Property Transfer Tax and Foreign Entity Tax 2018
Property Transfer Tax 2018
Effective February 21, 2018, the Property Transfer Tax (“PTT”) payable under the Property Transfer Tax Act (“PTTA”) are as follows:
- 1% on the first $200,000
- 2% on FMV over $200,000 and up to and including $2 million
- 3% on FMV over $2 million and up to and including $3 million
- 5% for the portion of the FMV that is in excess of $3 million
Example 1: For a property that has a fair market value of $500,000
|1% on the first $200,000||1% of 200,000 = $2,000.00|
|2% on the portion of the fair market value greater than $200,000 up to and including $2,000,000||2% of 299,999 = $5,999.98|
Example 2: For a property that has a fair market value of $4,500,000
|1% on the first $200,000||1% of 200,000 = $2,000.00|
|2% on the portion of the fair market value greater than $200,000 up to and including $2,000,000||2% of 1,799,999 = $35,999.98|
|3% on the portion of the fair market value greater than $2,000,000 up to and including $3,000,000||3% of 999,999 = $29,999.97|
|5% on the portion of the fair market value greater than $3,000,000||5% of 1,499,999 = $74,999.95|
New disclosure requirements were also introduced at the same time, one of which allows the Province to unveil the identities of beneficial owners. Registered owners now have to disclose the beneficial use of their property. The Province will also create a database to track assignments of condominiums pre-sales. Developers must collect and report information on assignments.
New Foreign Entity Tax 2018
On February 20, 2018, the province increased the Foreign Entity Tax payable by foreign entities and taxable trustees to 20% on transfers of residential properties registered on or after February 21, 2018, and expanded the areas to which the tax applies from the Regional District of Greater Vancouver to:
- Capital Regional District (Victoria and Islands)
- Fraser Valley Regional District
- Regional District of Central Okanagan
- Regional District of Nanaimo
The additional property transfer tax doesn’t apply to properties located on Tsawwassen First Nation lands.
The additional tax is payable on the interest acquired by the foreign entity or taxable trustee, and applies only on the residential portion of a property: There are three types of properties where this may occur:
- Property classified as residential (Class I) by BC Assessment. You pay the additional tax based on the fair market value of the full property.
- Property classified as farm land by BC Assessment that includes a residential improvement, such as a building used as a farmer’s home. You pay the additional tax on the value of the residential improvement plus 0.5 hectares of land (1.24 acres).
- Property classified as commercial by BC Assessment that includes a residential improvement (Class I), such as a condo in a building with commercial space. You pay the additional tax on the value of the residential improvement.
As stated above, the Foreign Entity Tax will be triggered by the registration of a transfer of “residential property” to a foreign entity or taxable trustee.
Residential property includes:
- any lands or improvements that are classified as “Class 1 property” by the BC Assessment Authority
- not only single-family residences but also multi-family residences, apartments and condominiums
- undeveloped lands that are classified as Class 1 property by BC Assessment. Nursing homes, cooperative developments, and senior residences are also included in Class 1.
The Foreign Entity Tax is payable with respect to any registered transaction that attracts PTT, including the transfer of a fee simple interest in land or a registered lease with a term longer than 30 years.
A “foreign entity” includes both a “foreign national” and a “foreign corporation”. A “foreign national” means a person who is neither a Canadian citizen nor a permanent resident at the time of registration, and includes a stateless person.
For purposes of determining which corporations are “foreign corporations”, the new rules include both a “de facto” control test and a “de jure” control test. The “de facto” test is akin to the one in section 256 of the Income Tax Act (Canada)(“ITA”).
De facto control occurs where a person or group of persons has a clear right and ability to affect 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.
A foreign corporation includes a corporation that is not incorporated in Canada, a corporation that is incorporated in Canada (including BC) but is “controlled” in whole or in part by a foreign national or foreign corporation, unless the shares of the corporation are listed on a Canadian Stock Exchange, and a corporation which is controlled directly or indirectly by a foreign entity (Section 256 of the ITA).
A “taxable trustee” 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 where a beneficiary of the trust is a foreign entity who holds a beneficial interest in the residential property to which the taxable transaction relates.
So, a friend or family who is a citizen and resident of Canada, who holds the property in trust for a foreign national, is a taxable trustee and must pay the Foreign Entity Tax.
If a resident of Canada is purchasing the property on behalf of a non-resident and fails to disclose that in the PTT Return, the resident buyer is liable for the payment of the Foreign Entity Tax and has committed an offence under the Property Transfer Tax Act (“PTTA”).
An Additional Tax
The Foreign Entity Tax is 20% of the Fair Market Value (“FMV”) of the residential property that is the subject of the taxable transaction and is payable by the buyer. The Foreign Entity Tax applies in addition to the general PTT. Each transferee under a taxable transaction is jointly and severally liable to pay the total amount of the Foreign Entity Tax owing, not just the foreign national.
