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Property Transfer Tax Issues Tips and Traps for the Unwary

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					RESIDENTIAL REAL ESTATE CONFERENCE—2010
PAPER 3.1




Property Transfer Tax Issues: Tips and Traps for
the Unwary




These materials were prepared by Randall E. Cobbett, and Michael S. Rathborne, Articled Student, both of
Cobbett & Cotton Law Corporation, Burnaby, BC, for the Continuing Legal Education Society of British
Columbia, December 2010.
© Randall E. Cobbett, and Michael S. Rathborne, Articled Student
                                                                                                3.1.1


                                                     PROPERTY TRANSFER TAX ISSUES:
                                                    TIPS AND TRAPS FOR THE UNWARY


I.      Introduction .......................................................................................................................................................2
II.     Fair Market Value..............................................................................................................................................2
        A. Fair Market Value—A Review................................................................................................................................................... 2
III.    First Time Home Buyer Exemption ................................................................................................................3
        A. Requirements for the Exemption............................................................................................................................................ 3
        B. What Property Qualifies for the Full Exemption? .......................................................................................................... 3
        C. Financing Requirements............................................................................................................................................................... 3
        D. Important Requirements During the First Year the Property is Owned ........................................................... 3
        E. Penalty for False Declarations ................................................................................................................................................... 4
        F. Partial Exemptions........................................................................................................................................................................... 4
IV.     Family Transfers ................................................................................................................................................4
        A. Exemptions.......................................................................................................................................................................................... 4
        B. When PTT Applies in a Family Transfer .............................................................................................................................. 5
        C. Recreational Residences and Family Farms—Exemption Requirements .......................................................... 5
V.      Straddling Properties........................................................................................................................................5
VI.     Splitting Titles....................................................................................................................................................6
        A. Split Transaction Involving One Transferee ...................................................................................................................... 6
        B. Split Transactions Involving Related Individual Transferees.................................................................................... 6
        C. Split Transactions Involving Associated Corporations................................................................................................ 6
VII.    Post Sub-division Transfers .............................................................................................................................7
        A. Subdivision of a Single Parcel..................................................................................................................................................... 7
        B. Exemptions Provided in Section 14(3)(j) ............................................................................................................................ 7
        C. Time to Issue Notice of Assessment ...................................................................................................................................... 7
        D. When Section 3(3.2) of the Act Applies.............................................................................................................................. 7
        E. Pre-plan Transfers............................................................................................................................................................................ 8
        F. Subdivision of Two or More Adjacent Parcels ................................................................................................................. 8
        G. Exemption Provided in Section 14(4)(k)............................................................................................................................. 8
        H. Exemption Provided in Section 14(4)(k.1) ......................................................................................................................... 8
        I.   Time to Issue Notice of Assessment ...................................................................................................................................... 8
        J.   When Section 3(3.3) and (3.4) of the Act Apply ............................................................................................................ 9
VIII.   Conveyancing Errors .........................................................................................................................................9
        A. Qualifying Conveyance Errors................................................................................................................................................... 9
        B. Filing the PTT Returns................................................................................................................................................................... 9
        C. Certificate of Exemption ........................................................................................................................................................... 10
                                                           3.1.2

                                                  I.     Introduction
The Property Transfer Tax (the “PTT”) has factored into the majority of real estate transactions since it was
enacted in 1987. Lawyers involved in these transactions must always be mindful of the implications of the
PTT and of the consequences of failing to advise or of incorrectly advising their clients with respect to it.
The general rule is that all transactions are considered taxable transactions, unless they are exempt. Most
exemptions are set out in s. 14 of the Property Transfer Tax Act (the “Act”). Purchasers may indeed meet the
exemption criteria for the PTT, but consideration must be given to a number of factors prior to a final
determination. Much more often than not the application of the PTT to these transactions is without
complications. However, there are several traps that real estate lawyers may fall into if they are not aware of
some of the more obscure provisions in the Act. This paper will review some of the commonly encountered
provisions of the Act, as well as highlight some that practitioners need to be wary of.
Much of the information in this paper has been extracted from the Ministry of Finance Property Transfer Tax
Bulletins relating to the PTT and the reader is well advised to refer to these Bulletins, as they offer clear and
concise explanations of many of the topics that follow. Further credit to Edward L. Wilson of Lawson Lundell
LLP for his paper titled, Property Transfer Tax: Unusual Transactions and Traps for the Unwary, from June 2008.


