The province of British Columbia offers a variety of compelling reasons for people to consider a life within its borders. Its majestic outdoors, diverse economic opportunities, culture, ethnicity, and quality educational systems make BC an appealing destination. Immigration has long been a sizeable component of the growth trajectory, and many foreigners seek a footprint within the province to spend a portion of their time. Although foreign investment is welcomed, it has had an unintended consequence of amassing dramatic increases in the price of real estate. In 2018, the government enacted the BC Speculation and Vacancy Tax (SVT) to help address the real estate affordability factor caused by excess foreign investment in major urban areas. Essentially, the BC government is leveraging this tactic to promote behavior that turns empty homes into housing for traditional residents of BC.
In the spirit of improving the affordability of specified housing markets, the SVT imposes an annual tax based upon how residents utilize their real property, the real property owner’s residency status, and where the owner(s) derive and report income. The tax rate varies depending on the tax residency of the property owner(s), as well as whether the owners are Canadian citizens, permanent residents, or a “satellite family.” In 2021, the tax rates are:
- 2% for foreign owners and “satellite families”
- 5% for Canadian citizens or permanent residents of Canada who are not members of a “satellite family”
Many returning Canadian citizens or permanent residents may be deemed a “satellite family.” The United States imposes taxes based on citizenship. This is not the case in Canada. Canada’s personal income tax system is imposed based upon residency. Because many Canadian citizens who have been residing in the US have not been required to file Canadian tax returns – because they were no longer physical residents of Canada or met other non-residency tax requirements – under the SVT rules, they would be categorized as a “satellite family.” This term refers to an untaxed worldwide earner whose unreported income (in Canada) is greater than their reported total income (in Canada). This ratio of unreported vs. reported income is derived from the individual’s income in the previous tax year. Herein lies the potential problem. Because a returning Canadian citizen might not have had the requirement to file a Canadian tax return for the year prior to returning to Canada, the applicable ratio of income sources prompts or creates the “satellite family” status.
Let’s utilize an example to further clarify the issue. A Canadian citizen couple currently living in Texas have decided that in 2022 they would like to return to Kelowna, BC. This couple ultimately decides to purchase and close on a property that will ultimately become their Canadian principal residence. Given that Kelowna is an SVT locality, they will be subject to SVT in early 2022. On an annual basis, the couple will need to complete a declaration as to how the property was utilized. The information included outlines the critical ratio of unreported vs. reported income and is extrapolated from the 2021 tax year. Because in 2021 the couple were not tax residents of Canada, under the SVT rules they would be classified as a “satellite family” unless certain exemptions apply.
Specific to the example above, owners can leverage an SVT exemption for the year in which they purchased property if they paid the BC property transfer tax on the purchase transaction. There are other exemptions that could potentially apply, however this one is tailored for the example that we have shared.
For tax years 2023 and beyond, the family would ultimately no longer be classified as a “satellite family.” Therefore, the SVT would no longer apply to them, and they would be entitled to the traditional principal residency exemption in Canada if they were to sell their home. However, because they are also US citizens, they should be aware of the different US tax rules that would apply to them if they do sell this property in the future.
In summary, there are many cross-border challenges to consider in returning one’s personal and financial life back to Canada. The SVT is certainly one issue that may arise, and the education provided in this article should be reviewed with competent cross-border tax and financial planning expertise as tax laws are in constant motion. To review your unique SVT scenario or other cross-border endeavors, speak to someone at Cardinal Point.