A Primer On Canada’s Vacant Home Taxes For U.S. Citizens And Residents

Disclaimer: This post is of a general nature. I will assume that the owner of the property is an individual person. This post does NOT address situations where the property is owned by a corporation, trust or other kind of entity. Vacant property regimes are different and may include enhanced rules for situations where residential property is NOT owned by an individual (including corporations, trusts, etc.). Under NO circumstances should the information in this post be considered to be complete. It is designed to provide an overview. In many cases you will be well advised to seek professional help. (I am thinking mainly of Canada’s Underused Housing Tax and the BC “Speculation And Vacancy” taxes.)

Outline:

Part I – Introduction – The Housing Shortage Of 2023
Part II – Impacts of Canada’s Underused Housing Tax on Canadian border communities
Part III – How Vacant Home Taxes Work – The Usage Of The Property ALWAYS Matters And Can Ensure The Tax Is Avoided
Part IV – How Vacant Homes Tax Differ – The Three Categories Of Taxes
Part V – The BC “Speculation And Vacancy Tax” – Moving To Canada
Part VI – Concluding Thoughts

Part I – Introduction – The Housing Shortage Of 2023

Vacant home taxes are a new kind of tax in Canada. They are the inevitable result of a rise in housing prices, a shortage of rental housing caused by short term rentals (AirBNB and others), a rise in rents (caused by the shortage of rental housing) and a political climate that is responsive to the housing shortage. This is NOT just a problem in Canada, but also in other countries. A recent New York Times article reported on similar conditions in Portugal (which interestingly resulted in the cancellation of Portugals “Golden Visa Program”).

Canada’s Family Of Vacant Home Taxes

Various Canadian governments have created a family of Canadian Vacant Home Taxes. Vacant Home Taxes are significant levies on owners who neither occupy their property as a principal residence nor rent the property to “arms length” tenants. The only true “safe islands in an ocean of punitive taxation” are in circumstances where ALL owners occupy the property as a principal residence (except possibly the BC Speculation And Vacancy Tax) or the property is rented and occupied by an “arms length” tenant for at least six months of the year.

Vacant Home Taxes are levied by all three levels of government: Federal (Canada’s Underused Housing Tax), Provincial (BC Speculation And Vacancy Tax) and Municipal (Toronto, Vancouver, Hamilton and Ottawa, etc.). “Canadian Vacant Home Taxes” are becoming increasingly prevalent.

Property owners can be impacted by more than one tax. A U.S. resident owning a vacant home in British Columbia could be subject to each of: Canada’s Underused Housing Tax, Vancouver’s Empty Home Tax and the BC Speculation And Vacancy Tax. Each of these taxes is independently punitive. Some might argue that the combined effect of all three is confiscatory. For example a U.S. resident who owned a vacant condo in Vancouver valued at 3.3 million Canadian dollars would be subject to combined “vacant home taxes” of $264,000 CDN for the 2023 year. As the following tweet indicates:

Interesting! At the current rate of Vancouver’s vacancy tax (5%), and given BC’s vacancy tax (2%) and the federal underused housing tax (1%), the author’s condo (valued in 2017 at $3.3 million) could trigger additional annual tax of $264,000 for 2023 alone (if valued the same).

Part II – Impacts of Canada’s Underused Housing Tax on Canadian border communities

Canada’s vacant home taxes have been particularly upsetting to U.S. residents who own second homes in Canada.

In 2017 a U.S resident, in an article in the Wall Street Journal, referred to the Vancouver “Empty Home Tax” as “Canada’s Tax On Being American”.

The author, claiming that the tax is aimed at “foreigners” writes:

A few months later, Vancouver introduced an annual “empty home tax” equal to 1% of the property’s assessed value. Since the levy is inapplicable if your Vancouver home is your principal residence, it’s obviously aimed at foreigners like us. At our condo’s current valuation, the tax will cost us almost US$33,000 a year.

She makes the further claim that the Vancouver Empty Home tax is based on nationality:

Nationality-based taxes are among the worst kinds of protectionism. The North American Free Trade Agreement expressly covers real estate owned by Americans in Canada. For that matter, Nafta covers real estate owned by Canadians in the U.S., of which there is plenty.

Although the Vancouver Empty Home Tax is NOT based on nationality (although Canada’s “Underused Housing Tax” is based on nationality), the author is correct that citizenship/nationality taxes are offensive. That said, the United States is the only major country in the world that defines “tax residency” in terms of citizenship/nationality (making the author’s claim somewhat hypocritical).

