British Colombia: real estate investors utilising loophole to avoid transfer tax

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Wealthy real estate investors in British Colombia are making use of a loophole to avoid paying property transfer tax. However, the Government has confirmed it is looking to stamp this practice out.

The real estate market in British Columbia is booming at the moment and is bringing millions of dollars into the province, as local and international investors sink their money into the booming sector.

The property transfer tax – which is tipped to bring in around $1.5 billion of revenue over the 2015/16 financial year – sits at one per cent on the first $200,000, rising to two per cent on purchases up to $2 million. Three per cent is to be paid on the remainder. The vast majority of first-time homebuyers do not have to pay the tax.

Major investors in the market are using bare trusts to avoid being liable for the property transfer tax and this is helping them to dodge millions of dollars worth of tax payments. While the property is owned by an organisation and the owners change, the same organisation name remains on the property title, meaning that the tax is not owed.

One key example of this theory being put into practice was the recent sale of commercial premises, 1065 Nelson Street in Vancouver, which was sold by Suncom to Nelson Street Residence for $68 million. The property transfer tax – which would have totalled more than $2 million – was avoided as the company name on the property title was left the same as before the transaction.

This legal loophole is said to be commonly used in commercial real estate transactions and is now also filtering into the high-end residential sales arena too.

According to Andrew Weaver, the Green Party's Member of Legislative Assembly, there is now a pressing need to close the loophole before it begins affecting BC's property sector. Those international investors are being advised to make use of the loophole before purchasing in BC, he said, which could well send the practice spiralling out of control.

Mr Weaver told The Globe and Mail: "Every time most people buy and sell a house, they’re paying property transfer tax. It’s only the wealthy and the wise who would buy in bare trust.

“As a society, if every single person created a bare trust and bought every property in a bare trust there would be no more property transfer tax collected in British Columbia… there’s no reason not to change it," he added.

Finance Minister, Mike de Jong, has recently confirmed that the BC Government is working to end the use of the loophole, but warned that this could be sometime in coming.

“We're working to ensure a reliable data in case of bare trusts, a better sense of the degree to which it is used as a mechanism for avoiding taxation. It’s something we have to be alive to, particularly as we make shifts in other forms of taxation policies," Mr de Jong told the publication.

According to accountant Arthur Azana, there are also other reasons why investors may be choosing to set up a bare trust, not all of which are linked to saving money. Indeed, bare trusts could become far more commonplace among international buyers as BC mulls the roll out of new legislation which requires real estate investors to clarify whether they are citizens of Canada.

Mr Azana told CTV News: “I can [see] such arrangements becoming more prevalent. Especially if the next step is something like an extra tax, higher property taxes on non-resident and non-citizen owned properties.”

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