Dempsey v. British Columbia

British Columbia's Property Transfer Tax Act is an incoherent, and at times absurd, taxation statute. Apart from the dubious economic and social policy of a tax that adds to the cost of housing in the province with the least affordable housing in Canada, there is little rhyme or reason to the types of transactions that are taxed, and those that are exempt.

In very broad strokes, the Property Transfer Tax Act taxes transfers of real estate based on the value of the property, with the first $200,000 of the fair market value taxed at one per cent and the value above $200,000 at two per cent. In many cases the tax will reflect the sale price of real estate between a buyer and seller of a piece of real estate.

But title to real estate may also be changed in circumstances other than a sale, for example as a gift between family members, or to a trustee as part of an estate plan. The Property Transfer Tax Act does have a variety of exemptions from the tax, including some that facilitate transfers between family members either as gifts or for estate planning. The problem is that these exemptions are tightly pigeon holed, and unless a transfer falls squarely within a pigeon hole, the transferee in a non-market transaction may be caught by a significant tax. The narrowness of the exemptions demonstrates little understanding of the nuances of estate planning on the part of the legislators.

The provisions considered in the recent decision of the Supreme Court of British Columbia in Dempsey v. British Columbia, 2014 BCSC 1977, illustrate my point. I should say at the outset that I do not take issue with the reasoning of the Court in this decision, but rather with the absurdity of the legislation when viewed in light of the facts of this case.

Ms. Rita Dempsey settled a trust, which held title to her residence in Victoria. She was also the trustee and a beneficiary of the trust. She later resigned as trustee, replaced by her daughter. She transferred title to the residence from her name to her daughter’s name as trustee. The transfer was exempt under section 14(4) (q) as a transfer from one trustee to another without a change of beneficiaries. 

Later Ms. Dempsey’s daughter as trustee transferred the residence into Ms. Dempsey’s name as beneficiary of the trust. The decision does not set out the reasons for the transfer, but there are many good reasons why a trustee might transfer the title out of the trust to a beneficiary including perhaps to facilitate a change in the estate plan or to allow the residence to qualify for a deferral of property taxes. Whatever the reason for the transfer in this case, no funds change hands, and Ms. Dempsey continues to live in the residence that is now again in her name, but no longer in trust.

Unfortunately, and unfairly, the Government of British Columbia seized the opportunity to charge Ms. Dempsey $7300 in property transfer tax.

Ms. Dempsey through her lawyer argues that this transaction falls within an exemption, section 14(3)(b) which says:

14 (3) If a taxable transaction entitles the transferee, on compliance with the Land Title Act, to registration in a land title office, that transferee is exempt from the payment of tax if the taxable transaction is a transfer within any of the following descriptions:
…

(b) a transfer from a transferor who is not a trustee referred to in paragraph (c), (d) or (e), to a transferee who is a related individual, if the land transferred has been the principal residence of either the transferor for a continuous period of at least 6 months immediately before the date of transfer or of the transferee for that period;

If the section appears to you to be confusing, that is because it is.

If the trust had not been registered, and the transfer had simply been from Ms. Dempsey’s daughter to Ms. Dempsey, the transfer would have been exempt as a transfer of a principal residence to a related individual. (As an aside, be careful with these terms, as a principal residence under this statute is not the same thing as a principal residence under the Income Tax Act, Canada.)

But Ms. Dempsey was on title as a trustee, so the question was how to interpret the phrase “not a trustee referred to in paragraph (c), (d) or (e)….” Those subsections are themselves exemptions, with (c) an exemption for certain transfers of property from the trust of an estate or trust to beneficiary who is a related individual to the will maker, (d) an exemption for certain transfers of property from a trustee to a beneficiary if the beneficiary is a related individual to the settlor of the trust, and (e) another exemption for certain transfers from a trustee to a beneficiary of a trust who is a related individual of the settlor.

Section (d), for example, exempts,

(d) a transfer from a transferor who is a trustee of a trust that is settled during the lifetime of the settlor and who is registered in that capacity under the Land Title Act as the trustee of the land transferred, if

(i)     the transferee is a beneficiary of the trust,
(ii)    the transferee beneficiary is a related individual of the settlor of the trust, and
(iii)  the land transferred is a recreational residence or was the principal residence of either the settlor for a continuous period of at least 6 months immediately before the date of transfer or of the transferee beneficiary for that period;

Ms. Dempsey argued that because the transaction did not meet all of the criteria in any of the three subsections (c ), (d) or (e), her daughter was not a trustee referred to in those subsections, and accordingly, the trustee exception to the exemption did not apply. The Province argued that only words in each of those sections describing a trustee applied. For example, in (d) the words “a trustee of a trust that is settled during the lifetime of the settlor and who is registered in that capacity under the Land Title Act as the trustee of the land transferred” are to be read into the definition of trustee in 14(3)(b), but not the rest of the subsection set out in (i), (ii) and (iii).

Madam Justice Gray held that the Province of British Columbia’s interpretation is correct, and accordingly, the transaction is subject to the property transfer tax. 

She wrote at paragraph 46:

[46]         I am left with the lingering question of why this kind of transaction would be taxed, but in my view I must apply the words of the statute if they are clear and unambiguous. In my view, they are clear and unambiguous.

Ms. Dempsey was both the settlor of the trust, and the beneficiary. You might wonder why this transfer is not exempt under subsection 14(3)(d). Very simply, under the Property Transfer Tax Act, Ms. Dempsey is not related to herself.