With the high cost of housing in British Columbia, both on the rental and purchasing markets, it can be very challenging for young people to find a stable place to live. For parents who wish to help their children and are fortunate enough to have the resources to acquire a secondary residence with the intention of renting it to their child, there are also some important tax and legal considerations. This article focuses on Speculation and Vacancy Tax, but it is also important to obtain tax and accounting advice on the impact of capital gains tax and other factors.
Speculation and Vacancy Tax (“SVT”)
The Speculation and Vacancy Tax is a BC provincial tax that aims to reduce real estate speculation and increase housing affordability by targeting properties that are left vacant. If you buy a property in certain areas of BC (the Province now has a website with an interactive map to help assess whether a particular property is covered by SVT at the following link: https://map-spec-tax-areas.apps.gov.bc.ca/) and rent it to your child, it is important to ensure that the property will meet the criteria for an exemption from the SVT based on its actual use.
While the SVT does not apply if a non-arm’s length tenant such as a child occupies the property as their principal residence, it is important to look at the exact criteria under the Speculation and Vacancy Tax Act (British Columbia) to ensure a second residence is not unexpectedly subject to the SVT.
Exemption for use as a Principal Residence
To avoid the application of the SVT, the property must be occupied as a principal residence or rented out for at least six months of the year in increments of 30 days or more. Accordingly, a child who is residing in the property must live there the majority of each month for at least six months during the year. For example, if a child just lives in the condo a parent has purchased for four months during a school semester, or if they just stay there on weekends throughout the year, the exemption will not apply.
It is important to monitor the actual use of the property, since if a child ceases to occupy the property as their principal residence for more than 6 months during any given year, it will likely be necessary to ensure that a residential tenancy agreement is entered into with an arm’s length tenant to make up the shortfall in the time the property is occupied as a principal residence.
If the property does not qualify for any exemption under the legislation (or if you fail to file the annual declaration as and when required), you could face an annual tax of up to 2% of the property’s assessed value, depending on your residency status. Accordingly, it is important to ensure that both parent and child have expectations surrounding the long-term use of the property as a principal residence that are aligned at the time of purchase. Since property that is owned by parents and rented out to their children would normally be subject to capital gains tax when sold (assuming it is not also the parents’ principal residence), a situation where SVT is accruing on the property and effectively forcing a sale can have a range of negative outcomes.
For personalized assistance or more information on the implications of owning and renting property in BC, please contact Baker Newby and one of our lawyers would be pleased to assist you.
