British Columbia's ground-breaking law requiring disclosure of beneficial or indirect interests in real estate has been finalized. Although there remain several key unknowns, the new law is expected to come into force sometime in 2020. Regulations clarifying the missing details are expected to be issued by the time this law comes into force.
This brief provides background to the legislation and sets out the key changes to the draft bill that was published in June 2018.
As with other jurisdictions, British Columbia's current land registry system requires only that the legal owners of the property be disclosed in the land title registry. This allows a company, title nominee, trustee or other entity to hold real estate in its own name, rather than in the name of the individual(s) behind it. While purchasers have been required to disclose the existence of a "bare" trust, and the beneficiaries thereof for all transfers of legal title since 2016, this has not been required for transfers of ownership that are not recorded in the land registry system, such as the transfer of shares of a corporate land owner. There is no current requirement to "look through" any land owners in the absence of a transfer of legal title.
Although the real estate market in and around Vancouver has cooled, the scrutiny of "hidden" ownership of such property has intensified. This has stemmed in part from the publication of two recent reports on money laundering in British Columbia, including money laundering within the real estate sector.1 A recently announced public inquiry into those activities means the issue is likely to remain in the public eye for the near future.
Key aspects the legislation
The law, known as the Land Owner Transparency Act (LOTA), will require disclosure of the ultimate owners of an "interest in land", which includes strata property and long-term leases, as well as freehold residential, commercial, industrial and agricultural properties. It mandates such disclosure by companies, partnerships and trusts that own any interest in land. There are exceptions for organizations that have disclosure requirements under other legislation, such as publicly-listed companies, or are considered less susceptible to abuse, such as charitable trusts. There is also potential for further exemptions by way of regulations, which have not yet been released. The entities that are subject to the new disclosure rules are referred to as "relevant corporations", "relevant partnerships" or "relevant trusts".
What must be reported?
LOTA sets out four key filing obligations:
- A registered owner of real property in British Columbia that is a "reporting body" on or after the date that LOTA comes into force will have to explain the ownership structure and identify the individual(s) who own(s), directly or indirectly, an interest in land (referred to as "interest holders"), through a new filing known as a "transparency report".2 This means relevant corporations, partners of a relevant partnership or a trustee of a relevant trust will all need to file a transparency report once LOTA comes into force.
- For any transfers of legal title on or after the date LOTA comes into force, the transferee will need to declare whether it is a reporting body by filing a "transparency declaration". If a transferee is a reporting body then it will also need to file a transparency report.
- Every reporting body must file a new transparency report within two months of any change in interest holders that does not involve a legal transfer of title, such as a sale of the shares of a corporation that is the owner on title, or a change in beneficiaries.
- As an anti-avoidance measure, a registered land owner who was not initially a reporting body, but who subsequently becomes a reporting body, must also file a transparency report within two months of becoming a reporting body. For example, a property-owning public company that becomes a private company must file a transparency report within two months of going private.
What must be included in a transparency report?
For a relevant partnership or relevant trust, all partners and beneficiaries with a direct or indirect interest in the property must be identified in the report. There are exceptions for beneficiaries whose interest is contingent on the death of another individual, and further exemptions may be provided in the regulations.
For a relevant corporation, individuals who directly or indirectly own 10 percent of the shares or 10 percent of the voting rights (previously 25 percent in each case), must be disclosed. A relevant partnership or relevant corporation would also have to provide information about itself, including its registered office address and business number.
In some cases, a registered owner will not have information about its interest holders, or will have difficulties verifying such information. In that respect, LOTA creates a duty for registered owners to take "reasonable steps to obtain and confirm the accuracy" of its interest holders' information, and to report certain details in the event that interest holders cannot be identified despite such steps.
There is also a provision in LOTA for access to lawyers' records that may be considered necessary for the administration or enforcement of the law. In the event that solicitor-client privilege is claimed over such records, the legislation contemplates that they may be seized and held in a secure manner until the claim over privilege can be addressed in court. Further details are to be provided by regulations. In the meantime, it is worth noting that other legislation has similar provisions in respect of accessing lawyers' records,3 and it is possible that the new regulations under LOTA will reflect that existing regime.
The information in the transparency reports will form a public registry of beneficial and other indirect land owners in British Columbia. Some personal information will only be accessible to law enforcement and other public authorities. This includes interest holders' social insurance numbers and all information about interest holders who are minors. Other data, including the name and city of residence of an interest holder, will be accessible by the public. As discussed below under "Key changes and developments – Blackout period for public access", anyone who is an interest holder for less than 90 days is effectively exempted from having their information accessible by the public.
The disclosure obligations and the public access to personal information raise concerns about the privacy rights of interest holders. LOTA seeks to address such concerns in several ways, such as requiring the registered owner to notify the interest holder(s) of the disclosure obligations and prohibiting misuse of personal information. For example, using such information to solicit or harass an interest holder will be an offence. In addition, interest holders may request that personal information be omitted if disclosure "could reasonably be expected" to threaten their health or safety, and will have 90 days in which to make such a request. If the request is granted, some or all of their personal information otherwise subject to disclosure will not be made public, but will still be accessible by law enforcement and other authorities.
There will be a fee for members of the public to search the registry. This is another way to limit the impact on privacy and, according to the government, to make LOTA's administration revenue neutral. The fee amount and who, if anyone (other than government), will be exempt from having to pay it, will be set out in the regulations.
Key changes and developments
LOTA retains the overall approach taken in the original 2018 draft but contains some important amendments, several of which are described below.4 The Province has not published a summary of its changes, and the submissions made in the consultation period that followed the 2018 draft have not yet been made public. As such, an assessment of the changes requires a comprehensive comparison of the final version against the 2018 draft. We have highlighted a few of the key changes below.
