A loophole in B.C. tax law that allows people to avoid property transfer taxes is costing the province tens of millions of dollars, says Green MLA Andrew Weaver, and he wants it shut down in next month’s provincial budget.
But the provincial government says closing the loophole could have unintended consequences for businesses, making the tax code unnecessarily complex. And the ministry said it has no evidence that the trusts are being used to avoid paying the tax other than anecdotes.
Mr. Weaver wrote a blog post Wednesday pushing for the Liberal government to take control of bare trusts in its upcoming budget. He says the trusts are being used by corporations and the rich to avoid paying property transfer taxes when pricey land changes hands.
By registering property in a bare trust, and then transferring their rights to the trust rather than to the actual property, companies and individuals can avoid paying the taxes that are triggered when a property title is signed over.
But since details of the trusts and who uses them are not publicly available, it’s hard to know how much money is really being lost in avoided taxes, Mr. Weaver said.
“As it gets more and more known, and as property prices go up, more and more people are doing it,” Mr. Weaver said, citing his conversations with accountants and real estate executives.
But a statement from the B.C. Ministry of Finance said a property transfer tax that applied to bare trusts “could create more fairness problems than it hopes to solve.”
“While it has not yet been determined that a remedy is required, it may be challenging to design [a tax] that doesn’t have other, unintentional consequences,” the statement said.
And it said tinkering with the system could amount to a new tax, which the government wants to avoid.
The ministry also noted that first-time buyers are exempt from paying the property transfer tax on their first home as long as the home sells for less than $425,000.
But Mr. Weaver countered that the Ontario system of taxing changes in ownership – even through trusts – works just fine without causing undue complications for businesses.
Property transfer taxes in B.C. are calculated at 1 per cent of the first $200,000 and 2 per cent of the value over $200,000. When the tax was first introduced in 1991, the average home price in Vancouver was about $200,000.
This year RE/MAX expects the average home to go for around $800,000, meaning that while the original tax was about $2,000 for a normal sale, today that cost has increased sevenfold.
Putting a piece of property in trust means that ownership officially remains with the original owner, but rights to it are transferred to the buyer, the so-called beneficiary. Because the property is not signed over completely, the property transfer tax is never triggered.
Real estate lawyer Neil Mangan of Vancouver law firm Bell Alliance said trusts are an age-old way of getting around taxes such as those applied to the transfer of property.
Doing it isn’t cheap or simple: For an individual selling a home, the expense of hiring a lawyer and registering the trust is a deterrent, and the risk of having to go to court over a breach of the trust is also unappealing for some. But for a large corporation looking at hundreds of thousands of dollars in savings, it’s sometimes worth the hassle.
“The formula changes [in larger deals],” Mr. Mangan said. “All of a sudden the opportunity to save hundreds of thousands of dollars in tax makes those issues well worthwhile.”
The official Green Party stand on the transfer tax is to eliminate it for all transactions, not just those involving bare trusts, but Mr. Weaver said with revenues from the tax worth hundreds of millions of dollars, getting rid of it is unlikely.
“In light of the fact that it’s not going to happen, let’s fix it.”