                                            II.        Fair Market Value

A.     Fair Market Value—A Review
In most real estate transactions, PTT is paid on the Fair Market Value (“FMV”) of the land at the time the
transaction is registered at the Land Title Office. “Land” is defined in the Interpretation Act, and “includes any
interest in land, including any right, title or estate in it of any tenure, with all buildings and houses, unless there
are words to exclude buildings and houses, or to restrict the meaning.” Therefore, in the absence of any
exclusionary words in the Act, the PTT is payable on the FMV of the land, and any improvements on that land.
FMV is defined as the price that a willing purchaser would pay to a willing seller in the open market. An open
market is one where the property in question is offered for sale so that any interested purchaser has an
opportunity to make an offer.
In the majority of transactions the purchase price is the best indicator of the FMV. However, it is quite
common for a transaction to be completed and the property registered several months after the contract of
purchase and sale is signed. In a fluctuating real estate market common to BC, the BC Assessment alone may
not provide an accurate determination of the FMV. Depending on the trend in the market, the FMV may be
higher or lower than the purchase price agreed to in the contract. In cases such as this a determination must
be made as to whether the purchase price provides an accurate determination of the FMV. An independent
appraisal may be required to acquire this information in order to determine the correct amount of PTT to be
paid.
There are some notable exceptions to the general principle that PTT is paid on the FMV at the time of
registration. These include pre-sold strata units (please see Property Transfer Tax Bulletin PTT024, which
discusses the implications of the PTT on pre-sold strata units).
*See Property Transfer Tax Bulletin PTT001 for a complete review of FMV.
                                                       3.1.3

                               III.   First Time Home Buyer Exemption
The First Time Home Buyer Program provides a PTT exemption when a real estate transaction involves a
transfer of real property from a vendor to an eligible first time home buyer.

A.     Requirements for the Exemption
In order to qualify for this exemption a first time home buyer must meet each of the following specific
requirements:
           •     you are a Canadian citizen, or a permanent resident as defined by the Immigration and
                 Refugee Protection Act (Canada);
           •     you have lived in BC for 12 consecutive months immediately before the date you register the
                 property, or you have filed two income tax returns as a BC resident during the six years prior
                 to the date of registration of the property;
           •     you have never owned an interest in a principal residence anywhere in the world at any time;
                 and
           •     you have never received a first time home buyers’ exemption or refund.
Note: Where a purchaser is not entitled to an exemption at the registration date solely because they are not a
Canadian citizen or a permanent resident, and the purchaser satisfies that requirement on or before the one
year anniversary of the registration date, the purchaser may apply for a refund of the tax paid. This application
must be made within 18 months of the registration date.

B.     What Property Qualifies for the Full Exemption?
The property a purchaser acquires qualifies for the full exemption if:
           1.    the FMV of the property, which includes the land plus any improvements, is not more than
                 the current threshold of $425,000;
           2.    the land is 0.5 hectares (1.24 acres) or smaller; and
           3.    the property will only be used as your principal residence.

C.     Financing Requirements
Prior to February 20, 2008, there were specific financing requirements in order for a purchaser to qualify for the
First Time Home Buyer exemption. These requirements no longer apply. Furthermore, all purchasers, whether
they purchased and registered property before or after this date, are no longer restricted by the amount that
they may pay down their mortgage in order to remain eligible for the First Time Home Buyer Exemption.

D.     Important Requirements During the First Year the Property is Owned
A purchaser of property must occupy the residence as his/her principal residence within 92 days of the
registration of the transfer at the Land Title Office. In order to be eligible for the full exemption, a purchaser
must continue to use the residence as his/her principal residence for at least one year following the date of the
registration of the transfer. If a purchaser fails to use the residence as his/her principal residence for the
duration of the year, he/she may be eligible for a pro-rated exemption determined by the date that the
purchaser moved off the property. However, the exemption continues to apply if the purchaser dies or if the
property is transferred as a result of a court order or separation agreement pursuant to the Family Relations
Act.
                                                      3.1.4

E.    Penalty for False Declarations
Each exemption application is reviewed in order to verify a purchaser’s eligibility. If it is determined that a
purchaser has made a false declaration with respect to any of the abovementioned requirements, then he/she
will be subject to a penalty in addition to the property transfer tax payable. This penalty is an amount
equivalent to the PTT payable, effectively doubling the tax payable.

