The BC government has brought forward legislation to implement one of its major policy measures on housing: the speculation tax. In a defence of the tax earlier this year, we outlined why the speculation tax represents an important step in addressing the housing crisis.
The tax covers a limited set of geographical areas in BC that have a high demand for housing and low rental vacancy rates. These include Greater Victoria, Nanaimo, most of Metro Vancouver, Abbotsford, Mission, Chilliwack, Kelowna and West Kelowna (more details and maps can be found here).
The speculation tax—which, for accuracy, has been renamed the “speculation and vacancy tax,” as we had recommended—has two basic components.
The first part of the tax targets so-called “satellite families.” As previously announced, these are households with substantial worldwide incomes, but little or no income reported in BC. Households of this kind will be subject to a 2% speculation tax rate on their property.
The legislation clarifies more of the specifics (some of which emerged as amendments agreed to by the government and the Green Party caucus). We now know that satellite families will mean those for which “the majority of their total worldwide income for the year is not reported on a Canadian tax return.” There is a tax credit that these families can use equal to 20% of their BC income. Thus, if they are reporting at least some income taxes in BC, they won’t have to pay the full speculation tax (and if their income tax bill is large enough, their speculation tax could be reduced to zero on principal residences).
The second part is the vacancy tax. Owners of second, third, or fourth properties (i.e. not a principal residence) will be subject to the new tax if they leave the property empty (if it’s in one of the taxable regions). The rate will be 0.5% of the property value for BC residents and other Canadians, and 2% for foreign owners. If a property is rented out for at least six months of the year, it will be entirely exempt from the vacancy tax.
In addition, even if BC residents do leave a secondary property empty, they would only pay the tax on the assessed value above $400,000. That’s because BC residents receive an automatic credit of $2,000 per year against any vacancy tax owing. For example, if a BC resident owns an empty secondary property worth $500,000 that they choose to leave empty (within one of the specified low vacancy rate areas), they’ll owe a modest $500 in vacancy tax (meaning, they only pay the 0.5% tax on the $100,000 value of the property above the $400,000 exemption).
Ownership of property wealth in BC is extremely unequal, even when it comes to principal residences. In light of this, it’s not surprising that so few British Columbians will be subject to the speculation tax.
The legislation contains a list of other exemptions to the speculation tax beyond those already mentioned, including cases of ill health, death, spousal separation and bankruptcy.
Overall, the government estimates that less than one percent of British Columbian residents will be subject to the speculation and vacancy tax (this includes those in the satellite family category, so an even smaller share will be subject to the vacancy tax part). As we’ve documented elsewhere, ownership of property wealth in BC is extremely unequal, even when it comes to principal residences (and is worse for secondary properties). In light of this, it’s not surprising that so few British Columbians will be subject to the tax.
Indeed, the tax is modest relative to the enormous windfalls of property wealth in BC, which amount to an increase of over $1 trillion since 2007. Additional policy measures will be needed if we want this wealth to be more broadly shared, as it should be. After all, the value of urban land is created collectively by all of us. Public investments in infrastructure like parks, schools and transportation make land in a given location highly sought after—and thus highly valued.
(The additional School Tax on properties over $3 million is another important step in this direction, though again it is modest relative to the huge scale of land wealth increases in BC.)
Still, the speculation tax undeniably breaks new ground, and it is expected to raise close to $200 million in revenue annually in the process. The government has specified that all revenue raised will be earmarked to fund affordable housing projects. These projects will be specifically tied to the regions where the tax is collected, as a result of one of the amendments to the legislation agreed by the government and the Green Party caucus.
In recent months, some municipal politicians came out strongly in opposition to the speculation tax, demanding the ability for their municipalities to opt out. While the request might sound reasonable at first blush, the provincial government was right to hold firm against an “opt-out” provision.
When people are priced out of communities by the housing crisis, they no longer have a voice in those local municipalities. If cities could simply opt out at their discretion, that would in effect give the remaining wealthier residents—mainly property owners—a veto over the rights and needs of renters. People should certainly have a voice in shaping public policy, but all people affected need to be represented, not just those who can still afford to live in a place.
Another of the amendments to the legislation specifies that the Finance Minister will hold an annual meeting with the mayors of cities covered by the tax, in which they will review its effectiveness. Regular reviews of this kind make sense, as this is a policy that should be responsive to circumstances. For example, if rental vacancy rates are returned to healthy levels in certain areas, it might be worth considering whether to exclude them from the tax (while being mindful of the risks of reversing progress).
The speculation tax undeniably breaks new ground, and it is expected to raise close to $200 million in revenue annually. The government has specified that all revenue raised will be earmarked to fund affordable housing projects.
Beyond the core components of the tax, a couple of other interesting details stand out in the legislation.
Properties that are being renovated or developed won’t be subject to the speculation tax. But there is an important caveat to this: projects have to proceed “without undue delay” and developers must be carrying out “eligible building activity” to qualify for the exemption.
This represents an important new tool to address speculation in BC. In essence, developers will be hit by the tax when they sit idly on undeveloped properties for years. If enforced, this will provide a powerful incentive compelling developers to get to work building badly needed new homes, rather than waiting for prices to rise and profiting from passive land speculation.
Another little-noticed feature of the legislation is how it deals with empty units in certain strata buildings that have rental restrictions (provisions in strata bylaws that would prevent a unit from being rented). For 2018 and 2019, these types of units will be exempt from the vacancy tax (as long as the strata rental restriction was in place before the legislation was introduced).
But starting in 2020, these empty units will be subject to the vacancy tax too, regardless of strata rules. This is good news for renters because it means there will be pressure within strata buildings to roll back prohibitions on renters (or at least for owners not to hold units that they plan to leave empty). Strata bylaws that prohibit renters are, in my view, a form of class-based discrimination that should not be legal in the first place.
The speculation and vacancy tax is only one piece of a much larger housing policy puzzle. With the government and Green Party caucus having agreed on amendments, the legislation is all but assured to pass into law. Going forward, the housing policy debate should focus on how to expand on this and other important measures we’ve seen so far.