On Monday, July 25, 2016, the BC government announced legislative amendments to the Property Transfer Tax Act which, effective only eight days later on August 2, 2016, will impose an additional tax on foreign entities acquiring residential real estate in the Greater Vancouver Regional District.*
The additional tax is substantial, amounting to 15% of the fair market value of the foreign entity’s interest in the residential property acquired. Perhaps most surprising to market participants, however, is the fact that the tax will apply to all transfers registered on or after August 2, 2016, regardless of when the underlying contract of purchase and sale was entered into. This means that a foreign entity that had an agreement on Monday, July 25th to purchase a $2,000,000 home in the GVRD closing the following Tuesday – the first day after the BC Day long weekend, no less – now has five business days to come up with an additional $300,000 in order to complete the transaction. This amount will be in addition to BC’s standard property transfer tax due at the time the property transfer is registered, being an amount equal to 1% of the first $200,000 of the purchase price, plus 2% of the balance up to $2,000,000, or $38,000 for a $2,000,000 property.
While the additional tax is obviously unwelcomed by foreign entities looking to buy residential property in the GVRD, it may prove even more problematic for local sellers whose sales agreements collapse if their buyers decide to forfeit their purchase deposits (typically 5% of the purchase price in BC, being $100,000 for a $2,000,000 property) rather than pay the unexpected tax. Even obtaining a release of the deposit in such a case can prove difficult for a seller, requiring a court order in the event the buyer refuses to authorize the release. The problems will be compounded for any seller who has already entered into an agreement to purchase another property in reliance on the anticipated proceeds from his or her sale. The volatility the unannounced legislation brings to the housing market is, at least in the short term, problematic.
The new legislation, brought in by Bill 28 – 2016: Miscellaneous Statutes (Housing Priority Initiatives) Amendment Act, 2016, certainly has teeth. The amendments to the Property Transfer Tax Act mean that the additional 15% tax will apply broadly to foreign nationals (i.e., individuals who are neither Canadian citizens nor permanent residents of Canada), foreign corporations (the definition of which includes Canadian corporations that are controlled by foreign nationals or corporations incorporated outside of Canada), any trust in which at least one of the trustees is a foreign national or a foreign corporation, and any trust in which a foreign national or a foreign corporation holds a beneficial interest in the GVRD residential property.
Should a transferee fail to comply with the new laws, anti-avoidance provisions incorporated into Bill 28 provide for a penalty of any unpaid tax, plus interest, together with a fine of up to $200,000 for corporations or $100,000 for individuals, and up to two years in prison. While the substance of the legislative amendments represent more than ineffectual saber rattling that could help to at least moderately improve housing affordability in the GVRD, the full consequences of the BC government’s decision to impose them without more notice remains to be seen.
*Note: The Greater Vancouver Regional District includes Anmore, Belcarra, Bowen Island, Burnaby, Coquitlam, Delta, Langley City and Township, Lion’s Bay, Maple Ridge, New Westminster, North Vancouver City and District, Pitt Meadows, Port Coquitlam, Port Moody, Richmond, Surrey, Vancouver, West Vancouver, White Rock and Electoral Area A. The additional tax does not apply to properties located on Tsawwassen First Nation lands.
C. Andrew Guerra
Lindsay Kenney LLP, Vancouver Office