F.    Partial Exemptions
Purchasers are eligible to claim partial exemptions from PTT under certain circumstances:
          1.     if a portion of the improvements on the land are used for commercial purposes or if there is a
                 separate dwelling on the land, only the portion that is the principal residence is eligible for the
                 PTT exemption;
          2.     if the land is larger than 0.5 hectares (1.24 acres), only the residential improvement and 0.5
                 hectares of the land are eligible for the PTT exemption. The PTT Return sets out the formula
                 to apportion the values such that PTT is paid on the value of the land exceeding 0.5 hectares.
          3.     If the property has a FMV of up to $25,000 more than the threshold amount of $425,000,
                 then the property is eligible for a partial PTT exemption. The calculation is based on the
                 following formula:
                 PTT x Qualifying Value + $25,000 – FMV = Exemption amount
                                            $25,000
                 Consider the following example:
                 Qualifying Value                                 $425,000
                 FMV of the property                              $445,000
                 PTT at 1% of first $200,000 and
                       2% on the remainder                        $ 6,900
                 Calculation of partial exemption
                 $6,900 x ($425,000 + $25,000 - $445,000)         $ 1,380
                                                                   $25,000
                 PTT payable                                      $ 5,520
*See Property Transfer Tax Bulletin PTT004 for a complete review of PTT and the First Time Home Buyers’
Program.


                                           IV. Family Transfers

A.    Exemptions
PTT exemptions are most often encountered in family transfers. Principal residence exemptions are dealt with
in Property Transfer Tax Bulletin PTT005. In order for the family transfer to be fully exempt from PTT for a
principal residence the following conditions generally must apply:
          1.     the relationship between the transferor and the transferee must be that of a related
                 individual;
                                                       3.1.5

           2.    at least one of the transferor and the transferee must have lived on the property as a principal
                 residence for a minimum period of six months immediately prior to the transfer occurring;
           3.    the transferee is a Canadian citizen or permanent resident; and
           4.    the property must be classified as residential by BC Assessment Authority, contain three or
                 less living units and be less than 0.5 hectares in size.

B.     When PTT Applies in a Family Transfer
PTT is payable in a family transfer in the following circumstances:
           1.    if the transfer involves an investment or rental property of both the transferor and the
                 transferee; and
           2.     although the property is a principal residence, the family relationship does not conform to
                 the definition of ‘related individual’ under the Act. This is a problem with transfers of a
                 principal residence between brothers, sisters, cousins, nieces and nephews, etc.

C.     Recreational Residences and Family Farms—Exemption Requirements
Please refer to Property Transfer Tax Bulletins PTT007, PTT008 and PTT009 for specific details and
requirements.


                                         V.    Straddling Properties
As already noted above, a purchaser is liable for PTT when he/she acquires an interest in land and registers that
interest at the Land Title Office. With few exceptions PTT is payable on the FMV of the interest acquired in the
land and its improvements at the date of registration. But how do you determine the tax payable when
improvements straddle more than one parcel of land?
If an improvement straddles more than one parcel of land, the parcels are considered a single parcel when
calculating the FMV if:
           1.    each parcel is the subject of a taxable transaction; and
           2.    the parcels are transferred to the same person, related individuals or associated corporations
                 in a single transaction, or in multiple transactions within a six month period.
Examples of improvements straddling more than one parcel of land include circumstances where:
           1.    a building or other major structure cuts across the property lines of more than one parcel; or
           2.    a building or structure is located on one parcel of land, but other improvements critical to
                 the building are located on the parcel or parcels next to it (examples of improvements that
                 may cut across more than one parcel include water lines and sewer lines).
When situations such as these arise, PTT is paid at the standard 1%/2% rate on the combined FMV of all the
parcels transferred. A PTT return is filed for each parcel being transferred. In order for the transfers to be taxed
as a single transaction, enter the total FMV of each parcel on one property transfer tax return, and enter the
FMV of ‘nil’ on the other return(s). Also, the PTT return number for each parcel being transferred must be
written at the top of each filed return.
                                                          3.1.6

If you are filing electronically, it is easier as you can file one Form A Transfer listing both parcels/PID’s and one
PTT, with the FMV of the combined parcels recorded.
Please refer to Property Transfer Tax Bulletin PTT027.


