It is a general rule that a sale of a capital asset (such as real property) will trigger tax in the hands of the seller on any gains. One exemption from this tax on capital gains which is widely used by Canadians is the exemption that applies to the sale of an individual’s principal residence. Recent changes to taxes imposed by various levels of government have affected the ability to utilize this exemption, as summarized in this blog.
Loss of Exemption from Tax on Capital Gains for Certain Trusts
Historically, a property held in trust could rely on the principal residence exemption, and individuals would sometimes own their principal residence through a principal residence trust. In October 2016, legislation was announced to eliminate the ability of a trust to take advantage of the capital gains exemption, unless the trust meets one of the following criteria:
(a) it is an Alter Ego Trust, Joint Spousal Trust or other type of “self-benefit” trust;
(b) it is a testamentary trust that is a Qualified Disability Trust; or
(c) it is a trust to benefit the minor children of a deceased parent.
Property Transfer Tax Rates
Property Transfer Tax is applicable in BC to the transfer of legal title of real property. It is charged when the title transfer is registered at the Land Title Office. There are some limited exemptions to this tax.
In 2016, the rates of property transfer tax for properties valued at over $2,000,000 increased, as follows:
(a) 1% on the first $200,000 (no change);
(b) 2% on the next $200,001 up to $2,000,000 (no change); and
(c) 3% on the value exceeding $2,000,000 (this is new).
In addition, in 2016 the Province of BC imposed an additional 15% property transfer tax on residential properties located in the GVRD which are acquired by foreign entities and taxable trustees. On a property valued at $1,000,000, where a BC resident would pay $18,000, the non-resident would pay $168,000 in property transfer tax.
This additional tax is imposed on the person acquiring property who is not a Canadian citizen or Permanent Resident of Canada. In the case of corporations acquiring property, it applies to: (i) corporations incorporated outside of Canada, (ii) corporations incorporated in Canada but controlled “in whole or in part” by a foreign national or other foreign corporation, and (iii) corporations controlled directly or indirectly by a foreign entity.
In the case of a trust acquiring property, the foreign buyer’s tax will apply if the trustee: (i) is a foreign national or a foreign corporation, or (ii) a Canadian citizen or Permanent Resident holds title in trust for beneficiaries who are foreign nationals or foreign corporations.
Empty Homes Tax
Properties located in the city of Vancouver are also now subject to a new “empty homes tax” where the property is not occupied on a full time basis, as defined by this new tax law. Where it applies, a tax of 1% per year on the property’s assessed value is charged to the homeowner. In the case of a property valued at $1,000,000, this would be a $10,000 annual tax.
The Effect on Estate Planning
The imposition of new and additional taxes requires that the property owner give careful consideration to how real property should be dealt with on death. If, for example, the will-maker has set up trusts for real property, that property may lose the ability to take advantage of exemptions from capital gains on sale. Additionally, if the trustee or beneficiary is a non-resident of Canada, that property may be exposed to the additional 15% foreign buyer’s tax; and where the property is not used continuously throughout the year, it will also be subject to the 1% empty homes tax.