The provincial government recently announced an amendment to the Property Transfer Tax Regulation to provide clarity on how the additional property transfer tax applicable to foreign buyers (often referred to as the foreign buyer’s tax) applies in cases where property is acquired by a limited partnership.
Under the current rules, the foreign buyer’s tax applies to purchasers of residential property located in specific geographic regions of the province if the purchaser is a “foreign entity” or “taxable trustee” for the purposes of the Property Transfer Tax Act (the “PTTA”). If it applies, the additional property transfer tax is equal to 20% of the fair market value of the purchaser’s proportionate share of the property. A “foreign entity” includes an individual that is not a Canadian citizen or permanent resident of Canada (referred to as a “foreign national” in the PTTA), a corporation that is not incorporated in Canada, and a private corporation that is incorporated in Canada but is controlled, directly or indirectly, by a foreign national or a corporation that is not incorporated in Canada. A “taxable trustee” includes a trustee of a trust where any trustee is a foreign entity, or a beneficiary who holds a beneficial interest in the property is a foreign entity. Since the introduction of these rules, it has been unclear how the rules apply to partnerships, creating uncertainty for developers and investors.
The amendment to the Property Transfer Tax Regulation, which will come into effect on June 1, 2020, provides that the additional property transfer tax will not apply to a general partner acquiring land on behalf of a limited partnership if:
- each general partner is a Canadian citizen, a permanent resident of Canada or a corporation other than a foreign corporation;
- the combined interest in the limited partnership of all foreign limited partners is less than half of the entitlement of all partners to share in the profits of the limited partnership; and
- each general partner and limited partner is a resident of Canada for income tax purposes throughout the taxation year in which the acquisition occurs.
The definition of “foreign limited partner” includes a limited partner that is a foreign entity, as well as a Canadian individual or entity that holds its interest in the limited partnership in trust for a foreign entity. Note that a company incorporated in Canada is deemed to be a resident of Canada for income tax purposes so a company can be a “foreign limited partner” and still meet the third requirement above.
The exemption may be helpful in cases where a foreign investor, through a Canadian company, holds a minority interest in a limited partnership carrying out real estate development in B.C. The exemption will not apply in cases where limited partnership property is acquired by an entity other than the general partner (such as a nominee company). It is also unclear how the “combined interest” of limited partners will be assessed in cases where the limited partnership includes different unit classes with different income entitlements.