                                               VI. Splitting Titles
There are three common situations where transfers of property are split in order for taxpayers to take
advantage of the lower rate of tax applicable to the first $200,000 of value; those that involve one transferee,
those that involve related individuals and those that involve associated corporations. A series of transactions
can be viewed as one transaction for PTT purposes. Section 3 of the Act governs the determination of PTT
payable when splitting titles under these three circumstances. Often, the reason for filing multiple transfers is
to have the PTT assessed at 1% on the first $200,000 of value for each of the filed transfers, but this is not
always possible.

A.     Split Transaction Involving One Transferee
When a purchaser acquires an interest in a property and within six months acquires another interest in the
same property the rate of PTT will be calculated based on the total FMV of both interests in the property. For
split purchases of one property to be considered valid, they must be at least six months apart. Please refer to
Property Transfer Tax Bulletin PTT014.

B.     Split Transactions Involving Related Individual Transferees
The term ‘related individual’ has a specific meaning in the Act. It is defined as:
           1      a person’s spouse, child, grandchild, great-grandchild, parent, grandparent or great-
                  grandparent;
           2.     the spouse of a person’s child, grandchild or great-grandchild; or
           3.     the child, parent, grandparent or great-grandparent of a person’s spouse.
(Examples of people who are not vertically related include siblings, uncles, aunts, nephews and nieces.)
When a purchaser acquires an interest in property and at the same time, or within six months, a related
individual acquires a further interest in the same property, the rate of PTT payable is calculated based on the
total FMV of both interests in the property. Despite there being two registered transfers at the Land Title
Office with two registered owners, the Act treats them as one for the purpose of calculating the PTT payable.
Furthermore, where there are two or more purchases of interest in the same property within a six month
period, the related purchasers will be jointly and severally liable for the PTT calculated on the total FMV of the
property. Generally, related individuals will combine all of their interests on one transfer as they cannot
benefit from the lower rate of tax on multiple transfers. It is the non-related individuals that may be able to
benefit from the multiple transfers.

C.     Split Transactions Involving Associated Corporations
Similar to the term ‘related individual,’ the term ‘associated corporation’ has a specific meaning under the Act.
For reference please review s. 256(1) of the Income Tax Act Canada.
Associated corporations splitting transfers are treated in the same manner as the Act treats related individuals
when transfers are split. When one corporation acquires an interest in property and within six months an
associated corporation acquires a further interest in the same property, the rate of PTT payable is calculated
based on the total FMV of both interests in the property. Again, similar to the above two situations, despite
there being two or more interests in the property registered in the Land
                                                      3.1.7

Title Office and two registered owners, they are treated as one for the purpose of calculating the PTT payable.
As above, where there are two or more purchases of interest in the same property within a six month period,
the associated corporations will also be held jointly and severally liable for the PTT calculated on the total FMV
of the property.


                                    VII. Post Sub-division Transfers
Various legislative amendments have made clear that the subdivision of a single parcel of land is treated
differently than the subdivision of adjacent parcels of land.

A.     Subdivision of a Single Parcel
Section 14(3)(j) of the Act applies to situations where a single parcel of land registered to two or more owners
is subdivided into smaller parcels. In order to claim an exemption in these circumstances, the original owners
must receive a proportionate share of the FMV of the land after it has been subdivided that is not greater than
the share held prior to the subdivision. The new amendments have altered the manner in which exemptions
may be claimed. Subdivisions of single parcels used to fail to qualify for the exemption altogether where any
one owner received a greater proportionate share after subdivision. Now, only the owner who receives the
greater proportionate share pays PTT due on that increased share after subdivision.