More recently, New York Congressman Brian Higgins has been particularly aggressive in objecting to the application of Canadian vacant property taxes to U.S. residents. The Canadian Government held hearings on the “Impacts of the Underused Housing Tax on Canadian border communities”. The hearings took place on June 5, 8 and 19 2023 and may be accessed here. On June 5, 2023 Congressman Higgins was a witness at the hearing. His comments referenced the application of Canada’s “Underused Housing Tax” to U.S. residents living in upstate New York. A transcript of his comments may be read here. Congressman Higgins is requesting that his constituents in New York State be exempted from the tax. His closing statement at the hearing was:

Mr. Brian Higgins:

I think you’re correct in that I understand why Canada would impose a tax on large swaths of land because of the larger problem that it creates. What I believe about that is really not relevant. That’s for you to decide. I suppose what I would ask each of you to consider is whether or not this tax, the vacant and underutilized tax, was intended to affect communities. You refer to them as rural communities that are outside of the urban areas. I refer to them as cottage communities.

Was that the intent, and if it wasn’t, is there some way that could be contemplated as it relates to revising that to exclude certain properties, like seasonal properties, that this was seemingly not intended to include?

Citizenship Taxation

Canada’s Underused Housing Tax is NOT based on “tax residency”. Rather, Canada’s Underused Housing Tax is a tax based on “citizenship” or”immigration status”. The U.S Tax code imposes income taxes based on “citizenship” and “immigration status”. Significantly, the U.S. imposes taxation on the Canadian source income of those Canadian residents who are also U.S. citizens. It is therefore reasonable to conclude that:

1. Congressman Higgins is objecting to Canada applying “citizenship taxation” on U.S. citizens living in the United States; while

2. the U.S. applies “citizenship taxation” to many Canadian citizens living in Canada.

In any case, Congressman Higgin’s complaint is about “citizenship taxation“.

Part III – How Vacant Home Taxes Work – The Usage Of The Property ALWAYS Matters And Can Ensure The Tax Is Avoided

Generally every property owner (Canada’s Underused Housing Tax is the exception) is required to report every year and answer questions about the usage of the property. These who fail to report are subject to the maximum tax. Those who do report must demonstrate that they are either NOT required to pay the tax (principal residence, rented out or some other exemption) or not subject to the maximum tax (citizenship/immigration status or tax residency status). All vacant home taxes start with a presumption that the owner must pay the full tax. The property owner bears the burden (by filing the return and providing information about the usage) or demonstrating that it (he, she or an entity) is exempt or subject to a lower tax.

“Some” ways of avoiding the tax …

Generally, if the property is rented to “arms length” tenants for at least six months of the year no vacant property tax is owing. With the exception of the BC “Speculation And Vacancy” Tax occupancy by the owner as a principal residence will result in no tax payable.

Vacant Home Taxes In Canada- Three Categories

Category 1. Based On Ownership: Targets ALL owners of the property and the tax is imposed based on the usage of the property – Targets people based on and only on being the owner of the property. The tax may be avoided based on the usage of the property (generally if used as a primary residence or if it is rented to tenants). (Municipal)

Category 2. Based On Ownership + Citizenship/Immigration status of the owner: Targets owners of the property based on the citizenship and immigration status of the owner (NOT being a Canadian citizen or Permanent Resident of Canada) – The tax may be avoided based on the usage of the property (Federal – Canada’s Underused Housing Tax).

Category 3. Based On Ownership + Citizenship/Immigration status + tax residency of the owner + source of the owner’s income – (British Columbia “Speculation And Vacancy Tax”)

Generally the BC “Speculation And Vacancy Tax” operates as follows:

Step 1: Targets all owners of the targeted properties and presumes they are subject to the maximum tax (every owner is required to file a return)

Step 2: Identifies those owners who are Canadian citizens or permanent residents. (Being a Canadian citizen or permanent resident” is a necessary BUT NOT SUFFICIENT condition to being subject to a lower rate of tax or being exempt from the tax.) An individual must be a “specified Canadian citizen” or “specified Permanent Resident” or “resident of British Columbia” to have preferential treatment or an exemption from the tax. (Note that if a Canadian citizen or Permanent Resident is is an “untaxed worldwide earner”, then that person cannot be a “specified Canadian citizen” or “specified permanent resident”.

Step 3: Determines whether the owner is an “untaxed worldwide earner. This is a determination based largely on the “tax residency” and income of of the owner. Generally an individual is an “untaxed worldwide earner” if more of his income (or combined income with his spouse) is NOT subject to tax in Canada than is subject to tax in Canada. (Significantly the income of both spouses is combined to determine whether the individual is an “untaxed worldwide earner”.)

