On October 24, 2023, the Supreme Court of British Columbia issued a decision finding that additional property transfer taxes of $6,000,000 were payable on a residential property. Both the registered and beneficial owners of the property in question were British Columbia companies and the individuals at the top of the structure were Canadian permanent residents. The results of this case are a stark reminder of the importance of having a clear understanding of the Property Transfer Tax Act when purchasing residential property, especially when the ownership structure involves foreign components.
In August of 2018, a company incorporated in British Columbia (the "Registered Owner") acquired title to a residential property (the "Property") for $30,000,000 in the Metro Vancouver Regional District (the "Transaction") and held such title as bare trustee for another British Columbia company (the "Beneficial Owner"). The Registered Owner and the Beneficial Owner were wholly owned by another British Columbia company (the "B.C. Shareholder"). The shares of the B.C. Shareholder were wholly owned by a company incorporated in the People's Republic of China (the "PRC Shareholder"). The shares of the PRC Shareholder were entirely held by two individuals with permanent resident status in Canada (the majority shareholder of the PRC Shareholder will be referred to as the "Ultimate Shareholder" in this blog post).
The Registered Owner and the Beneficial Owner paid property transfer tax on the Transaction, but did not pay additional property transfer tax ("Additional PTT"). Additional PTT is imposed on "foreign entities" (being a person who is neither a Canadian citizen or a Canadian permanent resident, nor a foreign corporation) and "taxable trustees" (meaning a trustee of a trust in which either a trustee is a foreign entity or a beneficiary who is a foreign entity holds a beneficial interest in the residential property held by the trust) under the B.C. Property Transfer Tax Act (the "PTT Act"), and applies to certain areas in B.C., including the Metro Vancouver Regional District.
In December of 2020, the B.C. Minister of Finance (the "Minister") assessed that the Transaction was subject to Additional PTT in the amount of $6,000,000. The Registered Owner appealed this assessment. In September of 2022, the Minister determined that the Registered Owner was "controlled" by the PRC Shareholder, a foreign corporation, under the PTT Act, and as such, the Registered Owner was also a "foreign corporation" under the PTT Act such that the Additional PTT applied.
Subsequently, the Registered Owner appealed the Minister's decision to the British Columbia Supreme Court.
The heart of the issue in the Transaction was the definition of a "foreign corporation" under the PTT Act. A foreign corporation includes a corporation that is incorporated in Canada and is controlled by a corporation that is not incorporated in Canada. The PTT Act defines the term "controlled" as "directly or indirectly [controlled] in any manner whatever" within the meaning of Section 256 of the Canadian federal Income Tax Act. This phrase, controlled "directly or indirectly in any manner whatever" is broad, and can include control in fact (i.e. influence) as well as legal control (i.e. share ownership).
In the British Columbia Supreme Court proceedings, Registered Owner argued that it was not a "foreign corporation" under the PTT Act because it was "ultimately controlled" by the Ultimate Shareholder, who was a permanent resident of Canada. In support of its position, the Registered Owner asserted that the meaning of "controlled" under the PTT Act should be restricted to Section 256(5.1) of the Income Tax Act because Section 256(5.1) specifically addresses the meaning of the phrase "controlled, directly or indirectly in any manner whatever". The Registered Owner also relied on certain case law which stated that "control" under Section 256(5.1) should be interpreted to mean that there could only be one person or entity that holds "ultimate control" of a taxpayer.
On the other hand, the Minister submitted that "controlled" under the PTT Act encompassed all provisions within Section 256 of the Income Tax Act, and did not depend on ultimate control by one person or entity. This assertion was critical to the Minister's argument, as there are specific provisions within Section 256 that allow for an entity to be controlled by more than one person at a particular time (i.e. simultaneous control). These provisions on simultaneous control in Section 256 were enacted specifically to override the "ultimate control" concept formulated in the specific case law relied on by the Registered Owner. The Minister asserted that the Registered Owner was simultaneously controlled by the PRC Shareholder, the BC Shareholder, and the Ultimate Shareholder due to the application of these simultaneous control provisions, and as such, was "controlled" by a foreign corporation within the meaning of the PTT Act.
The court ultimately agreed with the Minister, and the Registered Owner's appeal was dismissed. The court concluded that while the Additional PTT was avoidable from the Ultimate Shareholder's perspective (i.e. the Ultimate Shareholder could have chosen to simply not involve the PRC Shareholder in the ownership structure of the Property), the assessment for Additional PTT was a consequence of how the Ultimate Shareholder and his companies chose to structure their affairs.
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