The Property Transfer Tax Act (British Columbia) could soon be amended to impose property transfer tax (“PTT”) on beneficial transfers of real estate. The NDP-Green Party Coalition Government budget, scheduled for release this month, is expected to focus on the real estate market and PTT reform may be on the agenda.
Under the current regime, PTT is only payable when a new owner of an interest in real property is registered on title with the Land Title Office. While the registered owner and the true beneficial owner may be one and the same for your average homeowner, commercial property owners often separate legal and beneficial ownership by registering a corporation to hold title to property as a bare trustee for and on behalf of the true beneficial owner. The beneficial owner will typically own all shares in the bare trustee. When it comes time to transfer the property, the beneficial owner will sell the shares in the bare trustee to the purchaser and enter into a separate agreement to give effect to the beneficial transfer. Because the registered owner remains the same and the beneficial transfer is not registered with the Land Title Office, this arrangement allows legal and beneficial ownership of the property to be transferred without triggering PTT.
Various BC Government officials have entertained the idea of amending the Property Transfer Tax Act (British Columbia) to capture beneficial as well as legal transfers of real property for some time now. The Ontario Government has been taxing beneficial transfers for over three decades and BC could ultimately be headed in the same direction. On June 10, 2016, the BC Government introduced a new PTT registration form that requires purchasers to disclose whether the new registered owner is a bare trustee and, if so, the details of beneficial ownership. This form was amended by the new NDP-Green Party Coalition Government in November 2017 to further enhance disclosure requirements, leading many to speculate that the Government might be contemplating additional PTT reforms as part of the new housing policy it plans to introduce with the launch of its February budget.
PTT on beneficial transfers of real property where there is no corresponding legal transfer could significantly affect the way real estate developers and investors do business and structure their affairs. The amount of PTT payable is determined by reference to the fair market value of the land and improvements being transferred. At present, the tax rates are:
- 1% on the first $200,000,
- 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000, and
- 3% on the portion of the portion of the fair market value greater than $2,000,000.
At these rates, a transfer of a $10,000,000 property would cost a purchaser $278,000 in PTT. In addition to fee simple transfers, corporate reorganizations, life estates, crown grants, foreclosures and some leasehold interests can also attract PTT. Due to the recent enactment of what is now commonly referred to as the “foreign buyer tax”, transfers of residential real estate in the Greater Vancouver Regional District to foreign nationals or foreign companies could give rise to additional tax at the rate of 15% of a property’s fair market value. Taking our example above, the application of the foreign buyer tax would add an additional $1,500,000 to the tax payable on the transfer of a property valued at $10,000,000.
With the release of the budget scheduled to occur by the end of this month, real estate investors and developers may want to consider whether to restructure their affairs on short notice so as to avoid potential adverse tax consequences if the anticipated reforms are in fact introduced. Possible steps to consider include:
- accelerating closing dates under existing contracts;
- effecting internal beneficial transfers to accelerate acquisitions or consolidate assets in a single entity to enhance the entity’s borrowing position;
- accelerating joint venture arrangements, including accelerating the planned introduction of new partner(s);
- addressing multi-phase or master-planned projects where individual parcels (subdivided or to be subdivided) are intended to be transferred, beneficially, to single-purpose vehicles in the future; and
- adjusting the listing price of properties to factor in the additional expense that will be borne by purchasers.