Lawson Lundell LLP
July 26, 2016 - Canada
Digging Deeper into the New Foreign Entity Tax
In our blog post from July 25, 2016 we highlighted the provincial government’s introduction (effective August 2, 2016) of the new 15% property transfer tax (the “Foreign Entity Tax“) on foreign buyers of residential property in the Greater Vancouver Regional District (“Metro Vancouver“).
The Foreign Entity Tax has been introduced by way of an amendment to the Property Transfer Tax Act (British Columbia) (the “Act“).
Foreign Entity Tax applies in respect of a “taxable transaction“, where such transaction includes “residential property” located either wholly or in part within a “specified area” and where a transferee is a “foreign entity” or a “taxable trustee“, or both.
This article examines each of these key elements to determine those transactions that will trigger the required payment of this Foreign Entity Tax and provides further details of these new rules.
1. What is “Residential Property”?
The Foreign Entity Tax will be triggered by any registered transfer of “residential property” to a foreign entity or taxable trustee.
The Act defines “residential property” to include any of the following:
i) lands or improvements that are described as “Class 1 property” under the Prescribed Classes of Property Regulation (British Columbia). BC Assessment places properties within one or more of 9 classes of property, typically based on the property’s type or use. The class of a particular property is set out on both the BC Assessment Roll Report and Property Tax Certificate. Class 1 property is defined to mean land or improvements, or both, used for residential purposes and includes not only single family residences but also duplexes, multi-family residences, apartments, condominiums, manufactured homes, nursing homes and resthomes. It is important to note that “Class 1 property” also includes bare, undeveloped land that currently has no use and is neither specifically zoned nor held for business, commercial or industrial purposes; and
ii) an area of land, not including improvements, that is not larger than 0.5 hectares in area and which is classified as a farm under the Assessment Act (British Columbia) because the land is used either for: (i) an owner’s dwelling (meaning a dwelling that is occupied as the principal residence of the owner of the property and where the owner is a retired farmer, the spouse of a retired farmer or a person who was the spouse of a retired farmer at the time of the retired farmer’s death and such owner has reached the age of 65 years); or (ii) a farmer’s dwelling (meaning a dwelling located on or adjacent to the farm and is occupied by a person who is actively involved in the day-to-day activities of that farm).
2. What is the “Specified Area”?
The Foreign Entity Tax will apply to registered transactions in respect of residential property located, either in whole or in part, within Metro Vancouver (aka the GVRD), which 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 (ie. UBC).
Although Tsawwassen First Nation is included within Metro Vancouver, the new rules explicitly exempt these treaty lands from the “specified area”, and as such the Foreign Entity Tax will not apply to treaty lands of the Tsawwassen First Nation unless such treaty lands are later prescribed as part of the specified area by the Lieutenant Governor through regulation (as set out in more detail below at Item 12).
3. What is a “Taxable Transaction”?
Currently, property transfer tax is only payable with respect to registered transactions. Therefore, only transactions that are taxable within the meaning of the Act, including the transfer of a fee simple interest in land or a registered lease of land with a term longer than 30 years, will attract Foreign Entity Tax, subject to the anti-avoidance rule as described at Item 11 below.
4. What is a “Foreign Entity”?
Under the new rules, a foreign entity includes both a “foreign national” and a “foreign corporation“.
A “foreign national” means a person who is not a Canadian citizen or a permanent resident, and includes a stateless person.
For purposes of determining which corporations are “foreign corporations”, the new rules adopt the “de facto” control test in section 256 of the Income Tax Act (Canada). De facto control occurs where a person or group of persons has a clear right and ability to effect the composition or decision of the board of directors of the company, or can directly influence the shareholders of a company that can elect the board of directors. Many factors are taken into account in determining de facto control, common examples include family relationships, economic influence over the company or its shareholders, degree of involvement in the operation of the company and contractual relationships, and is therefore a fact based test that has a broad scope.
A corporation that is incorporated in Canada but is “controlled” by one or more of the following is considered to be a foreign corporation to which the Foreign Entity Tax applies:
i) a foreign national;
ii) a corporation that is not incorporated in Canada; or
iii) a corporation that is controlled by a foreign national or by a corporation that is not incorporated in Canada.
Corporations whose shares are listed on a Canadian stock exchange are explicitly excluded from the definition of a foreign corporation, and therefore will not attract Foreign Entity Tax even if such corporation is controlled by a foreign entity.
5. What is a “Taxable Trustee”?
A “taxable trustee” will attract Foreign Entity Tax and includes any trustee of a trust that is a foreign national or a foreign corporation, but also includes a trustee of a trust that is not a foreign entity but, immediately after the registration of the taxable transaction, a beneficiary of the trust who is a foreign entity holds a beneficial interest in the residential property to which the taxable transaction relates.
Under the new rules, real estate investment trusts, specified investment flow-through trusts and mutual fund trusts, all as defined in the Income Tax Act (Canada), do not qualify as “trusts” for the purposes of the Act, and therefore are not subject to Foreign Entity Tax.
