Legal woes, lost deals feared as tax begins
GARRY MARR
The Vancouver Sun
A tax on purchases of residential property in Metro by foreigners takes effect today. JASON PAYNE FILES
The new tax on purchases of residential property in metro Vancouver by foreigners that takes effect Tuesday is expected to cause further disruption to Canada’s most expensive housing market.
Vancouver realtors spent the past week and much of the holiday weekend scrambling to close deals to beat the 15 per cent tax — at one time bringing British Columbia’s land registration system to a near halt, forcing people to close deals by hand.
Dan Morrison, president of the real estate board of Greater Vancouver, which decried the lack of the notice given to the industry about the new tax, said the sudden shift in policy announced July 25 pushed many deals forward to Friday.
“At this point in time, there is not much we can do,” said Morrison, about trying to close more deals before Tuesday. Provincial officials say Land Tile and Survey Authority Internet portal was open on the weekend, but reported traffic was down.
Still unclear is what will happen with deals negotiated before Tuesday but that close afterwards and are subject to the new tax. That charge is in addition to the property tax transfer rate of one per cent on the first $200,000, two per cent on the portion greater than $200,000 up to and including $2 million, and three per cent on the portion of the fair market value greater than $2 million.
Some industry observers expect deals to fall apart as foreign buyers simply walk away from deposits that in many cases will be lower than the tax they will now face to close a deal.
“I’m not arguing with the provincial government about the merit of a 15 per cent tax, that’s a different conversation,” said Morrison. ” Our No. 1 concern is they did not grandfather existing contracts.
“Some were written two years ago and some might have been two weeks ago. People made good faith decision and the government changed the rules. A one per cent increase, people might have been tolerated. But a 15 per cent increase has given foreign buyers an incentive to walk away. Sometimes (the tax) is two or three times the deposit.”
Tony Spagnuolo, a Vancouver real estate lawyer, said he expects a domino affect in which people waiting to close on a house they are selling will come up short of cash when it’s time to buy because their first deal falls apart.
“A lot will rather walk than close,” Spagnuolo said. “I have a friend who sold his house for $3-million. The guy wasn’t going to close. He’s offshore, so he loses his $100,000 deposit but saves $350,000 not paying the tax.
“(His friend) was going to buy a $1.5 million condo. He needed that guy to close. Thankfully, everything got moved up and done by (Friday). We had to talk (the offshore buyer) into closing.”
The tax could also be challenged in court. Barry Appleton, a managing partner at Appleton and Associates International Lawyers in Toronto and the author of two treatises on the North American Free Trade Agreement, said the tax violates NAFTA, and Americans will be able to sue the federal government. He said the tax would also be in violation of the Canada-China Bilateral Investment Treaty.
“Who needs Donald Trump if you can create you own trade wars,” said Appleton, who believes, the Chinese government itself will be able to seek compensation from Ottawa which would then have to go after B.C. for the money.
Appleton said some jurisdictions that are governed by the treaty — such as Prince Edward Island, which taxes out-of state residents higher, and Mexico, which restricts ownership along the coast — were specifically exempted. There are other local tax agreements that were essentially grand-fathered under NAFTA and other trade deals.
“They needed to have a lawyer look at the policy before they started targeting foreigners,” said Appleton.
A spokeswoman for B.C.’s ministry of finance said the constitution provides that provinces may impose taxes within the province to raise revenue for provincial purposes.
“All legislation goes through constitutional and legislative analysis, and the changes presented in this bill build upon tax policy that has been in place for almost 30 years,” she said.
Keith Head, a professor at Sauder School of Business at the University of British Columbia, there is a specific section in NAFTA that addresses disputes and in most cases it is used to protect companies from unfair treatment.
“What we are talking about here is individual real estate buyers that have to pay an extra tax. That to me does not look like that kind of case we’ve seen in the past. It’s not at all to me an obvious match to intent in past practice to these investment agreements,” said Head.
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