Step 4: Determines whether the owner is a “specified Canadian citizen” or “specified Permanent Resident” or “resident of British Columbia” and is therefore subject to a preferential tax rate or an exemption. Note that if the individual is an “untaxed worldwide earner” he cannot meet this requirement. (Like Canada’s Underused Housing Tax the BC “Speculation And Vacancy Tax” does discriminate based on citizenship or immigration status. (Arguably, for this reason it may violate the non-discrimination provision in the Canada U.S. tax treaty.)

Significantly, the primary residence exemption is not available to an owner who is an “untaxed worldwide earner”.

Let’s examine each of the three categories in more detail …

Part IV – How Vacant Homes Tax Differ – The Three Categories Of Taxes

Category 1. Based On Ownership: Targets all owners of the property and the tax is imposed based on the usage of the property – Targets people based on and only on being the owner of the property (Municipal)

Municipal Vacant Home Taxes – “Simplicity Is Virtue” – Focus ONLY on the usage of the property

To date, municipalities (Toronto, Hamilton, Vancouver, etc.) base their tax on ONLY the usage of the property. It doesn’t matter who the owner is, where the owner lives or what the income sources of the owner are.

Generally these taxes proceed on the basis that:

If the property is neither occupied as a principal residence nor rented to a tenant (for a prescribed portion of the year) then the tax will apply.

If the tax applies, that tax is a percentage of the assessed value of the property.

Municipal vacant home taxes are conceptually simple, easy to understand and designed to incentivize owners to release their properties into the rental market.

Category 2. Based On Ownership + Citizenship/Immigration status of the owner: Targets owners of the property based on the citizenship and immigration status of the owner (NOT being a Canadian citizen or Permanent Resident of Canada) – The tax may be avoided based on the usage of the property (Federal)

Canada’s Underused Housing Tax – More Complicated – Focus is FIRST on the Citizenship and Immigration Status of the owner and SECOND on the usage of the property

In general Canada’s Underused Housing Tax does NOT apply to Canadian citizens or permanent residents whether they are “tax resident” of Canada or not! For example, a Canadian citizen living in the United States who owned a house in Canada would (because of Canadian citizenship) (1) NOT be subject to the tax and (2) would not be required to file an Underused Housing Tax Return. Generally the tax applies to property owners who are neither Canadian citizens nor permanent residents of Canada. Canada’s “Underused Housing Tax” is therefore a tax based on citizenship (not Canadian citizens) or immigration status (not Permanent Residents of Canada). Welcome to the unjust world of “citizenship taxation“!

If one is neither a Canadian citizen nor a permanent resident of Canada it is unlikely that the property could be occupied as a principal residence. Therefore, the tax (with few exceptions) can be avoided only if the property is released to the rental market (with all the implications). From a practical perspective Canada’s Underused Housing Tax, is a tax levied on “foreign” owners of Canadian residential housing. The tax is far more complex than its municipal cousins. The key point is that Canada’s Underused Housing Tax:

First, focuses on the citizenship or immigration status (not the “Tax residency”) of the owner.

Second, focuses on the usage (occupancy status) of the property.

Third, can be avoided (subject to the specifics of the legislation) only by releasing the property into the rental market. To release the property into the rental market subjects the owner to provincial landlord tenant legislation which is extremely tenant friendly and could cause the owners to lose control of their property.

Notably the focus in on the citizenship and immigration status of the owner and NOT on the “tax residency” of the owner. A Canadian citizen living in the United States is NOT subject to Canada’s Underused Housing Tax. A U.S. citizen living in the United States is subject to Canada’s Underused Housing Tax. Therefore, it is clear that the Canadian tax is a tax based solely on citizenship or immigration status. It is pure citizenship-based taxation.

When the tax is payable, it is generally based on the “value” (which can be determined in multiple ways) of the property.

The legislative scheme of Canada’s Underused Housing Tax is complicated. Many people will need professional assistance in completing their returns.

Category 3. Based On Ownership + Citizenship/Immigration status + tax residency of the owner + source of the owner’s income: Targets all owners of the property providing a preferential tax rate for those who are Canadian citizens, Permanent Residents of Canada or residents of British Columbia. It then denies the preferential tax rate and/or exemption to owners who (although Canadian citizens or Permanent Residents) are “untaxed worldwide earners”. (British Columbia)

An information sheet on the BC “Speculation And Vacancy Tax” is here:

https://www2.gov.bc.ca/gov/content/taxes/speculation-vacancy-tax/how-tax-works/terms-definitions#untaxed-worldwide-earner

The text of the BC “Speculation And Vacancy Tax” is here:

https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/18046

BC Speculation And Vacancy Tax – MOST Complicated – Is determined by four factors which include:

1. Usage: The usage of the property – Relevant to whether an exemption is available. Many people will be exempt because the property is used as a principal residence or as a rental property.

