Will BC’s Foreign Buyers’ Tax Administrators Please Speak Up?Published by Noah Sarna
The BC government recently congratulated itself on the apparent effects of its controversial decision over the summer to impose an additional 15% property transfer tax on purchases of real estate in Metro Vancouver by foreign buyers. Since then, the previously galloping increases in local housing prices have slowed, or perhaps even reversed slightly. Foreign buyers, whose presence in the purchasing pool has reportedly diminished, nonetheless paid over $10.1 million of the additional tax during the first three months of the tax alone.
The political discussion surrounding the tax has assumed that the affected purchasers are mainly wealthy individuals from overseas who are intent on snapping up Vancouver real estate in neighborhoods that are now too expensive for local income-earners to live in. However, real estate lawyers and other professionals have generally been confronted with more complicated circumstances that are potentially subject to the tax, which have largely been left out of the public discourse.
This is particularly concerning when one considers the amounts at stake. For example, the average sale price of a Vancouver house is over $1.5 million, which would mean additional tax of $225,000 on a single purchase. With these kinds of numbers in play, one would expect not only complex legislative changes to underlie the tax, but also appropriately sophisticated government publications that explain the government’s views on common interpretative issues expected to arise in the course of the administration of the tax.
The related amendments to BC’s Property Transfer Tax Act (the “PTTA”) are indeed complex. But the implementation of these amendments was coupled with the publication by the government of Information Sheet 2016-006: Additional Property Transfer Tax on Residential Property Transfers to Foreign Entities in the Greater Vancouver Regional District (July 27, 2016). Nothing has been published more recently. The four-page Information Sheet provides a surprisingly narrow discussion on the legal components of the tax, without any meaningful indication of the government’s positions on the many interpretative questions that arise from the amended text of the PTTA.
One critical interpretive question involves limited partnerships – more specifically, the role of the general partner. For example, there is no exemption from the tax for purchases of residential property for redevelopment and sale. This type of purchase is very common in Vancouver’s development-heavy market. It is also common for multiple adjoining parcels to be sold together for a hefty price, so if the additional tax were to apply, the potential liability would be considerable. These transactions frequently involve the use of a limited partnership on the purchaser’s side. Often some of the funding comes from a foreign investor, who has an interest in the partnership as a limited partner. The remaining partners, including the general partner, are local. The general partner conducts the purchase on behalf of the partnership.
In this scenario, the amended text of the PTTA is arguably vague about whether the additional tax would apply. In one interpretation, the general partner can essentially be considered a bare trustee in relation to the partnership property (i.e. the Vancouver real estate), in which case the tax would generally apply because of the foreign investor’s beneficial interest in the partnership property. Alternatively, it is possible that the purchase is being made on the general partner’s own account (i.e. the limited partners do not acquire interests in the property itself, but instead only have personal claims against the general partner, who is the sole beneficial owner of the real estate). In the latter case, the tax would generally not apply because the limited partners would not impact the application of the tax.
Unfortunately, the Information Sheet provides no indication whatsoever about how the government intends to administer the tax with respect to purchases by limited partnerships, despite their prevalence in the Vancouver market.
Furthermore, some of the more difficult concepts related to the tax are discussed with inadequate care in the Information Sheet. For instance, the Information Sheet describes the concept of a taxable trustee as follows: “Taxable trustees are trustees that are a foreign national or foreign corporation, or a beneficiary of a trust that is a foreign national or foreign corporation” (emphasis added). Words are clearly missing for the second part of that sentence. It states incorrectly that a beneficiary might be a taxable trustee. This mistake highlights the overall weakness of the document.
The government has made a serious change in tax policy, yielding millions of dollars in new tax revenue each month. While the policy benefits of the additional tax are debatable, there is a clear deficiency in the government’s publications related to the tax. More is required than simply serving as a tax collector. The government should promptly revise and expand on the Information Sheet to more comprehensively communicate its views on how the tax applies in a practical manner to those who will potentially be subject to the tax.