the province’s new Speculation and Vacancy Tax. A careful review of the Bill suggests that it is overreaching and lacking in taxpayer fairness. Critical aspects of the tax will invariably put certain homeowners, including many long-time BC residents, in an unjustifiably difficult position.
This article highlights several concerns with the introduction of the Bill and the composition of the tax. A brief overview of the Bill is provided, followed by a detailed review of certain concerning provisions contained therein. This article emphasizes only a few of the troublesome issues with the Bill that merit further consideration.
A Brief Overview of Bill 45
The contours of the speculation tax were originally sketched out by Finance Minister Carole James on budget day this past February. At the time, the Province offered only a 3-page overview that raised more questions than answers. Core details of the tax were said to be included in enabling legislation, which would be released in the fall.
In general, the Bill establishes a tax imposed annually on every owner of residential realty in most major population centres across the province. This broad tax base is narrowed by a dozen or so highly-detailed exemptions that turn mainly on the specific use, or non-use, made of the property in the particular year.
In moving through the provisions in the Bill, it quickly becomes apparent that the tax is, in many respects, unprecedented. Few other jurisdictions in Canada have even attempted to impose similar taxes. Closest to home, Vancouver’s Vacancy Tax – which was introduced in 2017 – is an obvious forerunner and conceptual twin. But Vancouver’s tax is also far less ambitious and complex. It functions awkwardly like an additional property tax bound to certain properties, with fewer (but generally broader) exemptions and a less sophisticated legislative and administrative framework. It also avoids taxing so-called “satellite families” (known in the Bill as “untaxed worldwide earners”), which are the central targets of the Province’s tax.
A second example of a similar tax appears in PEI’s property tax system. Since the late 1980s, it has included a rebate program only for owners who reside in that province for most of the year. This effectively doubles the tax due from second-home owners. Interestingly, the program was subject to an unsuccessful constitutional challenge in the mid-1990s. The owners’ failed attempt in court may have emboldened BC and Vancouver in their view that their taxes likewise pass constitutional muster.
Another general feature of Bill 45 is that it is not only long – it runs over 100-plus pages – but is also exceptionally dense. It has myriad definitions, special interpretative rules, exclusions, interlinking provisions and critical references to other statutes. In this respect, Vancouver’s vacancy tax bylaw, at roughly one-fifth the length and with less technical text than Bill 45, is certainly more user-friendly.
Specific Concerning Provisions
Given the length, novelty and complexity of the Bill, there are many provisions that require serious consideration. However, there are certain sections that should be specially highlighted since they raise particular unfairness issues.
(a) Section 13
Section 13 of the Bill affirms that the tax will apply retroactively to the 2018 calendar year. In the authors’ view, this is highly problematic. The Bill was only released last week and might not be finalized for a while yet. In a democratic society, persons are entitled to know what laws apply to them. This maxim appears in taxpayer codes subscribed to by federal and provincial governments, including BC. Yet for most of this year (i.e. the proposed first year of the tax), owners – and their advisors – have been denied knowledge of the precise legal conditions governing the tax.
The government might counter that certain leniencies were included in the bill to mitigate any unjustified harshness for 2018. For example, section 19 says that, while the tax rate under the bill for certain owners might ordinarily be as high as 2%, a rate of 0.5% applies to every taxable owner for 2018. Similarly, subsection 38(2), which relates to the conditions an owner must meet to qualify for one of the tenancy exemptions, requires only three months of occupation during the year by an arm’s length tenant, as opposed to the regular six months.
With respect, a rate of 0.5% is still very meaningful. It can still result in a taxpayer paying tens of thousands of dollars of additional tax. The reduced occupation period for tenancies is also problematic. There are several detailed conditions that need to be met for a tenancy to make the owner exempt. Having a bona fide lease is not enough. As a result, it is certainly possible that an owner will have rented out their property in good faith but will not satisfy all the conditions. Because the Bill was released less than 3 months before the end of the year, those owners – through no fault of their own – will be too late to make any adjustments necessary to qualify for the exemption.
(b) Subsection 36(2)
Staying with tenancies, subsection 36(2) says that, for an owner to qualify for the arm’s length tenancy exemption, two main conditions must be met. First, the tenant must be entitled under a written long-term lease to occupy a residence on the property. This is largely uncontroversial (although it does exclude Airbnb-style rentals). The second condition, however, is that the residence must, for each month, be “a place the tenant makes the tenant’s home”. The word “home” is undefined in the Bill, though presumably it is different than “principal residence” (which is defined). Likewise, there is no guidance in the Bill for what steps an owner must take to determine whether the tenant has actually made the residence their home in a particular month.
In most cases it will be highly impractical, if not impossible, for an owner to have detailed knowledge of their tenant’s use of a residence. While an owner might reasonably know whether their tenant has occupied the premises at certain times (e.g. at the start of the lease), it is unfair to insist, for the purposes of making the declaration required under section 62 of the bill, that the owner know with confidence month-to-month whether the tenant has also made it their home. More importantly, it is problematic for the imposition of the tax to depend essentially on the nature and extent of someone else’s private use of realty.
(c) Section 5
The taxation of a so-called “satellite family” member – or, in the language of the Bill, an “untaxed worldwide earner” – turns mainly on the scope of the definition that appears in section 5. In essence, an untaxed worldwide earner is identified by comparing an owner’s Canadian-reported (or assessed) income to their worldwide income. If the former is eclipsed by “the total of all amounts the individual earns or realizes in any manner inside or outside Canada” that has not been reported in a Canadian income tax return, then they must pay the speculation tax at the highest rate, unless one of a more limited set of exceptions applies.
