This article was written with assistance from summer student Anita Yuk.

During the past several years, public concern has increased in the Greater Vancouver Regional District (the "GVRD") over the steep rise in home prices. For many residents of the GVRD, owning a home has become beyond their reach. The affordability and availability of rental units is also becoming increasingly problematic in the GVRD.  The situation in Vancouver has repeatedly been referred to as a "crisis" and a "threat" to the region's economy.1 This has led to political pressure on the British Columbia government to intervene to make home ownership more affordable and to increase the supply of rental units.    

In response to these public concerns, the government surprised the market by proposing an additional tax to be paid by foreign buyers of residential real estate in the GVRD. Draft legislation was just released, and already the Legislative Assembly of British Columbia is working to pass it into law effective as of August 2, 2016. 

If the legislation, currently set out in Bill 28 – 2016: Miscellaneous Statutes (Housing Priority Initiatives) Amendment Act, 2016 ("Bill 28"), is passed into law, it will amend the Property Transfer Tax Act (British Columbia) (the "Property Transfer Tax Act") to impose an additional 15% tax on foreign buyers of residential real estate in the GVRD.  At the moment, there is no relief planned for buyers who have already signed a purchase and sale agreement, so this new tax will have a significant and immediate impact on real estate transactions.

The shortage of rental units in Vancouver is thought to arise partly from foreign buyers acquiring houses and then leaving them vacant.  In order to discourage this, Bill 28 also proposes to amend the Vancouver Charter to allow the Council of the City of Vancouver to impose a new tax on residential property that is vacant and not otherwise exempt from taxation under the Vancouver Charter.

Our answers to some of the most frequently asked questions on the new property transfer tax are set out below.  Unless otherwise stated, all section references are to the Property Transfer Tax Act resulting from Bill 28.

Question / Issue Answer
What is the additional property transfer tax? The additional property transfer tax (the "Additional Tax") is 15%* of the fair market value of the property affected.

*Section 2.02(4)(b) allows for prescribed rates which are different from the 15% rate.
When does the Additional Tax apply? The Additional Tax applies when an application is made at a land title office to register a transfer of title. The Additional Tax must be paid in order to complete registration of the transfer.
Who pays the Additional Tax? The transferee of residential property must pay the Additional Tax. Each transferee will be jointly and severally liable to pay the total amount of tax owing.
To which properties does the Additional Tax apply?

The Additional Tax only applies to residential properties located in the GVRD. For this purpose the GVRD consists of 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 (i.e.: UBC and Endowment Lands). Further, the Additional Tax only applies to the foreign buyer's interest in the residential property.
What kind of property is considered to be residential property? Basically, the Additional Tax applies to land or improvements used for residential purposes. This includes single family residences, duplexes, multi-family residences, apartments, condominiums, and rental apartments with long term occupants. The Additional Tax also applies to farm houses, in particular any area of land (without improvements) that "(i) is not larger than 0.5ha in area, and (ii) is classified as a farm under the Assessment Act only because the land is used for (A) an owner's dwelling as defined in section 23(0.1) of the Assessment Act, or (B) a farmer's dwelling as defined in section 1(1) of the Classification of Land as a Farm Regulation, B.C. Reg 411/95".2 These are only some examples of properties that constitute residential properties. More details are set out in class 1 property in section 1 of the Prescribed Classes of Property Regulation, B.C. Reg. 438/81.
What about mixed use buildings? If there is a mixed use building, the Additional Tax applies to the residential component.
How is foreign status determined? The Additional Tax applies to both "foreign entities" and "taxable trustees". These are technical terms which are defined in Bill 28, but essentially a foreign entity is any foreign national or foreign corporation.

A foreign national is a person who is not a Canadian citizen or permanent resident of Canada (landed immigrant). A stateless person is also considered a foreign national.

A foreign corporation includes any corporation that was not incorporated in Canada. A private Canadian corporation will also be considered to be a foreign corporation if it is controlled by certain foreign parties, including one or more of: (i) a foreign national; or (ii) a corporation that is not incorporated in Canada.

Control of a corporation may be difficult to determine in some situations since Bill 28 contemplates both legal control through the ownership of voting shares, as well as more general control based on the surrounding facts and circumstances. Questions might even arise in some situations as to whether a foreign entity is considered to be a "corporation" for purposes of the Additional Tax. This is because some jurisdictions allow the creation of entities that do not have a direct counterpart under Canadian law and it might not be clear if they are corporations for purposes of these rules.
What is a taxable trustee? To prevent foreign buyers from avoiding the Additional Tax by using a trustee to hold title, the Additional Tax will also apply when title to residential property is transferred to a "taxable trustee". For this purpose, a foreign entity will be considered a taxable trustee, but in addition, even Canadian persons will be considered taxable trustees who must pay the Additional Tax if they hold the property in trust for a foreign entity.

Certain trusts which are mainly used as public investment vehicles are excluded from this rule, such as mutual fund trusts and real estate investment trusts.
When does the Additional Tax come into effect? August 2, 2016

Provided that Bill 28 becomes law, any transfer of residential property registered in a Land Title Office in British Columbia on or after August 2, 2016 will be subject to the Additional Tax, if applicable. The date on which the contract of purchase and sale was entered into is not relevant in determining whether the Additional Tax is payable.
Is there any transitional relief? Even if a contract was signed for the purchase of residential property before the new tax was announced, any applicable Additional Tax must be paid at the time the transfer of the property is registered in the Land Title Office. An Additional Property Transfer Tax Return (FIN 532) must be filed at the time of registration of the property transfer.
Can the Additional Tax be avoided? The government has anticipated that buyers might try to avoid the new Additional Tax. In addition to specifically providing for trustees to be taxed where they acquire property for foreign buyers, as discussed above, the legislation also includes a general anti-avoidance rule. Under this rule, if a transaction is structured in a way to reduce, avoid or defer payment of the Additional Tax, the transaction can be reviewed and the parties assessed for tax. In that case the administrator under the Property Transfer Tax Act is given the authority to determine a "reasonable" amount of tax to impose on the transferee based on the circumstances. How this rule will be applied remains to be seen, but the courts have experience with similar anti-avoidance rules under other tax legislation in Canada.

In contrast to the current $50,000.00 maximum fine for offences contrary to the Property Transfer Tax Act, an offence relating to the Additional Tax is subject to a maximum fine of $100,000.00 for an individual and $200,000.00 for a corporation (in addition to the tax assessed to be owing, plus interest, if applicable).

Footnotes

1 See O'Neil, Peter & Olivier, Cassidy, "Vancouver's housing affordability crisis making neighbourhoods 'inhospitable' for middle class: Trudeau." The Vancouver Sun, 18 June, 2016.; and Lindsay, Bethany, "Exodus of millennials threatens Metro Vancouver economy, but they simply can't afford to keep living there." National Post, p.n., 21 May 2015. 

2 Section 2.01 of Bill 28.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.