6. Calculating Foreign Entity Tax
Currently, the amount of the Foreign Entity Tax is 15% of the fair market value (the “FMV“) of the residential property that is the subject of the taxable transaction. The Foreign Entity Tax applies in addition to the general property transfer tax (“PTT“) payable on a taxable transaction under the Act. Therefore, the total amount of property transfer tax payable will range depending on the FMV of the residential property that is the subject of the transaction.
By way of example, if a foreign entity decides to buy a multifamily apartment building in Burnaby for $5,000,000, that entity would be required to pay $878,000 in taxes under the Act at the time the transfer is filed in the land title office ($750,000 for the 15% Foreign Entity Tax and $128,000 for the traditional PTT – being 1% for the first $200,000, 2% for the FMV that exceeds $200,000 but does not exceed $2,000,000, and 3% for the FMV exceeding $2,000,000).
If a property consists of both residential property and also commercial property, only the value of the residential portion of a transfer is used for calculating the Foreign Entity Tax. Also, if a foreign entity or taxable trustee acquires only a portion of the residential property that is the subject of the taxable transaction, that entity will be responsible for its proportionate share of the taxable transaction’s FMV.
7. Implications for Canadian Entities doing Business with Foreign Entities
Each transferee under a taxable transaction is jointly and severally liable to pay the total amount of the Foreign Entity Tax owing. If a Canadian entity goes into business with a foreign entity, for example by way of a joint venture or a partnership, and taxable residential property is purchased collectively by the parties, the foreign entity, but not the Canadian entity, will attract Foreign Entity Tax. However, because the obligation to pay the tax is joint and several, the Canadian company will be liable for the payment of the Foreign Entity Tax if the foreign entity fails to do so.
8. Exemptions under the Act that do not apply to the Foreign Entity Tax
Under the Act, certain transactions are exempt from the payment of PTT. However, the same exemptions do not apply to exempt the payment of the Foreign Entity Tax.
For example, while an amalgamation of two companies under the Business Corporations Act (British Columbia) or the Canada Business Corporations Act is typically exempt from PTT, Foreign Entity Tax will be payable if the amalgamated company is controlled in whole or in part by a foreign national or foreign corporation.
Other transactions that are otherwise exempt from PTT but which attract Foreign Entity Tax include, but are not limited to:
i) a transfer between related individuals;
ii) a transfer to the survivor of a joint tenancy of the land; and
iii) a transfer from a transferor to a transferee, each of whom is registered under the Land Title Act as a trustee of land, if the change in trustee is for reasons that do not relate, directly or indirectly, to a change in beneficiaries or in a class of beneficiaries or to a change in the terms of the trust.
In these circumstances, while PTT would not be payable, the transferee would still be required to pay the Foreign Entity Tax in the amount of 15% of the FMV of such transaction.
9. Revisions to Notice of Assessments
With respect to PTT generally, the government must issue any notice of assessment providing for the corrected determination of the FMV or tax owing within one (1) year after the date the transaction was registered in the land title office. With respect to the Foreign Entity Tax, the government will be able to issue a notice of assessment with respect to Foreign Entity Tax within six (6) years after the date that the transaction was registered in the land title office.
10. Increase in Financial Penalties
The new rules make it an offence for any person to make a false and misleading statement with respect to information required to be provided under the Act.
Additionally, the fines payable under the Act with respect to an offence related to the Foreign Entity Tax is significantly higher than the fines under the Act payable with respect to an offence related to PTT. The following table summarizes these fines:
Fines for an Offence by a Corporation Fines for an Offence by an Individual
•amount of tax not repaid or remitted, with interest, and
•amount of tax not repaid or remitted, with interest, and
11. New Anti-Avoidance Rule
There is also now a new anti-avoidance rule whereby the government is given the power to determine the tax consequence to a transferee though an assessment under the Act if it determines that a particular transaction, or part of a series of transactions, resulted either directly or indirectly in a reduction, avoidance or deferral of the Foreign Entity Tax. Similar anti-avoidance rules have not existed previously under the Act with respect to the payment of PTT, and still do not apply to PTT under the Act.
As this anti-avoidance rule is only intended to capture avoidance transactions, an exception has been created for transactions that are reasonably considered to have been undertaken or arranged primarily for bona fide purposes other than for the purpose of obtaining a reduction, avoidance or deferral of Foreign Entity Tax.
The government is also granted the power to investigate whether the information required to be provided under the Act is accurate. This expands the government’s current investigative powers under the Act.
12. Legislative Flexibility
Under the new rules, the Lieutenant Governor may, by regulation, amend certain elements of the Foreign Entity Tax, including the following:
i) Prescribing other areas in British Columbia as being located within the “specified area”. In such case the Foreign Entity Tax would apply to these areas even though they are not located within Metro Vancouver.
ii) Prescribing a new tax rate that is not less than 10% and no greater than 20% of the FMV of taxable residential property.