Effective date, grace period for pre-existing owners
Oversight and implementation of LOTA is within the portfolio of the Minister of Finance. According to the Ministry of Finance, the law is expected to be made effective sometime in 2020, following an education and awareness campaign.
For a reporting body that is a legal or indirect owner on the effective date (referred to as a "pre-existing owner"), regulations are expected to provide for a grace period after the effective date, during which time a pre-existing owner will be required to file a transparency report. This grace period will likely be at least six months according to the Hansard transcript and initial feedback from the Ministry of Finance. As noted above, a transparency declaration and a transparency report will immediately be required for any transfer of legal title to a reporting body that occurs on or after the effective date, and any transfer of indirect ownership on or after the effective date will trigger a requirement to file a transparency report within two months.
Corporate interest holder
The threshold at which shareholders of a relevant corporation must be identified has been reduced from 25 percent to 10 percent. This change appears to stem from a recommendation contained in a report on money laundering commissioned by the Province. The rationale is that the higher threshold is too easily avoided,5 although this is debatable. This change means that any individual holding 10 percent of the shares or voting rights in a relevant corporation must be disclosed in the new registry. The 10 percent threshold can also be triggered if shares are held "jointly or in concert" with others in a group of shareholders who collectively own 10 percent or more of the shares or voting rights.6 This may capture shares owned by family members in some circumstances, or parties to a shareholders' agreement who individually own less than 10 percent, but collectively own more than 10 percent of the shares or voting rights.
This change is also notable because the reporting threshold under LOTA differs from the reporting threshold for shareholders of private companies under other legislation.7 Curiously, an amendment to British Columbia's Business Corporations Act, being made in conjunction with LOTA, requires companies to keep a record of 25 percent beneficial shareholders. The same higher threshold is currently used under the Information Collection Regulation (ICR), which we described in our August 2018 brief referenced above.
One provision from the 2018 draft that has, helpfully, been removed is the requirement to make a determination of "value or equity interest" in the case of more than one class of shares, though that is still required under the ICR when completing a property transfer tax return.
In our view, LOTA substantively supersedes the ICR, and therefore the ICR should be repealed once LOTA is implemented. Whether this will in fact occur is unclear.
Partnership interest holder
The definition of "partnership interest holder" includes a new anti-avoidance provision addressing situations where a partnership is a partner in another partnership. In such cases, a partner in the first partnership is deemed to be a partner in the second partnership. This may expand the possible number of individuals who must report an interest in "partnership property". Other amendments to this section, however, provide that a partner of a relevant land-owning partnership is only presumed to have to report under LOTA (rather than required, as under the 2018 draft), and set out the bases on which that presumption may be rebutted.
Administrative penalties and fines for offences
Other key changes relate to administrative penalties and fines for violations of LOTA. In some cases, these penalties and fines have been increased to up to five percent of the assessed value of the applicable property.8
Blackout period for public access
Certain information about interest holders will be publicly accessible, including the name, citizenship and location of principal residence for individual interest holders and trust settlors. This personal information, however, does not become publicly accessible until at least 90 days after the filing of a transparency report,9 which allows individual interest holders to request that it be omitted from the public record. Such a request will be granted if the interest holder can show that the personal information could reasonably be expected to threaten the safety, or mental or physical health of the individual interest holder or a member of their household. It is not known whether the criteria to be used in assessing the merits of such requests will be made public.
Searches of the publicly accessible information will only produce results that are available at the time of the search, and, in some cases, information about individual interest holders may not be publicly accessible for up to 150 days.10
New personal information disclosure requirement
The following matters must be reported about individual interest holders but will not be publicly accessible:
- The individual's last known address;
- Whether or not the individual is resident in Canada for income tax purposes;
- The date on which the individual became or ceased to be an interest holder; and
- A description of how the individual is an interest holder.
These were not included in the 2018 draft.
Other key changes include amendments that require or allow an "enforcement officer" to do certain things previously ascribed to the "administrator" of LOTA. It is too early to draw a conclusion about these changes, but it seems to suggest that the Province will take enforcement seriously.
The Province is expected to issue regulations by 2020 to clarify the missing details prior to LOTA's implementation. Watch this space for updates. In the meantime, for more information please contact Wil Chan and Bob Nikelski.
Daniel McElroy, Practice Support Lawyer in Dentons' Vancouver office, contributed to this alert.
2 Previously a "disclosure report" in the 2018 draft.
4 The new anti-avoidance filing rule is described under "Key aspects of the legislation" above.
6 The "jointly or in concert" anti-avoidance provision was also in the 2018 draft of LOTA and is relied on by the legislation noted below, which has a 25 percent threshold.
7 For example the Proceeds of Crime, Money Laundering and Terrorist Financing Regulations, s. 11.1, recent amendments to the Canada Business Corporations Act (s. 2.1(3)), and changes to British Columbia's Business Corporations Act (s. 119.2, not yet in force) that are being made in conjunction with LOTA, though this is somewhat addressed in the Hansard record, per note 5 above.
8 The caps are unchanged for breaches of LOTA not in respect of a particular property (for example, using publicly accessible information to harass someone). The applicable amounts are CA$25,000 for an administrative penalty incurred by an individual or CA$50,000 by a corporation, and CA$50,000 for an offence committed by an individual or CA$100,000 by a corporation.
9 The 2018 draft provided for a blackout period of 30 days rather than 90.
10 In the event an individual acquires and divests an interest in land during that period, their personal information would presumably never be publicly accessible. Information about non-individual owners, such as corporations, will be accessible with less delay. Subject to the regulations, this could be immediately after a change in legal title, or within 60 days of a change in indirect ownership.
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.