The new B.C. speculation tax has the purported aim to push empty homes onto the long-term rental market, finance minister Carole James has said. Indeed, this seems to be a much higher priority than targeting actual real estate speculators, as the tax captures a sizeable chunk of owners who are not speculators, and fails to capture many who are (more opinion on that here). Minister James confirmed to media recently that the government had decided against imposing a capital gains tax on the sale of flipped real estate for the very reason that such a tax wouldn’t add homes to the long-term rental pool.
So, despite the “speculation tax” misnomer, creating more much-needed long-term rentals seems the primary goal. For this reason, anybody who owns a second home in the affected areas is exempt from the tax if they rent out their property long-term (which is for more than six months of the year, in minimum-30-day periods). The folks at LandlordBC have said they think it could work. But some disgruntled owners I've spoken to are considering a possible way to avoid this.
Part of the outcry against this tax has been that many owners of B.C. vacation and second homes have no desire to rent out their units long term, as they say they use those properties frequently throughout the year, and their homes are full of their furniture and personal possessions. But not renting the home out long-term makes those owners liable to an annual tax of 0.5 per cent of the home’s assessed value if they are B.C. residents (minus a $2,000 tax credit), or one per cent for Canadians outside B.C., and two per cent for overseas owners – a tax that many owners have told media they cannot afford.
The vacation-rental workaround
There is a workaround that some are starting to consider. Owners of second homes in areas affected by the speculation tax where Airbnb-type short-term rentals are either permitted or essentially tolerated – pretty much anywhere outside the city of Vancouver – are realizing that long-term renting their home or selling it are not the only two options, as many have claimed. Instead, by renting their property short term when they’re not using it, on Airbnb or a similar site, they would be able to raise enough money to pay for their speculation tax bill. This also means that they could reserve their home for use whenever they want it, and keep their personal possessions stored there, as is common in vacation rentals.
Take a fairly typical family of four who live in Calgary and own an inherited vacation condo in Kelowna – worth around $550K. Perhaps they have a lower-than-average household income and little spare cash, but their entire summer vacations, plus spring breaks, winter holidays and lots of long weekends, are spent at this two-bed Kelowna condo, which is full of family possessions and seasonal gear.
If that family did what Minister James is hoping for, and rented out their Kelowna condo long-term, it could net them around, let’s say, $14,000 a year, after paying income tax on the revenue and for a property manager. They would then be exempt from the speculation tax. Great, right? Well, for this family to also enjoy the same vacation accommodations as before, they’d have to rent a two-bed unit for each vacation, let’s say, a total of 12 weeks a year at a typical $1,500 per week (according to Airbnb’s average two-bed, high-season prices in Kelowna), totalling $18,000 a year. Offset by their net long-term rental income, this option would leave them out of pocket by $4,000 a year. That’s nearly as much as their annual speculation tax bill would be ($5,500) if they left their place unrented. Either way, this family is on the hook for thousands of additional dollars a year, unless they drastically cut their annual vacation time.
The above example may be a little laboured, but the point is this: Faced with an onerous bill whether or not they rent out their property long-term, most owners will likely choose not to do so. That way, at least they can keep using their vacation home whenever they want and they can keep storing their stuff there. For many people, there are also unquantifiable benefits, such as spending summers in a home that holds many memories and has been in the family for years. And for cash-challenged owners who can’t afford the ensuing speculation tax bill, they only have to rent out the property via Airbnb for a month or two per year, in order to raise enough money to cover that bill. While they’re doing so, they might choose to rent it for even more of the time it’s empty, to pay for a property management service and earn some additional income. That’s a much more appealing prospect than giving up a much-loved vacation home and having to scramble for other suitable accommodations every vacation.
It will be interesting to see whether the speculation tax does indeed spark a jump in available Airbnb-type accommodations in the affected areas. In turn, of course, this could spark crackdowns on short-term vacation rentals in these areas, like the one recently seen in Vancouver. Kelowna’s bylaws already prohibit rentals of less than 30 days in theory, but the city still has many short-term rentals currently operating, as it is not yet properly policed. And Greater Victoria is mulling new regulations that could see an additional annual fee for short-term rentals, which would be steeper on secondary or investment homes, but not an outright ban.
I also have to wonder whether any such increase in short-term vacation rentals could placate some of the fears Kelowna-area officials have expressed about the tax potentially damaging local tourism. It may be an unintended consequence, but if the second homes currently left empty for much of the year end up being rented out to short-term vacationers more than before, for the above reasons, that would be a good thing for local tourism economy, and it might offset any loss of business from owners who do sell up or rent out their homes long term. (Who knows, maybe the B.C. government has actually thought all this through, and a boost in Airbnbs is secretly an intended consequence of the new tax, and is the reason Minister James seems unconcerned about its effect on local tourism. It would be nice to think so.) So, if Kelowna is more worried about its tourism economy under the new tax than it is about long-term rental vacancies, city officials might think twice about cracking down on short-term rentals.
Whichever way it pans out, with the speculation tax not being legislated until the fall, it’s likely that we won’t see its full effects until the summer season of 2019.