B.C. Court of Appeal Upholds Assessment of Foreign Buyer Tax

The recent decision in 1164708 B.C. Ltd. v. British Columbia (1164708 B.C. Ltd.) addressed the applicability of the additional property transfer tax (ATT), commonly known as the “foreign buyer tax,” under British Columbia’s Property Transfer Tax Act, R.S.B.C. 1996, c. 378 (PTT Act).

This appeal involved a challenge by the appellant, 1164708 B.C. Ltd. (Petitioner), of a C$6-million reassessment of ATT that was levied by the Ministry of Finance in connection with an acquisition made by the Petitioner. The appeal argued that the foreign buyer tax should not apply to the acquisition as the Petitioner was ultimately owned by two Canadian permanent residents.

Background

In 1164708 B.C. Ltd., the Petitioner purchased a 38-unit apartment building located in Burnaby for C$30-million (Acquisition). The Petitioner held the property in trust for a B.C.-numbered company (Beneficial Owner). Both the Petitioner and Beneficial Owner were corporations incorporated in B.C. All of the shares in those two corporations were owned by a third corporation incorporated in B.C. (Third Corporation). The sole shareholder of the Third Corporation, however, was a corporation incorporated under the laws of the People’s Republic of China (Foreign Corporation). Both the majority shareholder and the minority shareholder of the Foreign Corporation had permanent resident status in Canada at the time of the Acquisition.

In connection with the Acquisition, the Petitioner paid the general property transfer tax (C$1.418-million) under s. 2 of the PTT Act. Subsequently, in December 2020, representatives of the Ministry of Finance investigated the Acquisition and assessed C$6-million in ATT owing under s. 2.02 of the PTT Act on the basis that the Petitioner was a “foreign entity” under the PTT Act by virtue of the fact that it was controlled by a corporation that was neither incorporated in Canada nor listed on a Canadian stock exchange.

The Petitioner appealed the assessment to the B.C. Supreme Court, arguing that the Foreign Corporation’s incorporation in China did not make the Petitioner a “foreign entity” because all of the Foreign Corporation’s shareholders were permanent residents of Canada. The appeal of the assessment was dismissed by the chambers judge. The Petitioner then appealed that decision to the B.C. Court of Appeal.

The sole question at the B.C. Court of Appeal was whether the Foreign Corporation’s status as a foreign corporation served to make the Petitioner a “foreign entity” or “taxable trustee” under the PTT Act, thereby making it liable for ATT.

The Decision

The B.C. Court of Appeal affirmed the decision of the chambers judge and dismissed the appeal.

The B.C. Court of Appeal went through a detailed analysis of the PTT Act with particular focus on the definition of “foreign entity” in s. 2.01. “Foreign entity” is defined to include a “foreign corporation,” which is, in turn, defined as “(a) a corporation that is not incorporated in Canada,” and “(b) unless the shares of the corporation are listed on a Canadian stock exchange, a corporation that is incorporated in Canada and controlled by … (ii) a corporation that is not incorporated in Canada.”

The B.C. Court of Appeal affirmed the lower court’s analysis that the Foreign Corporation clearly met the definition of a “foreign corporation” under the PTT Act and affirmed the application of s. 256(1.2) and 256(5.1) of the federal Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (ITA) to the definition of “controlled” under the PTT Act. The B.C. Court of Appeal also affirmed that the Petitioner was properly categorized as a “taxable trustee” under its definition in s. 2.01 of the PTT Act.

The B.C. Court of Appeal emphasized that s. 256(5.1) of the ITA was designed to broaden the concept of control beyond legal control to include situations where a person, while not having the legal right to control a corporation, is able to exercise control through moral, economic or contractual influence. The B.C. Court of Appeal highlighted that the explanatory notes accompanying s. 256(5.1) reinforce the broad application of the ATT, extending the concept of control to direct or indirect influence “in any manner whatever”. Importantly, the Court noted that the presence of one controlling party does not exclude others from also having control, and that a person can be deemed to control a corporation even if they do not actively exercise their influence. Because the Foreign Corporation directly controlled the Third Corporation, and indirectly controlled the Petitioner and Beneficial Owner, both the Petitioner and Beneficial Owner were properly categorized as “foreign entities,” despite the fact they may also have been controlled by permanent residents of Canada at the time of the Acquisition. 

In coming to its decision, the B.C. Court of Appeal also undertook an analysis of the purpose behind the PTT Act. The high-level purpose of the legislation is, according to the B.C. Court of Appeal, to cool off the residential housing markets in areas of the province considered to be overheated. The PTT Act accomplishes this by applying the ATT and making it significantly more expensive for foreign investors to purchase such housing stock. In going through its statutory interpretation analysis, the B.C. Court of Appeal also refuted the Petitioner’s assertion that where foreign corporations are owned or controlled by persons who live in Canada, the concerns intended to be addressed by the PTT Act do not apply.

A key consideration for the Court was the fact that when foreign corporations are involved in the chain of ownership, difficulties in obtaining foreign-based information can occur and often, it will be difficult to ascertain where the foreign actor’s funds come from.

Accordingly, the appeal was dismissed and the Petitioner was liable for the C$6-million ATT both as transferee who is a “foreign entity” and as a “taxable trustee.”

Key Takeaways

1. Review the Entire Chain of Ownership: B.C. corporations acting as trustees may be liable for ATT even if the ultimate owner or shareholder of the acquiring entity is not a “foreign entity.” Only if the acquiring entity is neither a “foreign entity” nor a “taxable trustee” and its chain of control does not include any “foreign entities” will it escape the application of ATT to an acquisition of lands within a “specified area” established by the PTT Act.
2. Heightened Due Diligence in Real Estate Transactions: This decision underscores the importance of robust due diligence when structuring real property transactions. Even if an acquiring entity appears to be Canadian, the underlying ownership and control (both direct and indirect) must be thoroughly reviewed to fully understand the potential application of ATT.
3. Potential for Increased Audits and Tax Assessments: This decision is not an isolated recent judicial consideration of the application of property transfer taxes generally or ATT specifically (see, for example, the British Columbia v. Peakhill Capital Inc. line of cases). It is apparent that the Ministry of Finance is paying close attention to the PTT Act to ensure that it is collecting the full amount of any taxes that may be due.
4. Shifting Landscape for Property Transfer Taxes: In addition to the increasing attention the courts have given the PTT Act of late, it is noteworthy that the 2025 Cooperation and Responsible Government Accord setting out the agreement between the B.C. Green Party Caucus and the B.C. NDP Caucus made reference to ending “the property transfer tax loophole for sale of properties by trusts.” It remains to be seen if and how this policy initiative will be implemented, but it is certainly a development worth monitoring as such a change could have material impacts on acquisitions and dispositions of real property in British Columbia.

For more information, please contact the authors or any member of our Commercial Real Estate group.