Category Archives: Vacant Home Tax

Canadian citizenship: When citizenship in one country affords rights of access to another country

Part I – Citizenship in the 21st century

In the 20th century few people thought much about citizenship. Few people thought about the value of multiple citizenships.

In the 21st century people think about citizenships. People are beginning to see the value of having more than one citizenship. They are also (because of the awareness (caused by FATCA) of U.S. citizenship taxation) beginning to see the value of NOT being a U.S. citizen. (Interestingly U.S. Senator Ron Wyden is claiming that dual citizenship provides enhanced opportunities for tax evasion.)

When people renounce U.S. citizenship they will experience the following changes:

1. For U.S. immigration purposes they cease to be U.S. citizens and are treated by the United States like all other citizens of their country of citizenship; and

2. For U.S. tax purposes they cease to be “U.S. Persons” and become “nonresident aliens”. (This loss of U.S. citizenship may or may not be a benefit depending on their individual circumstances). The definitions of “U.S. Person” and “nonresident alien” are found in “26 U.S. Code § 7701 – Definitions“.

When citizenship may afford enhanced rights of access to other countries

Those with more than one citizenship will remember situations where citizenship in one country provided benefits that citizenship in another country did not. Sometimes the benefits are mundane (citizens of one country paying less for an entry visa than citizens of another country). Sometimes citizenship is a condition for various kinds of “enhanced entry programs” (think the U.S. Global Entry programs that include NEXUS.) Sometimes the benefits are more substantive (visa free access for citizens of country A and no visa free access for citizens of country B). Sometimes citizenship in one country gives the right to live in other countries (think citizenship in EU countries). Sometimes citizenship in one country gives the right to seek specific employment in other countries (think Canada-US-Mexico TN visas.) Sometimes there are tax advantages (the France U.S. tax treaty affords interesting tax benefits for U.S. citizens living in France). Sometimes citizenship can protect a person from extradition requests (civil law countries are reluctant to allow their citizens to be extradited). Sometimes citizenship can protect a person from tax enforcement claims from another country (the U.S./Canada tax treaty affords certain protections to individuals based on citizenship status). Sometimes citizenship can protect a person from certain kinds of taxation (Canada’s “Underused Housing Tax” and the BC “Speculation and Vacancy Tax” are recent examples). The point is that citizenship may (and often does) afford benefits that extend beyond the right to live and work in a country. When considering whether to seek various citizenships or renounce various citizenships it is important to think beyond the basic right to live in a country.

Conclusion: ANY change in your citizenship (whether renouncing U.S. citizenship or acquiring an additional citizenship) should consider the issues raised above!!

Part II – What about Canadian citizenship? What do Canadians give up by renouncing U.S. citizenship? What are the reasons (there are many) why Permanent Residents of Canada should naturalize as Canadian citizens?

Because of generous and easy access to the United States, Canadian citizens who renounce U.S. citizenship give up far less than citizens of many other countries. Furthermore, becoming a Canadian citizen affords many privileges vis-a-vis the United States and Canada.

Rather than list the reasons individually I am pleased (with his kind permission) to refer you to a recent post by Los Angeles based immigration lawyer Parviz Malakouti-Fitzgerald, Esq. The post – Six Benefits of Canadian Citizenship for Access to the U.S. Market – is referenced in the following tweet.

The post has its origins in a recent twitter exchange and begins as follows:

Does being a Canadian citizen offer unique benefits of access to the United States market?

This is more-or-less the question I read on twitter from U.S. citizenship renunciation expert John Richardson last week on the last day of 2023.

“Question on @Quora: Is the only real advantage in being a Canadian in accessing the US market, six months visa free stays & a limited range of professions on the TN visa list which also does not lead do a Green Card? No special concessions or fast track ..”

The author provides an excellent, well researched summary. It not only demonstrates why Canadians give up less by renouncing U.S. citizenship but also why Canadian citizenship is valuable to have.

I encourage you to read the complete post here …

https://www.malakoutilaw.com/six-benefits-of-canadian-citizenship-for-access-to-the-u-s-market

John Richardson – Follow me on Twitter @Expatriationlaw

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 …

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