B.     Exemptions Provided in Section 14(3)(j)
There are two requirements for a transfer to be exempt under this section:
          1.     when the original parcel is subdivided into smaller parcels, the transferees of those smaller
                 parcels must be the registered owners of the original parcel; and
          2.     each transferee must acquire a registered interest in one or more of the parcels created by the
                 subdivision with a share of the total FMV of all the new parcels, which is no greater than the
                 share in the FMV of the original parcel, which he/she held prior to subdivision.
In order for the full exemption to be available, the transferee’s proportionate share of the FMV of the land after
the subdivision (calculated using the FMV immediately after the subdivision), cannot be greater than the
proportionate share of the FMV of the original parcel (calculated using the FMV immediately prior to
subdivision).
When making a determination of the FMV attributable to each registered owner prior to the subdivision, the
FMV of all improvements on the land will be allotted to all the owners, based on their respective registered
interests in the parcel, regardless of any unregistered agreements concerning the improvements or which party
contributed them.

C.     Time to Issue Notice of Assessment
Section 18(6.1) of the Act extends the time during which the administrator may issue a Notice of Assessment
where an exemption is claimed under s. 14(3)(j). In this type of situation the administrator has two years rather
than one, starting from the date of the first transfer after the subdivision to issue a Notice of Assessment with
respect to the exemption claimed.

D.     When Section 3(3.2) of the Act Applies
When a transferee receives a greater proportionate share of the FMV of the subdivided land than was held
prior to subdivision, the exemption provided in s. 14(3)(j) is not available with respect to that transferee.
Section 3(3.2) illustrates how the PTT will apply in instances such as these.
                                                       3.1.8

The section provides that PTT is payable only on the transferee’s net increase in his or her share of the FMV of
the subdivided property. This section provides a simple formula that can be used to determine the FMV of the
increase in the transferee’s proportionate share and to determine the PTT owing.

E.     Pre-plan Transfers
Owners of land that is to be subdivided sometimes alter their shares in the land prior to the filing of the
subdivision at the Land Title Office. The purpose of this type of transfer is to achieve a specific arrangement of
ownership after the subdivision. They are known as ‘pre-plan transfers’ and are subject to PTT calculated using
the FMV of the interest in the property being transferred.

F.     Subdivision of Two or More Adjacent Parcels
Sections 14(4)(k) and (k.1) of the Act provide for exemptions from the PTT where adjacent parcels of land
registered to two or more owners are transferred to a trustee for the purposes of subdivision, and the newly
created parcels are then transferred back to the original owners. The exemptions require that the trustee
transfer the land back only to the original owners and not to third parties and that the trustee not retain any
of the subdivided land in trust. The exemptions also require that each original owner receive a proportionate
share of the FMV of the subdivided land that is not greater than the proportionate share of the FMV of the
original parcels held prior to subdivision.

G.     Exemption Provided in Section 14(4)(k)
There are two requirements for a transfer to be exempt under this section:
           1.    the trustee must be registered as a trustee under the Land Title Act; and
           2.    the property must be transferred to the trustee for the purpose of subdividing the original
                 parcels of land.

H.     Exemption Provided in Section 14(4)(k.1)
This section clarifies that an exemption is available when property, which has been transferred to a trustee for
the purpose of subdivision is transferred back to the original owners. Three pre-conditions must be met to
qualify for this exemption:
           1.    the trustee must be registered as a trustee under the Land Title Act;
           2.    the transfer must be from the trustee to any one or more of the original owners; and
           3.    the original owner’s proportionate share in the FMV of the parcels created by the subdivision
                 cannot be greater than the proportionate share in the FMV of the original parcels prior to the
                 subdivision.
Note: the FMV of the land, rather than the area of the land, must be used to calculate an original owner’s
proportionate share both before and after subdivision.

