Property Transfer Tax (PTT)

Imposition of the PTT

-Under the Property Transfer Tax Act (the “PTTA”), the PTT generally applies to any transfer of an interest in real property that is registered at the Land Title Office

-taxable transactions, which include most commonly the sale of a fee simple interest in a home that is conveyed from a seller to a buyer and also include other interests in real property that can, and often are, registered in the Land Title Office, such as the right to purchase a property

-Where PTT applies, it is payable by the buyer (also referred to as the transferee in the PTTA to describe whomever will appear on title as the holder of the interest).

-The amount of the tax is based on the fair market value (the amount that would have been paid for a property had it been sold in an open market by a willing buyer free of any mortgage or other charge) of the property at the date of registration, subject to any applicable exemptions.

-With respect to commercial real property, it is important to keep in mind that PTT is generally calculated with reference to all fixtures, including some machinery or equipment that might be subject to Provincial Sales Tax as well

-some exemtions: transfers of principal residences amongst related individuals or a transfer between spouses pursuant to a written separation agreement or court order under the Family Law Act, and also transfers of family farms.

Rate(s) of tax

Since 2018, the applicable rates have been:

• 1% on the first $200,000;

• 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000;

• 3% on the portion of the fair market value greater than $2,000,000; and

• if the property is residential, a further 2% on the portion of the fair market value greater than $3,000,000 (effective February 21, 2018).

First Time Home Buyers’ Program

-allows eligible buyers to claim an exemption from property transfer tax for certain eligible residential properties.

-The conditions for the Program include the following:

• The buyer must be a Canadian citizen or permanent resident of Canada.

• The buyer generally must have lived in the province for a year before the purchase.

• The buyer cannot have previously owned a principal residence anywhere in the world.

• The property must become the buyer’s principal residence, have a fair market value of less than $500,000, and be 0.5 hectares or smaller.

Newly Built Home Exemption Program

-was introduced in 2016 for a buyer of a newly built home and the conditions for this relief are closely related to those of the First Time Home Buyers Program

-For example, the buyer must be an individual who is a Canadian citizen or permanent resident, and the property must be used as their principal residence and have a fair value market of $750,000 or less.

Functioning of the PTT

-Any PTT payable by the buyer must be paid to the government before the buyer’s interest in the property can be registered.

-In contrast with the operation of GST, the seller has no collection obligation.

-Rather, PTT is paid directly to the government by the buyer along with a PTT return, which must be submitted to the Land Title Office.

-The province regularly audits PTT returns to determine if, in its view, the correct amount of PTT has been paid on a transfer.

The Additional PTT for Foreign Buyers

-The Foreign Buyers’ Tax was introduced in 2016 in order to address the rapidly increasing housing prices in the Greater Vancouver Regional District and the perception that interest from outside of Canada was driving up real estate prices

-after the calculation of the basic PTT payable, the Foreign Buyers’ Tax must be added to the PTT amount.

-Effective February 21, 2018, the Foreign Buyers’ Tax was increased from 15% to 20%.

-Furthermore, the tax was extended outside of the Greater Vancouver Regional District to include the Capital Regional District, Fraser Valley, Central Okanagan, and the Nanaimo Regional District.

-Two main conditions for the application of the Foreign Buyers’ Tax:

1. the nature and location of the property

2. the identity of the buyer (i.e., the transferee).

- focus on three potential buyers that are subject to the additional PTT: foreign nationals, foreign corporations and taxable trustees.

Withholding Taxes for Non-Residents Who Sell Property

-Under Canadian income tax law, a non-resident of Canada selling Canadian real property is subject to Canadian income tax on any gain on sale

-If the seller is not a resident of Canada, the buyer is required to withhold 25% of the gross purchase price if the property is non-depreciable property (a residence of the seller) or 50% where the real estate is a depreciable property (a building used for rental or business purposes).

-The withholding amount is held in a lawyer’s trust account in trust for the Canada Revenue Agency until a Tax Clearance Certificate is obtained

-Once the Tax Clearance Certificate is obtained, the taxes are paid from the withholding amount and the seller receives any amount left over.

-The withholding amount is not a final tax, but a temporary withholding tax, as there may be applicable treaties that reduce the tax amount owed.

-A seller who wishes to avoid this withholding amount must provide to the buyer, on or before closing, a Tax Clearance Certificate from the Canada Revenue Agency certifying the applicable taxes on the transaction.

Taxes on Capital Gains Upon Sale of Real Property

-When a property is sold for a price greater than what it was purchased for, the seller may realize what is called a capital gain.

-profit earned from the sale of a property or other investment

-Usually, 50% of capital gains are taxable at an individual’s tax rate (or at the corporate tax rate, if applicable).

-exempt from taxation if the property sold was the seller’s principal residence.

-A property will generally qualify as a principal residence where the seller has lived in the property during the year and no other property is designated as the principal residence

-in the case that the property was not the seller’s principal residence for certain years during the time they owned it, or a part of the property was not used as the principal residence, taxes may be owed on a portion of the capital gain corresponding to those years or that part of the property

-In certain instances, profit made on the sale of a property will be categorized as business income rather than as a capital gain. If this is the case, then 100% of the profit is taxable