PROPERTY TRANSFER TAX LOOPHOLE
‘ Bare trusts’ help keep down costs for a select few
A good tax policy raises money for government coffers with minimum impact on investment, which is good for the province’s competitiveness and is how economists define an efficient tax.
Huge sums — at least tens of millions, and possibly hundreds of millions — elude the provincial taxman each year thanks to a property transfer tax loophole that many big real estate players slip through with ease.
The mechanism is what’s called a “bare trust.” It’s a legal entity created for the sole purpose of holding title to something, usually land and/ or buildings. But this title alone is, as seen by the law, essentially worthless as it doesn’t include the “beneficial ownership” — that is use of, or rent from, or capital gains on the property.
For income tax purposes, all tax liability comes from the beneficial ownership so there’s generally no advantage in having the land title held by a bare trust. But when it comes to the provincial property transfer tax, the liability is attached to the transfer of the title, not the benefits of ownership.
So when a property with title held by a bare trust is sold, the price for the beneficial ownership is the market value. Ownership of the trust that holds the title then goes to the same purchaser for a token fee. Because the same trust continues to hold the title, there’s no title transfer and hence no property transfer tax.
The vast majority of homeowners don’t use bare trusts, but if they did, the typical savings in Metro Vancouver would be $ 10,000 to $ 20,000 when a property changes hands. For a downtown office building, however, it could add up to a couple of million or more.
What it boils down to, says lawyer Richard Weiland of Clark Wilson LLP, is that the tax is typically paid by people involved in small transactions and ducked by those doing the really big deals.
It’s difficult, maybe impossible, to nail down precisely how many property owners legally avoid the transfer tax through this mechanism as no one — not even the land titles office — tracks whether corporate owners listed on deeds are or are not the beneficial owners as well as the titleholders. But industry insiders agree that it’s a lot.
“It’s the majority of them,” Weiland said in an interview. “And it’s probably far beyond that.”
I’ve traced this tax- avoiding technique at least as far back as 1992, not long after the tax was introduced by then- premier Bill Vander Zalm. So it’s no surprise that Finance Minister Mike de Jong says his ministry is aware of how it’s being used.
“While it has not yet been determined that a remedy is required,” de Jong added in an emailed statement, “it may be challenging to design a remedy that doesn’t have other, unintended consequences.”
I think it’ll be even more challenging to fix the tax in a way that meets his stated wish to balance “fairness, competitiveness, efficiency, administrative simplicity and economic objectives.”
Because this is a most perverse tax, I used to think it was at least administratively efficient, but the difficulty dealing with this widespread dodging tells me I was wrong about that. And it has certainly never been fair, competitive, efficient, or a useful tool to attain rational economic objectives.
Those last three — being competitive, efficient and economically useful — are linked. A good tax policy raises money for government coffers with minimum impact on investment, which is good for the province’s competitiveness and is how economists define an efficient tax. This, of course, is — or should be — the economic objective.
Yet the property transfer tax, at least to the extent it’s actually collected, adds to the cost of every transaction involving a home or business premises. Thus its effect is neither positive or even neutral — it suppresses economic activity.
A few years ago, Abbotsford realtor Dave Andrews shared with me — and I shared with readers — his calculations on how this small- sounding tax can add up to tens of thousands of dollars over the lifetime of a typical homeowner. He reckoned — and I think his calculations were sound — that for every $ 1 the tax added to government revenue, it would cost the taxpayer $ 2 in out- ofpocket costs and forgone capital gains.
I’ve never believed it was fair to hit buyers of any property with bills so large at the very time they need their money the most. Now I realize that, with the ability of so many big players to duck the tax entirely, the degree of unfairness goes from serious to scandalous.
Fixing the tax might be an option if the minister can figure out how to really make it fair, competitive, efficient and all that. But more sensible would be for him or his successor to scrap it and come up with a better way to raise the threequarters of a billion a year it typically brings in. And a way to stem the flood of rich people’s money slipping through this loophole.