For purposes of the definition, an individual who fails to file their federal income tax return for a year is deemed to have nil reported income. In those circumstances, any income earned in the year might qualify the individual as an untaxed worldwide earner. This could potentially be the case even if all taxes owed had already been collected via source deductions. There is seemingly no exclusion for those who would owe no taxes, or even be entitled to a refund, if their return were filed (which is a somewhat common scenario). If that oversight lasts beyond December 31 of the subsequent year, it is unclear whether any later filing or assessment cures the initial lapse. The individual may forever be considered an untaxed worldwide earner for that year even if they are lifelong BC resident and, for example, occupy the property at issue as their principal residence.
Furthermore, are gifts, loans, or inheritances included as amounts “earned or realized” for the purposes of the definition? If the intent is to capture low- or untaxed satellite family members owning homes in BC, presumably they would be. However, those amounts are not reported on an income tax return. Therefore, if a BC resident receives a significant loan or gift from a family member – living inside or outside Canada – does that mean they are an untaxed worldwide earner for that year?
With respect, these concerns illustrate the Bill’s generally problematic interaction with the federal Income Tax Act.
(d) Section 77
Another concerning provision is the broad anti-avoidance provision in section 77. In short, general anti-avoidance rules (GAARs) exist in several tax statutes in order to empower the relevant taxation authority to deny a tax benefit to a person who has engaged in abusive tax avoidance. In that regard, the courts have long since established that a person is legally entitled to arrange their affairs in a tax-efficient manner; in other words, mere tax avoidance is entirely permissible. Thus, the typical point of contention in GAAR disputes is whether the transactions at issue go so far as to be abusive. The “abuse” requirement is vital to balance the public and private interests at stake in a tax regime.
The GAAR in section 77 of the bill, however, is missing the critical “abuse” requirement. Depending on how this is interpreted, the province could arguably issue assessments against owners who deliberately seek to avoid the speculation tax by undertaking transactions that clearly align with the purpose of the legislation, such as encouraging sales or tenancies of underutilized residences. For instance, what if a foreign owner rushes to sell their otherwise taxable property by December 31st to avoid the tax for that year? In that case, the owner would be following a direct aim of the bill (i.e. increasing housing supply). However, they may nevertheless be exposed to the risk of an assessment based on section 77.
Then there is the practical application of the Bill’s current GAAR. The province has not made public any policies that would direct, or limit, the use of the GAAR. Accordingly, it is unrealistic to expect that tax auditors would in every case decline to use the power in the provision to pursue an owner they happen to believe, for one reason or another, is getting away with something.
(e) Section 83
This provision sets out a gross negligence penalty for certain non-criminal misconduct by owners. This type of penalty is common in tax statutes. It involves a civil monetary sanction being imposed by the tax authority. In theory, such penalties should be limited to imposing reasonably onerous consequences on taxpayers who exhibit intentional non-compliance.
In the GST/HST setting, the equivalent penalty is essentially equal to 25% of the underreported tax. In the income tax setting, the rate is generally 50% of the tax liability. In section 83, however, the rate is 100%. With respect, this is exceptionally harsh. A penalty at that level is more akin to fines levied in response to the commission of a criminal offence. A penalty which effectively doubles a tax assessment seems, with respect, unduly punitive.
(f) Section 84
This provision incorporates into the Bill, with slight modifications, the advisor penalty found at section 163.2 of the Income Tax Act (Canada). That penalty is essentially an administrative fine imposed on persons who assist or cause others to make a false statement for tax purposes. At the simplest level, this penalty could be assessed against someone who prepares an incorrect tax return for filing, where the falsehood is included in the return knowingly or in circumstances amounting to culpable conduct. The penalty amount varies based on several factors but could result in a severely high liability owed by the advisor.
While a special penalty for bad-apple advisors might be appealing to some, the inclusion of section 84 in the bill is alarming. There are two related reasons for concern. The first involves the key role played by advisors, such as lawyers and accountants, in virtually all functioning tax systems. Tax laws are profoundly complex and generally require self-reporting. Many individuals rely on advisors to assist them in determining how a tax applies to them.
The presence of the advisor penalty in the Bill may very likely have a chilling effect on advisors. In that regard, the tax is new and complex and its administration untested. Additionally, the penalty is levied on advisors personally. In this setting, many honest, competent advisors might consider that assisting an owner in complying with the intricate and highly technical provisions of the Bill is simply not worth it. This would inevitably, and unreasonably, diminish taxpayer fairness.
A second issue with section 84 is that it appears in a dramatically different context than section 163.2 of the Income Tax Act (Canada). Section 163.2 was a heavily scrutinized response to misconduct among a small number of advisors, namely those promoting certain tax shelters or preparing fraudulent tax returns. Several years of parliamentary committees, and multiple turns of the enabling legislation, took place before section 163.2 was enacted in 2000.
The environment surrounding the Bill appears fundamentally different. The speculation tax has not yet been implemented, and the Province has not identified any group of advisors requiring corrective action. Section 84 should be scrutinized closely, and ideally subjected to a meaningful public consultation process, before being incorporated into any final legislation.
The Bill is presently moving through the committee stage of the legislative process, which is usually when particular provisions of a bill are given the most attention. We hope that the issues discussed above, among others, are examined carefully and rigorously before further steps are taken.