BC’s recently introduced 15% property transfer tax imposed on non-resident buyers has resulted in significant uncertainty within the real estate industry, but the full extent of its fallout is still to come.
While many non-resident buyers were able to expedite their closings before the deadline, many more find themselves tied to incomplete contracts. In the absence of a grandfather clause, the new legislation means they will face a hefty tax bill at closing.
Not surprisingly, this has many buyers wondering how they can structure their affairs to minimize the tax payable.
One Vancouver real estate agent reportedly responded to the new legislation by sending out an email suggesting clients could transfer (assign) ownership of their pre-sale contract to a (Canadian) family member or friend to avoid paying the tax. The Real Estate Council of British Columbia and Premier Christy Clark were quick to respond, implying that the assignment of a contract is both illegal and ineffective. Nevertheless, assignment of contracts is not new, nor is it illegal.
The amended legislation contains provisions aimed at tax avoidance. That, however, does not mean that any effort to minimize the tax payable is unlawful.
It’s not just foreign buyers who are concerned. The implications of the new tax are being felt throughout the market. Sellers with contracts to sell to foreign buyers are understandably nervous – even more so if those sellers have arranged their financial affairs on the assumption of a completed sale.
But hope is not lost. There are lessons to be learned from another sudden change in the law, which was instituted by Ottawa.
In early 2010, the federal government announced new down-payment requirements for non-owner occupied properties. Instead of 5%, buyers were required to have a 20% down payment. As with the new 15% provincial tax, the new federal rules were not grandfathered. The consequences for pre-sale buyers was severe.
Shortly after the announcement of the change to the federal rules, panicked pre-sale buyers who were suddenly unable to complete their purchase sought help from lawyers. Litigation ensued. In many instances, lawyers were able to assist their clients by finding a basis in contract law or in the disclosure provided by the sellers to negotiate or litigate for return of their deposits.
So what has that got to do with the current legislation? In short, the laws surrounding contracts of purchase and sale of land in British Columbia are not always intuitive nor are they straightforward. Even when a seller knows or reasonably believes a buyer will not be able to complete the contract, the seller is not off the hook.
Parties to a contract for the purchase and sale of land must both be ready, willing and able to complete the contract as scheduled. The exception is if one party has indicated in clear terms that he or she cannot complete the contract, thus repudiating it. The other party may then choose to accept that repudiation, or not. If nothing is said, the contract remains alive and the parties’ obligations are unchanged.
For this reason, a buyer who cannot complete a contract should be very careful in deciding whether to share that information with the seller. So long as the contract remains alive, the buyer may have any number of legal positions available to escape the contract and obtain the return of the deposit.
The changes to the property transfer tax have created an environment of uncertainty. While some were able to move up the closing date on their contracts, many were not. Undoubtedly, many will not be able to complete their contracts and will go into damage control mode. Those who can best understand and navigate the sometimes confusing law of real estate will be the ones to emerge unscathed.
Nerissa Yan and Wes McMillan are lawyers at Hakemi & Ridgedale LLP. Yan’s practice covers a wide range of commercial and civil litigation; McMillan’s focuses on real estate and construction disputes
