Canadian Tax Haiku of the Week: (Property Transfer Tax)
Tax will not work, ‘cuz
Real property buyers just
Want to hide money
BC officially imposed a 15% “property transfer tax” on foreigners wishing to purchase property in BC. Premier Christy Clark has stated that the new property transfer tax would limit demand, making housing more affordable in Metro Vancouver. Which is, of course, utter poppycock. The tax will NOT work for three key reasons: 1) the tax is too easy to get around; 2) the vast majority of the non-resident investors buying up Vancouver real estate do not care about an extra 15% “property transfer tax” – they will see it as a cost of doing business; 3) the law is a violation of Canada’s investment protection treaties, including NAFTA. So the real purpose of the new tax is to allow the government of BC to look like they are doing something, while at the same time doing nothing whatsoever.
Lets start with how easy it will be to avoid the property transfer tax. A Vancouver realtor was already sanctioned for advising to clients on how to bypass this new property transfer tax. It literally took us 15 seconds to come up with a better, completely legal, ultra-tax-efficient way for investors to avoid the property transfer tax, and then leverage their property to actually allow them to buy more properties. So yeah, this new property transfer tax may actually have the unintended consequence of pouring gas on the fire… Also, although the BC government has made a big deal about enforcing the property transfer tax, they do not have the resources to do so. Moreover, the people who are making the investments are likely to see the proposed penalties as just a cost of doing business.
That being said, the ultimate reason this property transfer tax will not slow demand is that non-residents are buying real property, specifically residential homes in Metro Vancouver, is because it is the modern equivalent of a Swiss bank account. These assets are an unreportable, effectively untraceable source of retained value. If you put $13.42 into a Canadian bank account, you get a T4 slip for the 7 cents in interest earned over the year. If a foreign government asks the Canada Revenue Agency (CRA) for information about any individual because they think that person is evading taxes in their home country, the CRA, pursuant to the relevant Treaty, is obliged to, and would gladly, hand over their copy of any and all existing T4 or T5 slips in that person’s name. However, if someone has say $12 million dollars in real property in Canada, and their home-country government asks the CRA about said person’s assets in Canada, the CRA will hand them a big bag of nothing. Why? Because the CRA knows NOTHING about it; real property transactions, particularly residential property transactions, are completely non-reportable in the Canadian tax system.
Which is why Canadian real property is so popular with foreign investors. Unlike a real Swiss bank account, where the banks will nickel and dime you to death on fees, and the Swiss are now co-operating with various tax authorities, a home in Vancouver in the wife’s maiden name is utterly untraceable back to the real owner, and will actually grow in value.
At the end of the day, rich foreign buyers do not care about 15% extra cost, especially if they can get it back in a couple years, and real estate values in Metro Vancouver are skyrocketing. Moreover, many of the investors come from countries where corruption is rife, so they would have to pay at least that much in bribes back home to get the property registered, and the utilities hooked up and the local authorities and cops smoothed over. Investors will see this property transfer tax (if they have to pay it, which they won’t) as a cost of doing business. As we stated above, even if the BC government does crack down and somehow catches someone, again this would be seen by most of the investors as another cost of doing business; the proposed $200k penalty is also still less than what they would pay in bribes or otherwise to launder the money involved.
Lastly, several reports out yesterday from trade lawyers make it clear that the law discriminates on the basis of national origin, which is illegal under Canada’s investment protection treaties. We just can’t hit non-Canadians with a tax that Canadians do not have to pay, OK? So either the federal government will have to refund the property transfer tax to the affected investors, or they will sue us in our own courts, and they will win.
So the property transfer tax is a complete waste of time, will not work and could make things worse. But what is a real solution? Easy; reporting. The federal government can, by regulation immediately make all (not just foreign investor-related) real property transactions of a value in excess of $500k of real property reportable on a form similar to a T4; call it a “T4RE”. That way when a foreign government requests information from the CRA about a particular non-resident investor, the CRA would have something to share. Moreover, the only penalty for misrepresenting the name of the new true beneficial owner of the property that will have any impact, is if the property would automatically escheat to the Crown on conviction. Given the inherent incentives behind the wave of investment that is driving up property prices in Vancouver and Toronto, any punishment less severe would make it worth the risk of lying. FYI, may real property transactions reportable would also provide the CRA with information about house flippers and organized crime laundering money through real estate. The net result would actually reduce speculative, artificial demand for residential property and prices in Vancouver and the GTA would come back down to earth.
Moreover, if we really wanted to get serious, we would have to renegotiate our investor protection treaties and then just outright ban foreign ownership of single family homes. In Australia, only Australian citizens and permanent residents are able to purchase residential property. Foreigners typically have to apply for investment approval before purchasing residential real estate. In Switzerland, it is incredibly difficult for non-Swiss residents to purchase property unless that property is in a designated “Holiday Zone”.
So all in all, when we first heard of this proposed tax, we figured it was a political gimmick. After looking into it, that’s exactly what it is. The 15% BC property transfer tax on non-residents would merely be a “cost of doing business” for rich foreigners wishing to purchase real estate in Metro Vancouver, if they actually had to pay it, which they don’t. On top of that, the proposed tax does not address the core issue; what the non-resident investors in Canadian real property really want is an anonymous store of value that their home government can’t find out about. So the tax will accomplish nothing. Which is exactly the point. BC real estate is in a bubble, and the government does not want to pop it, because that could be really ugly for the economy.
In conclusion, either Christy Clarke’s government are a bunch of idiots who came up with a half-baked knee-jerk brain-dead plan to appease people and they are too dumb to realize that it will not work, or they intentionally came up with something that looks harsh but in reality will do nothing. So either the government of BC is collectively stupid, or the government thinks the people of BC are even dumber. We’d like to think that the recent poll suggesting 9/10 Vancouverites support this tax is more due to them realizing that there is a problem, rather than thinking this tax is a fix.
By Jonathan Garbutt, Barrister & Solicitor and Aasim Hirji, Student-at-law
This Blawg is provided on a “For your information” basis only, and is not intended as, does not constitute and should not be seen as legal advice with regard to tax or family law matters.
 We are not telling you what we would do to get around the tax as that is what we get paid the big bucks for. But if you are serious, give us a shout.
 See http://business.financialpost.com/fp-comment/barry-appleton-b-c-just-violated-nafta-with-its-foreign-property-tax-and-we-could-all-pay-for-it Note that we do not have an investment protection treaty with China yet, nor with Russia, and these are two of the largest sources of buyers in Vancouver and the GTA. Regardless, the law is going to become a problem.
 We chose this amount because outside of Vancouver and Toronto, approximately of all real property transactions are below this value. The average house price in Canada was $470,297 in February 2016, but if you do not include Vancouver and Toronto, the average is $338,392 (http://www.cbc.ca/news/business/housing-crea-january-1.3449838). The real estate industry would freak if they really had to report any transactions as they will scream that it will destroy the market, so we set the number high enough that in most markets it will not matter, but it will hit Toronto and Vancouver.
 “Escheat” means to pass the property to the Crown
 A recent poll suggests 9/10 Vancouverites think this tax is a good thing….but we hope this is due to a lack of knowledge on the subject