residential development land

B.C. residential development land takes tax hit

New affordable housing strategy balances market curbs and supply incentives
Tuesday, February 27, 2018
By Barbara Carss

The British Columbia government expects to collect about $520 million in new annual revenue through additional residential property taxes and property transfer taxes. The measures, outlined in the 2018-19 provincial budget last week, are part of an effort to deter some of the forces driving housing prices upward and find funds to maintain and bolster affordable stock.

Investors and homeowners who do not pay income tax in British Columbia and/or who own residential properties worth more than $3 million will be subject to the new levies. However, a much broader range of homeowners and tenants are in line to absorb the flow-through costs of the surcharges on sites purchased for residential development or land idling in the preconstruction stage while required approvals and financing are secured.

“It could easily add a few thousand dollars to a unit,” projects Neil Moody, chief executive officer of the Canadian Home Builders’ Association of British Columbia (CHBA BC).

The new taxes will help underwrite the B.C. government’s promise for more than $1.6 billion in housing related spending over the next three years. Both the 2018 budget and an associated 30-point plan, outlining long-range intentions for a 10-year $6.6 billion investment, place the greatest emphasis on not-for-profit supply, but the private sector is identified as a supporting player. To begin, more funding has been allocated to programs that enable low-income renters to find accommodations in privately owned buildings and developers of purpose-built rental housing have been offered a potential property tax break.

The government will also attempt to facilitate more partnerships between not-for-profit and private sector players through a new office to be known as HousingHub. That’s seen as particularly instrumental for meeting a target for 14,000 low-end-of-market units in buildings that would house a mix of tenants with low and middle incomes.

“These monies do represent an opportunity for the private sector rental housing providers to house more British Columbians,” states budget analysis from the rental housing industry association, LandlordBC.

Demand management tactics

Five new tax measures to be rolled out in 2018 and 2019 are aimed at cooling market demand and, thus, stabilizing the province’s soaring housing prices. Changes to the property transfer tax will capture more high-end deals and foreign buyers at the point of purchase, while a value-triggered school property tax premium and a supplemental tax on owners/investors from outside B.C. pose a continuing tax liability.

“B.C.’s real estate market should not be used as a stock market. It should be used to provide safe and secure homes for families, renters, students and seniors,” Finance Minister Carole James told the legislature as she introduced the budget. “Soaring prices have benefited many people. We think it is fair to ask those who have benefited from those high prices to give a bit more back.”

Expanded property transfer taxes took effect on February 21 and are projected to raise about $120 million over a 12-month period. This imposes a new province-wide premium rate of 5 per cent on sale value in excess of $3 million. (Previously, property transfer taxes topped out at 3 per cent on the portion of the sale value above $2 million.) Foreign buyers, who have been subject to an additional 15 per cent tax on the purchase of properties in Greater Vancouver since the summer of 2016, now face a 20 per cent tariff in Vancouver and four other urban regions of the province, including Victoria, the Fraser Valley, Nanaimo and Kelowna/West Kelowna.

Owners/investors of residential properties in these five designated regions who do not pay income tax in British Columbia will also see a new add-on to their property tax bills, which the B.C. government has dubbed a speculation tax. For 2018, that will be equivalent to 0.5 per cent of the assessed value, but it’s slated to jump to 2 per cent for 2019, garnering an estimated $200 million.

Finally, a province-wide surcharge will be added to the provincial share of property tax — commonly known as school property tax because it is theoretically meant to support schools — beginning in 2019. This applies a further 2 per cent levy on the portion of assessed value between $3 million and $4 million, and a 4 per cent premium on assessed value greater than $4 million. This, too, is expected to raise $200 million annually.

One-time and ongoing surcharges

Residential development land is likely to be a significant contributor to the envisioned new revenue. Notably, Altus Group reports $2.5 billion worth of residential land deals in Greater Vancouver in just the first half of 2017, with the largest transaction surpassing $150 million. However, school property tax surcharges are expected to be more onerous than the one-time hit of the higher property transfer tax.

“This policy is intended for multi-million-dollar homeowners, but, at current land prices, will affect almost all developers and builders who purchase land parcels for development,” Moody says. “If a property takes four or five years before it can be developed, that’s four or five years of this added school tax.”

He also calls for clarification on how the speculation tax will be applied in the five designated jurisdictions. The budget promises upfront exemptions for most principal residences and “qualifying long-term rental properties” or a corresponding income tax credit that can be carried forward, but is silent on developers’ land holdings.

“There must be some sort of business exemption created that supports builders who have purchased land for development in advance. It’s not speculating if they have the intention to build on it and are delayed or are waiting for permits,” Moody asserts.

Indeed, Minister James acknowledged that persistent uncertainty for developers in her budget speech. “We will need to join with mayors, businesses and community leaders to speed up approvals and find ways to build more housing, faster,” she said.

Incentives for purpose-built rental

Both LandlordBC and CHBA BC commend the government for opening up a potential property tax break for new purpose-built rental housing. Nevertheless, any mitigation of the school property tax would be contingent on municipalities having revitalization plans (enabled under provincial planning legislation) in place and designating new purpose-built rental housing among properties qualifying for property tax relief. In such cases, school property tax reductions would then be matched to the percentage amount and duration of relief that the municipality has approved for its own share of property tax.

“The budget does not indicate whether or not the province will be exerting any pressure on the municipalities to take advantage of this opportunity. Revitalization agreements are somewhat obscure so we’re not sure to what extent they will be used,” observes David Hutniak, chief executive officer of LandlordBC. “A simpler approach might be a housing agreement with the municipality with a covenant on title whereby the municipality restricts use of the building to purpose-built rental for the life of the building, or 60 years, in exchange for the exemption.”

For now, it appears that rental housing developers will continue to pay property transfer tax at the same rate as those building ownership housing. “LandlordBC specifically recommended that the government waive property transfer tax for purpose-built rental in a pre-budget submission to Finance Minister James and Housing Minister Robinson. We continue to liaise with the government on this matter in the hope that they will recognize that their failure to implement such waiver will impede the development of new purpose-built rental,” the association’s budget analysis affirms.

“CHBA BC continues to encourage strong incentives to help weather the unique risks to rental versus strata title,” Moody concurs.

Fuelling an interminable debate

In introducing its demand management mechanisms, the B.C. government has been blatant about its intention to collect school property taxes for purposes other than schools. “This is what a progressive tax system looks like. The revenues from these taxes will help address housing affordability in our communities,” the 30-point plan reiterates.

This perhaps stokes the somewhat interminable debate about what property tax should pay for, and appears to conflict with the many voices demanding a share of income tax for local governments. Municipal advocates have long advanced the argument that the property tax base is inadequate for supporting municipalities’ social service responsibilities and an inappropriate instrument for income redistribution. Still, constitutionally, municipalities have little option to resist.

“Definitely, there is a concern about provincial use of the property tax ,” says Almos Tassonyi, executive fellow with University of Calgary’s School of Public Policy and a research associate with the International Property Tax Institute. “There are a number of aspects to this debate, but the Province, in theory, can do whatever it wants.”

Barbara Carss is editor-in-chief of Canadian Property Management.

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