Sunday, June 19, 2016

New Requirement that Bare Trusts be Disclosed on Property Transfer Tax Returns

The Government of British Columbia has amended the Property Transfer Tax Return to require more information on the purchase of land, effective June 10, 2016. The requirement that a purchaser who is not a Canadian citizen or permanent resident identify his or her citizenship has received some press coverage. Although I don’t like it at all, I am writing about another change: the requirement that the person taking title disclose whether he or she, or it (if a corporation) holds the title in a bare trust.

The question on the Property Transfer Tax Return is “Is this a transfer of a bare trust?” I am not sure how one transfers a bare trust, but the question is intended to elicit whether the person acquiring title will hold title as a bare trustee. To hold land in a bare trust means that although you have title, you hold it for someone else, who is the true owner. Because the title holder has no management powers and is subject to the direction of the true owner, the title holder is an agent of the owner (rather than a trustee in the sense I often write about with significant powers and responsibilities).

If the answer to the question is “yes,” then the Return has a number of other questions. As set out in the Land Title & Survey Authority website here, if the transfer is to register a bare trust,
... an additional page will be created to enter information for the Settlors and Beneficiaries.
Select whether they are an Individual, Corporation or Other.
If Individual is selected, answer Yes or No to the question “On the date of registration, are you a Canadian citizen or a permanent resident as defined in the Immigration and Refugee Protection Act (Canada)?”
Select the country of citizenship. If there is more than one country of citizenship, select all that apply using the “ADD” button.
The address for each of the Settlors and Beneficiaries must be filled in.
If Company is selected, an additional page will be created. Fill in the “Total number of directors”
Fill in the names of all directors, their country of citizenship (all that applies) and address.
I am not clear on why the Government is collecting information on bare trusts. It may be intended to ensure that the Government is able to collect information on the whether the true owners are not Canadian citizens or permanent resident. Otherwise, someone who is neither a  permanent resident or Canadian could avoid disclosing his or her citizenship by using a permanent resident or Canadian citizen as a bare trustee.

Alternatively, the Government may also be considering whether bare trusts are being used to avoid paying property transfer tax. I came across a story on CTV with the headline “Real estate loophole lets wealthy buyers save millions in taxes.” The story was about how people can avoid paying property transfer tax by having a company hold bare title. Instead of transferring title to the land, the land stays in the company, but the control of the company is transferred to the purchaser.

The fact is, though, that anytime a company owns land (whether as the true owner or as a bare trustee), and someone buys the shares of the company rather than the land from the company, title to the land does not change hands, and there is no property transfer tax payable.

If the motive for adding information about bare trust to the Return is related to “loss” of revenue through the use of bare trusts, then I doubt it will be very helpful to the Government. As set out above, it is only when the title is transferred that purchaser is required to file the Return. If a bare trust is used to avoid the property transfer tax, the provincial Government will not know about the subsequent sale. Nor, is it necessary to file a Return, if after purchasing land, the owner later decides to declare that the owner holds title as a bare trustee. I don’t know what mechanism the Government could use to even gather information about changes in beneficial ownership without a change in title, let alone tax those changes. Such a mechanism would no doubt be intrusive and difficult to enforce.

I do use bare trusts to avoid property transfer tax, but in a different context. If I have a client who wishes to transfer real estate into a trust for estate planning, then we have to consider whether to register the trust with the Land Title Office. In some cases, there is an exemption available from property transfer tax. For example, if the property meets the requirements of the Property Transfer Tax Act for a principal residence (which are different from the Income Tax Act, Canada requirements), and if the trustee is a “related individual,” for example a spouse or child, then the land can be transferred to the trustee without paying property transfer tax. But there are plenty of traps for the unwary. For example, if my client wishes to be the trustee of her own trust, and we transfer title to her as trustee, property transfer tax is triggered even if it is her principal residence. Why? Under the legislation, she is not a “related individual” to herself.

When property transfer tax will be triggered by transferring title to the trustee, one option is for the owner, who is settling the trust, to sign a bare trust agreement declaring herself a bare trustee for the trustee of the trust. Some might see this as a loophole from tax. But consider the fact that in most of the trusts created for estate planning, for practical purposes little changes for the person settling the trust. Often she is the sole beneficiary during her lifetime, and it’s only upon her death that her beneficiaries, often children and grandchildren benefit. It is different from a sale of land to an unrelated purchaser, but in many cases, this type of estate planning is caught by the legislation.

Instead of making the Property Transfer Tax Return more intrusive, it would be preferable to scrap the property transfer tax, which is becoming more complex, likely increases the cost of real estate, and collect revenue from some other source. This will involve raising other taxes, but next to probate fees, the property transfer tax is probably the most flawed tax British Columbia has. 

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