On June 21, 2007, the Province of British Columbia passed amendments to the Assessment Act (British Columbia) (the "Act") and the Prescribed Classes of Property Regulation (the "Regulations"). These new amendments relate to the assessment of ski resorts, ports and "strata hotels."
This article addresses the new regime for assessing "strata hotels." As described in more detail below, the amendments create a new classification regime under which qualifying strata lots will be assigned a split classification based on the number of days in a year they are actually rented for short-term rentals.
What Are "Strata Hotels"?
"Strata hotels" are facilities made up of individually owned strata lots pooled together for the purpose of being rented for overnight stays to the traveling public. In practice, some units in strata hotels are used purely for business purposes while others have a significant personal use component.
The amendments to the Act and Regulations provide some relief for owners in strata hotels that have a personal use component.
Classification of Strata Lots in Strata Hotels Prior to Amendments
For years, owners of strata lots in strata hotels have been in conflict with B.C. Assessment over whether their strata lots should be classified as "Class 1 – Residential" or "Class 6 – Business." Municipal tax rates for "Class 6 – Business" are typically about four times higher than the tax rates for "Class 1 – Residential." Not surprisingly, owners of strata lots in strata hotels have advocated for their strata lots to be classified as "Class 1 – Residential."
Pursuant to section 1 of the Regulations, a property is classified as "Class 1 – Residential" if it is "used for residential purposes." However, a number of property types are expressly excluded from "Class 1 –Residential," including hotels and motels. If a property is specifically excluded from "Class 1 – Residential," it is classified as "Class 6 – Business" by default and becomes subject to significantly higher property taxes.
In 1991, the British Columbia Court of Appeal in Assessor of Area 1 Sanich-Capital v. Hard (1992), 88 D.L.R. (4th) 183 ruled that strata lots in a building that were pooled together for the purpose of being rented out in a manner similar to a hotel was not a "hotel" and therefore not excluded from "Class 1 – Residential."
Shortly after the Hardt decision, the Province amended section 1 of the Regulations to create a new exclusion from "Class 1 – Residential" for short-term overnight accommodation properties, or "STOCAPs." The language of this exclusion was very complex and resulted in a significant amount of litigation as to its interpretation. Additionally, owners adopted creative strategies to attempt to avoid the STOCAP exclusion. One such strategy involved the use of multiple rental management companies, while another strategy required an owner to ensure that his or her strata lot was not rented, or available for rent, for more than 50 per cent of the year. Owners who adopted these and other strategies met with mixed success. As a result, an unfortunate situation developed where in any given community owners of strata lots in one strata hotel would enjoy a "Class 1 – Residential" classification while owners of strata lots in another almost identical strata hotel would suffer the burden of a "Class 6 – Business" classification.
Strategies adopted to avoid the STOCAP exclusion had other undesirable consequences: Examples of such consequences are as follows: (i) some of the strategies likely had a negative impact on the rental revenue earned by owners; (ii) the use of multiple property managers resulted in increased administrative burdens and generally poorer guest services and experience; and (iii) the "forced vacancies" necessitated by some of the strategies cut against the general community’s desire to maximize rental occupancy to maintain and enhance community vibrancy.
The New Amendments - Highlights
As a result of the new amendments to the Act and Regulations, the following changes have been made to the way strata lots in strata hotels are to be classified:
1. Individual strata lots will be subject to a split classification between "Class 1 – Residential" and "Class 6 – Business" based on the number of days the strata lot is actually rented, based on the following formula:
- Class 6 = the number of days the strata lot is actually rented (for periods of less than 28 days) in excess of 36 days/365
- Class 1 = the balance, which is equal to the sum of the number of days the strata lot is used by owners and their guests, vacant days and maintenance days plus the 36 exempt rented days/365
2. An owner is only entitled to the split classification if:
a. the owner had the right to use the strata lot for at least seven days during the previous year; and
i. the owner or owner’s guests actually used the strata lot for seven days during the previous year; or
ii. more than 50 per cent of the strata lots in the development were used by their owners or owner’s guests for at least seven days during the previous year; and
c.the owner provides the prescribed usage information to BC Assessment by August 31 of the year previous to the applicable tax year.
3. Existing "Class 1 – Residential" strata lots are grandfathered provided that the strata lots continue to be used in a manner that would have resulted in a "Class 1 – Residential" classification under the old regime. Unfortunately, the grandfathering provisions are confusing and in some circumstances may not accord with the stated intentions of the Province and BC Assessment.
4. The usage reporting period for classification has been changed to the 12 months ending June 30 of the year previous to the applicable tax year. Previously, the usage reporting period was the 12 months ending October 31.
The New Amendments – Benefits
In many circumstances, the new split-class regime will result in fairer property tax treatment. As such, it is a welcome change.
For owners of strata lots with a personal use component that are currently classified "Class 6 – Business" under the STOCAP exemption, the split classification regime should result in significant tax savings. Most owners will now only be assessed as "Class 6 – Business" for those days in excess of 36 that the owner’s strata lot is actually rented and generating revenue.
The following example illustrates how the split-classification regime would apply to a qualified strata lot:
- if a strata lot were rented for fewer than 36 days in a year, it would be 100 per cent "Class 1 – Residential"; and
- if that strata lot were rented for 100 days in a year, it would have a split classification of 18 per cent "Class 6 – Business" ((100 days– 36 exempt days)/365 x 100 = 18%)) and 82 per cent "Class 1 – Residential."
Accordingly, the split-classification regime is likely to be embraced by owners in strata hotels where there is a personal use component.
As the higher "Class 6 – Business" classification will now only be applied to days that a strata lot is actually rented, it is anticipated that owners will now structure their affairs without being unduly influenced by their desire to achieve the more advantageous "Class 1 – Residential" classification. As a result, the new regime will likely:
- reduce the number of owners who remove their strata lots from rental programs, which should increase the overall revenue and marketability of a given strata hotel;
- reduce the number of strata hotels that use multiple management companies, which should improve these strata hotels from a renter’s use and enjoyment perspective;
- remove the impetus for owners to structure their affairs in a manner that might be contrary to restrictive covenants often registered on title that require each strata lot to be placed in the rental program when not being used by owners or their guests; and
- provide new strata hotel developers and prospective purchasers with the knowledge that purchasers will be subject to a fairer property tax classification regime, and accordingly help to promote the continued development of strata hotels in resort destinations throughout the Province.
Note that several of the foregoing benefits are less likely to be achieved in strata lots presently classified as "Class 1 – Residential" and for which the owners intend to rely on the grandfathering provisions contained in the amendments. For such strata lots, there will be a continuing incentive for owners to maintain the systems presently used by them to obtain the "Class 1 – Residential" classification.
Finally, as often occurs when a government attempts to modify a taxation system, there will likely be unanticipated and unintended results arising under the new split class regime. One such result will likely occur in strata hotels where revenue is pooled but the tax burden is not. In such a strata hotel, an owner of a unit rented more frequently (for example, by virtue of being on a higher floor or having a better view), would have a higher percentage "Class 6 – Business" allocation, while an owner of a unit rented less frequently would share in the rental revenue from the other owner but would enjoy a more favourable split classification. It would be prudent for strata hotel developers to address such inequities (real or perceived) before filing a disclosure statement and selling strata lots to the public.