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Corporate, Real Estate

Implementation of new tax creates problems for B.C. homebuyers

The B.C. government opted for a quick implementation of its new property transfer tax, aimed at slowing the Vancouver housing market — which has resulted in confusion and problems for a number of buyers, Vancouver corporate lawyer Jonathan Reilly tells AdvocateDaily.com.

As the Canadian Press reports, last July, the B.C. government unveiled legislation aimed at charging foreign nationals a 15 per cent property transfer tax when they bought real estate in the Metro Vancouver area, effective Aug. 2.

The article notes that the tax was part of legislation “aimed at addressing low vacancy rates and high real estate prices in southern B.C.", as recent government housing data indicated foreign nationals spent more than $1 billion buying B.C. property last June and July, principally in the Lower Mainland area.

All other B.C. residents currently pay a one per cent tax on the first $200,000 of their purchase, two per cent on the remaining value up to $2 million and three per cent on the portion above that, reports CP.

However, Reilly, founder of English Bay Law Corporation, says the tax was implemented without sufficient input from stakeholders, which has resulted in several court challenges and has left a number of buyers facing a significant financial burden.

“Normally, when the government goes to change a tax they would take the time to study it, they would seek input, not only from the community at large but also from the business community specifically affected by the tax. And they look for input — not just on whether or not the tax is a good idea, but on how to roll out the implementation of the tax so that it would go through smoothly. That was not done in this case; it was done very quickly and without any notice,” he explains.

“I think what's really going on is that the government simply sees a cash windfall that it's not participating in and it wants to participate in it. So if it gets the money it's happy and if it slows the market down and that pleases the electorate it's happy,” adds Reilly.

While Reilly admits the cost of housing in Vancouver is a problem, he says the government’s “knee-jerk response” is unlikely to result in success. Although the tax has had an impact on the volume of sales, he says he is not convinced it has affected prices, as money is still flowing into the Vancouver market.

In addition, he says, court challenges have been launched against the legislation, alleging that it is particularly targeted against foreign investors from Asia.

Although the legislation was not retroactive, contracts made before the legislation was implemented that had completion dates after it became law were not grandfathered, says Reilly, whose firm practises real estate law.

“So those parties signed contracts with no thought of any tax and then suddenly a new tax applied,” says Reilly.

“The way it was implemented, people who signed contracts when the tax did not exist got caught being required to pay the tax and for some of those people it could have meant that they could no longer afford to pay for the property. So they were caught in a bind of not being able to finance the purchase or losing their deposit,” he explains.

“If you're buying a $500,000 or $1-million condo or a $3- $4- or $5-million home at a 15 per cent price tax, it is quite significant. There were a number of people who were unable to accelerate their purchase dates. We had about one week where we had much of our August business accelerated into the end of July in order to not have to pay that tax,” says Reilly.

In addition, he says, the new legislation leaves questions as to whether assigning a contract to someone else constitutes tax avoidance.

“In British Columbia, for at least 100 years, if you buy property and there was no restriction on assignment you could take that contract and sell the contract to someone else and maybe make a profit. We saw this frequently in pre-purchase contracts and development where one group of people would come in and as soon as the developer advertised condominiums they would buy the condominiums on the pre-sale contract and then they might flip that pre-sale contract to someone else.

“The way the legislation is written, it's so poorly drafted that it is possible to interpret it as those assignments are tax avoidance and tax avoidance is a new concept in property transfer tax. It's existed for many, many years at federal income tax level but it's new at the provincial level for provincial transfer tax or property transfer tax. So that's just another example of the way in which the legislation was poorly drafted and is causing problems in its implementation.”

“We have clients who are developers, we also have clients who have bought property from developers and they now have concerns that they can't complete a contract because of the extra 15 per cent and a big question mark as to whether or not they can assign it either. They've got a third-party willing buyer but is that going to be a problem?” says Reilly.

Ultimately, Reilly says he would have preferred to have seen a more thorough consultation with the industry in terms of how to best implement the property transfer tax, or which properties it should apply to.

“It applies to residential properties but it doesn't apply to commercial properties. So some of that foreign money that's coming into Vancouver has switched from buying expensive residential to buying apartment buildings and things like that. So the price pressures have gone up incredibly on apartment buildings,” he explains.

“Solving the problem requires much more attention from many bright minds and great input from across the entire community and that was not done. It's a big problem, but it came about incrementally over the last 25 or 30 years. So you can't fix it overnight or that would be worse for everyone, you don't want to collapse the market. But a couple of minds over in Victoria are not enough to come up with a workable solution.”

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