2. Citizenship/Immigration Status: The citizenship and/or immigration status of the owner – Canadian citizenship or permanent residence is a NECESSARY but NOT SUFFICIENT condition to qualify for a lower tax rate or an exemption!

3. Tax Residency: “Tax residency” of the spouse and owner – Relevant to determination of whether an owner is an “untaxed worldwide earner”

4. Source Of Income: Income and sources of the owner and his/her spouse – relevant to a whether an owner is an “untaxed worldwide earner”

The BC “Vacancy And Speculation Tax” is a difficult and complex tax consisting of many moving parts. A fundamental principle of taxation is:

The more complex the tax, the more likely it will result in unfairness.

The article referenced in the following tweet demonstrates a (likely) unintended consequence of the tax. Yes, in this case the BC “Speculation And Vacancy Tax” is a tax based on being married to a nonresident spouse. (I have received calls from two families exploring whether a divorce might solve their BC tax problem!)

Generally the BC “Speculation And Vacancy Tax” starts at a high rate which can be reduced to zero if the property has been released into the rental market. In the event that the property is occupied as a principal residence the tax may or may not apply depending on the citizenship/immigration status of the owner and the extent to which their income is taxed in Canada. Yes, this is complicated. It leads to unfair results. An example of the unfairness is the case of a Richmond, BC resident whose circumstances are described in the following article:

His Terra Nova home is his only property, which he bought in 2000 and where he raised both his children. The house is in his name, not his wife’s, and the two don’t have shared accounts.

Chan said previously that he hasn’t “moved anywhere,” his home has never been rented and has never been vacant for more than a few months a year when he visits his wife in the U.S.

Under the tax, Chan is defined as an untaxed worldwide earner – or a member of a satellite family – because most of the household income is earned outside of Canada.

Understanding the “untaxed worldwide earner” – Are you a “tax resident” of Canada?

An untaxed worldwide earner, also known as a member of a satellite family, is an individual whose unreported (in Canada) income is greater than their reported (in Canada) total income. An individual’s income is combined with their spouse’s income for the purposes of this calculation. In the example of the Richmond, BC resident above, the Richmond resident was married to a U.S. resident. The U.S. resident had a higher income than the Richmond, BC resident. Furthermore, the income of the U.S. resident was NOT taxable in Canada. Therefore, most of the combined family income was NOT taxable in Canada. As a result, the Richmond, BC property was owned by an “untaxed worldwide earner”. The consequence of being an “untaxed worldwide earner” is that one:

– cannot meet the definition of “specified Canadian citizen”

– cannot meet the definition of “specified Permanent Resident”

– cannot meet the definition of “resident of British Columbia”

and therefore

– cannot qualify for the primary residence exemption to the BC “Speculation And Vacancy Tax”; and

– will always be subject to the highest rate of tax!

This can lead to being subject to a 2% tax on the value of your home!

To put it simply: All “untaxed world earners” who are Canadian citizens living in their property are subject to the 2% tax. Example: If the property is assessed at one million dollars you are subject to a $20,000.00 annual tax. Note that this is a way to impose taxation on income sourced outside of Canada to a an individual who is NOT a “tax resident” of Canada!!! This is pure evil!!!

Part V – The BC “Speculation And Vacancy Tax” – Moving To Canada To Occupy Property Already Owned

There are many Canadians who live in the United States and continue to own property in Canada. In many cases they will move back to Canada to live in a property they already own.

A Nasty Surprise For Those Contemplating A Move To Canada To Live In Property Already Owned

Note also that the reported and unreported income calculations used are from the tax year before the speculation and vacancy tax year. For example: the income information for the 2022 year would be used to determine the tax implications in the 2023 year.

What does this mean for current property owners planning to move to and become tax residents of Canada and occupy those properties in the following year? If their income was NOT taxed in Canada then they would be treated as “untaxed worldwide earners” in the year prior to moving to Canada. They may be subject to the BC “Speculation And Vacancy Tax” even when as tax residents of Canada all of their current income would be taxed in Canada. The legislation provides an exemption for only the year that the property is purchased.

The move will likely require tax planning! (Can you imagine the horrific situation of a Canadian citizen Green Card holder in the United States whose move to Canada might subject him (in addition) to the U.S. 877A Exit Tax!)

Part VI – Concluding Thoughts

Canada’s Underused Housing Tax and the BC “Speculation And Vacancy Tax” are complicated taxes. People will certainly have difficulties with compliance. Strongly suggest that you seek assistance with filing (at least) your first return.

John Richardson – Follow me on Twitter @Expatriationlaw

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