So, if a husband and wife purchase a home, and the wife is a Canadian citizen and resident, but the husband is a non-resident of Canada, ½ of the fair market value will be subject to the Foreign Entity Tax. If the husband fails to pay the Foreign Entity Tax on his ½ of the FMV of the property, his wife is liable to pay it.
Standard Exemptions Do Not Apply
Under the PTTA, 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. The Foreign Entity Tax will be payable if the amalgamated company is controlled in whole or in part by a foreign national or foreign corporation.
A transfer of a principal residence from one spouse to another spouse is exempt from PTT, but not where either of the spouses is a non-resident. So, a transfer from a resident spouse to a non-resident spouse of the principal residence, will see the “buying spouse” having to pay both the regular PTT and the Foreign Entity Tax. A transfer from a non-resident spouse to a resident spouse of the principal residence, will see the “buying spouse” having to pay the regular PTT but not the Foreign Entity Tax.
With respect to PTT generally, the Province must issue any notice of assessment providing for the corrected determination of the FMV or tax owing within one year after the date the transaction was registered in the land title office. With respect to the Foreign Entity Tax, the Province will be able to issue a notice of assessment with respect to Foreign Entity Tax within six years after the date that the transaction was registered in the land title office. This gives the Province six times longer to challenge the information set out in the PTT Return.
There is also an anti-avoidance rule whereby the Province is given the power to determine the tax consequence to a transferee through an assessment under the PTTA 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 tax.
Seemingly simple efforts, such as the assigning a contact of purchase and sale from a non-resident buyer to a resident buyer to avoid payment of the Foreign Entity Tax may constitute avoidance, and may result in the imposition of the Foreign Entity Tax as well as penalties.
New Exemptions and Refunds
A few months after the introduction of the new Foreign Entity Tax, the Province introduced 2 distinct exemption and refund programs. On March 15, 2017, the BC Government created:
(i) a retroactive exemption from the Foreign Entity Tax for foreign nationals who are provincial nominees, and
(ii) provided refunds for certain purchasers who have previously paid or are required to pay the Foreign Entity Tax and who later become Canadian citizens or permanent residents.
Exemption under BC’s Provincial Nominee Program
Inclusion in BC’s Provincial Nominee Program (BC PNP) places a foreign national into a “fast track” stream with respect to their permanent residency application. The Program is divided into two categories:
- entrepreneurial nominees (i.e. foreign nationals with high net-worth and business or management experience) and
- skilled nominees (i.e. foreign nationals filling in-demand occupations).
Current foreign national provincial nominees who purchased a principal residence on or after March 31, 2017, and paid the Foreign Entity Tax, have 18 months following the date of their purchase to claim a refund for the additional Foreign Entity Tax paid.Foreign national provincial nominees who purchased principal residence on or after August 2, 2016 but before March 31, 2017 are likewise eligible to apply for a refund of the additional Foreign Entity Tax.
The new exemption is available for provincial nominees who are foreign nationals purchasing principal residences subject to the Foreign Entity Tax, provided the provincial nominee intends to inhabit the dwelling as their principal residence. The exemption can only be used by provincial nominees once, and is not available for companies or taxable trustees.
It is not available for foreign nationals applying for permanent residency under other programs, so the vast majority of foreign nationals applying for permanent residency in BC will not be able to claim this exemption. Foreign nationals in British Columbia under normal work visas are not eligible for this new exemption.
The number of nominations under the BC PNP is based on annual nomination allocations from the Canadian federal government, and processing times at the BC Government. For 2017, the allocation is 6,000. In 2016, it was 5,800. Given that many nominees relocate to markets affected by the Foreign Entity Tax, this new exemption may provide relief for a significant number of home buyers.
Refunds for New Canadian Citizens and Permanent Residents
The second and distinct refund program provides that starting August 2, 2017, a refund is available for Canadian citizens or permanent residents who have previously paid the Foreign Entity Tax and have obtained citizenship or permanent residency status in the period following the effective date of the Foreign Entity Tax.
Going forward, refunds will also be available for foreign national purchasers who become Canadian citizens or permanent residents within one year after purchasing their property, and is not available for companies or taxable trustees.
In order to be eligible for the refund, the Foreign Entity Tax must have been paid in respect of a residential property purchase which, on that date of registration of the applicable conveyance, included a permanently affixed improvement that was intended to be a dwelling; and the purchaser must continuously occupy that dwelling as his or her principal residence for at least a year beginning on a date that is at least 92 days after the acquisition date.
As with the provincial nominee exemption described above, each purchaser is only eligible to receive a refund of the Foreign Entity Tax once, and must claim it within 18 months of purchasing the property.
Commencing in the fall of 2018, non-residents who do not pay income tax in B.C. will be subject to a speculator tax on residential property located in Metro Vancouver, Fraser Valley, Capital Regional District, and Nanaimo, Kelowna and West Kelowna. Principal residences and long-term rental properties will be exempt. The rate of the tax calculated on market value will be 0.5 per cent in 2018 and two per cent in 2019.