I.     Time to Issue Notice of Assessment
Section 18(6.2) of the Act extends the time during which the administrator may issue a Notice of Assessment
where an exemption is claimed under s. 14(4)(k.1). In this type of situation the administrator has two years
rather than one, starting from the date of the first transfer after the subdivision to issue a Notice of Assessment
with respect to the exemption claimed.
                                                        3.1.9

J.     When Section 3(3.3) and (3.4) of the Act Apply
There are situations where a transfer is not exempt under s. 14(4)(k) and (k.1) because the pre-conditions are
not met. For example, where a trustee transfers a portion of the subdivided property to a third party or retains
a portion of that land in trust, the exemption is not available.
Subsection 3.3 was added to s. 3 to clarify how the trustee is to be treated in this situation. PTT will only be paid
by the trustee on lands that were not transferred back to the original owners. Furthermore, there are also
situations where the transfer is not fully exempt under s. 14(4)(k.1) because an original owner received a
proportionate share of the FMV of the subdivided land greater than the share held prior to subdivision.
Subsection 3.4 was added to s. 3 and clarifies how the transferee will be treated in this situation. PTT is owing only
on the net increase of the original owner’s share in the FMV of the land.
See Property Transfer Tax Bulletin PTT006 for a complete review of the exemptions for transfers in the course
of subdivisions, and for various formulas and examples.


                                         VIII. Conveyancing Errors
Conveyancing errors are occasionally made during registration of a title at the Land Title Office. When these
errors occur, subsequent transfers may need to be filed in order to correct the title(s). Please refer to Property
Transfer Tax Bulletin PTT011. Generally speaking, to correct a conveyance error on a title, you would file:
           1.     a transfer to change the title back to its previous state; and
           2.     a transfer to change the title as the purchaser(s) had initially intended.

A.     Qualifying Conveyance Errors
The following are considered qualifying conveyance errors which will be exempt from PTT:
           1.     the wrong property was transferred;
           2.     the wrong name was registered;
           3.     one of the two or more intended legal parcels of land (parcel identification numbers) were
                  omitted; or
           4.     the wrong ratio of ownership interests was registered.
The following are not considered qualifying conveyance errors:
           1.     the purchaser or their representative realize there was a better way to transfer the property;
           2.     the purchasers change their mind about having transferred the property and want to rescind
                  the transfer; or
           3.     either the purchaser, or their representative made an error, and the property was transferred
                  before all the requirements for a particular exemption had been met.

B.     Filing the PTT Returns
Generally speaking, there is a two-step process required in order to correct a qualifying conveyance error. In
some circumstances a reconveyance is not required. An example of this situation is if one of two intended legal
parcels of land were omitted during an original conveyance, then only a correcting conveyance is required for
the omitted parcel of land. The following is the two-step process to correct qualifying conveyance errors:
                                                       3.1.10

Step One – Reconveyance
Complete a Special Property Transfer Tax Return form (FIN 579S) and claim the exemption by entering
exemption code 35 in section F. Attach a note to the form citing the return number from the correcting
conveyance form (FIN 579G). This enables ministry staff to connect the two returns and allows for the
submission of supporting documentation only once.
Step Two – Correcting conveyance
Complete a General Property Transfer Tax Return form (FIN 579G) but do not remit the tax. Attach the
following supporting documentation as may be appropriate to the return:
          1.     a letter explaining the conveyance error in detail;
          2.     a copy of the current BC Assessment valuation;
          3.     a copy of the contract of purchase and sale and the purchaser’s statement of adjustments;
          4.     a copy of any pre-conveyance evidence that supports the purchaser’s original intention; and
          5.     a copy of the plan (or strata plan), if applicable.
After a review of the documentation, the ministry will send the transferee a Notice of Assessment indicating
the correct amount of PTT to be paid. A refund will be issued if it is determined that an overpayment was
made.

C.    Certificate of Exemption
While no longer required before filing reconveyance/correcting conveyance transfers, another option is to
simply detail the conveyancing error in a letter to the Administrator, with all supporting paperwork, and
request that a Certificate of Exemption be issued in advance. Often, you will be permitted to file only the
correcting conveyance transfer(s) and eliminate the first step.
For example, in a new stratified duplex, the wrong strata lot may have been conveyed to each new owner.
Either you transfer titles back to the builder and then file correcting transfers, or you merely have each new
owner transfer to the other. Once you receive the Certificate of Exemption, you enter the Certificate number
on the special PTT return.

				
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