Could Vancouver’s housing and taxation programs turn otherwise law-abiding citizens into potential criminals? Sadly, I fear they might.
Be it laneway houses, secondary suites, the Empty Home Tax, or the latest Airbnb restrictions — all have complex legal and tax implications, which are often not known or fully understood.
In sharing these observations, I should note I am neither a tax accountant or lawyer. Rather, I am an architect and real estate consultant who has long advocated for the legalization of basement suites and laneway or coach houses for rent and sale.
While I oppose taxes on vacant dwellings for philosophical and administrative reasons, I support new regulations on Airbnb and similar programs since they have negative impacts on available rental housing, condominium living and the hotel industry.
Many owners of empty or “under-utilized” dwellings also oppose the Empty Home Tax on the grounds it is inappropriate and/or unfair, and intend to sign creative, and in many cases fraudulent leases, to avoid paying the tax.
However, owners of laneway houses and basement suites could soon be found to be inadvertently or deliberately evading taxes, due in part to the recent Canada Revenue Agency (CRA) decision requiring Canadians to report the sale of a principal residence on their income tax returns, starting in 2017.
This new rule was meant to reduce tax evasion by closing a loophole exploited by real estate speculatorswho often bought and sold properties tax-free as principal residences.
Most Vancouver residents who rent a laneway house or basement suite know they are required to report net income from rentals. However, few understand the GST implications of building these dwellings, or the income tax implications when the property is sold.
The Real Estate Board of Greater Vancouver and CRA have prepared documents setting out these tax obligations. Many accounting firms, including Grant Thornton, have also prepared useful tax advice.
GST considerations related to laneway houses vary considerably depending on whether the house was built for long-term or short-term rentals, or a family member.
Without going into all the details, if a property owner builds a laneway house to be rented to others, and is not registered for GST, he or she must self-assess GST on the fair market value of the laneway house and the land associated with it. Yes, that’s right. It is not just based on the cost of the laneway house. The valuation must include the associated land.
Determination of land value could be difficult, especially since the laneway house cannot currently be sold. But if the CRA deems it to be say a quarter of the total lot value, even though the owner may be entitled to Input Tax Credits and certain tax rebates, the tax consequences could be significant.
These rules apply because the homeowner is considered the builder of the laneway house for GST purposes. This is not the case if he or she purchases a property that already includes a laneway house.
However, if the laneway house is built for a family member, the tax consequences are quite different; the owner may not be required to self-assess GST.
But here is where it gets interesting. If that owner subsequently decides to rent the property, he or she will not have to self-assess the value of the laneway house and associated land because the status of the property will have changed to a “used residential complex.”
Consequently, first occupancy of a laneway house by a related person provides the best outcome for the owner in terms of GST liability.
From my discussions with homeowners who have built laneway houses and contractors, few appreciate these GST tax implications. More importantly, they are not aware of what will happen when the property is sold.
The principal residence rules are very complex, and most property owners should consult their accountants. But the key point is the laneway house is not eligible for the same principal residence tax exemptions as the balance of the property. Any deemed increases in value will be treated as taxable capital gains.
Somewhat surprisingly, similar tax consequences could apply to basement suites that have been ‘structurally altered’ to meet city building codes. But this is another story for another day.