Spec Tax? No thanks!
On December 31st, 2018, the British Columbia government began charging a new Speculation and Vacancy Tax for some property owners in BC’s major urban centres. This annual tax was designed to increase the availability of affordable housing for BC renters and homebuyers.
The Speculation Tax is charged at 0.5 percent of assessed home value for Canadians, and a more significant 2 percent tax for foreign owners. If your property is worth 1 million, that means you’ll pay $5,000 as a BC resident or $20,000 as a foreigner – every single year.
While nearly 99 percent of BC residents who use their property as a primary residence are exempt, if you’re planning to purchase a second home, a vacation spot, or an investment property, you’ll be on the hook to pay this highly punitive tax.
This article walks you through 5 of the most effective and practical strategies to avoid the tax and save your hard-earned cash.
1. Rent Out A Separate Residence
If you have a legal suite or carriage home on your property, you can completely avoid the speculation tax by renting out at least one separate residence.
This lets you avoid a monstrous tax bill and create cash flow in BC’s hot housing market, while keeping your home and most of your property to yourself to use as you like.
If you have the opportunity to build a secondary suite, this option is well worth considering. Check Kelowna’s zoning regulations to find out if you’re entitled to build a carriage house on your property.
2. Bring in the Family
As a BC homeowner, you can qualify for a full Speculation and Vacancy Tax exemption under the “non-arm’s length tenant” rule. A non-arm’s length tenant is a trusted friend or family member who uses your property or legal suite as their primary residence for at least 6 months in a year.
Your non-arm’s length tenant must be a legal BC resident and at least 19 years old, but they don’t have to sign a formal rental agreement. According to the rules, they don’t even have to pay rent.
Do keep in mind that neither the homeowner and the homeowner’s spouse qualify under the arm’s length rule.
3. Rent Your Property as a Vacation Home
The Okanagan Valley in one of Canada’s top vacation destinations. If you’re planning to buy property here to use as your own vacation home, why not generate some income by renting your place as a luxury vacation rental while you’re not using it?
You can offer a fixed-term tenancy to an executive, somebody waiting to finish building their house, or a well-off student at UBC Okanagan. Renting your vacation home for 6 total months of the year lets you completely dodge the tax bill.
In our experience, well vetted tenants take excellent care of rental properties. It’s not uncommon for vacationers to rent the same place every year, which makes for easy business arrangements.
If you need a hand with this, we can help coordinate property managers and cleaners so that your vacation property is in perfect condition when you get back. Rest assured you absolutely do not have to lend out your bedding and towels.
4. Hire Your Own Live-In Caretaker
A stress-free way to avoid BC’s Speculation and Vacancy Tax is to hire a live-in caretaker that pays some amount of rent. You can offer a discounted rental rate as part of the home caretaker’s compensation agreement while they occupy either a portion of your second home, or the entire place.
A live-in caretaker helps you maintain your property value in BC, save money on the spec tax, and generate some rental revenue at the same time. Having somebody to watch over your property while you’re not there offers security and peace of mind.
5. Buy in a Non-Taxable Area
BC’s onerous Speculation Tax is only relevant for buyers in major urban centers of British Columbia. Outside of those areas, you’re completely off the hook.
There are fantastic non-taxable municipalities up and down Okanagan Lake from Kelowna. To the south, the lakeside communities of Peachland, Summerland, and Penticton offer a more quiet pace of life with all the benefits of being close to the lake.
To the north of Kelowna via Westside Road, the rural communities of Nahun, Fintry, and Killiney Lake all offer a slice of Okanagan beachfront paradise. Further North there’s the rural community of Lake Country and the City of Vernon.
The BC Government website lists every taxable region for the spec tax.
Breaking it Down
The best way to avoid BC’s spec tax totally depends on your situation. If you can afford it, a live-in caretaker is low stress and high security., bringing in a trusted family member is about as easy as it gets. On the other hand, renting out your property may be your best financial move.
For a comprehensive list of spec tax exemptions, check out the official BC Government page on the Speculation Tax here. If you plan to use any of these exemption strategies, keep in mind that you’ll need to reapply every year under the new rules.
If you’d like to see a list of exempt properties for sale in Kelowna, or if you’d like help employing any of the above strategies, please contact us.