Lawson Lundell's Real Estate Law Blog

Negotiating a Tenant’s Restoration Obligations: A Reminder on Reasonable Wear and Tear Exceptions in B.C.

Posted in Commercial leasing

One of the many issues commonly negotiated between landlords and tenants is the condition of the state of repair that the premises must be in at the expiry of the lease. Typically, a standard form lease will require that the tenant return the premises to the landlord in the same condition as that which it is required to maintain during the term of the lease, and to remove certain tenant improvements. While these restoration clauses can be more or less complex or onerous depending on the nature of the property (i.e. industrial, retail or office), one common thread is that tenants will try to negotiate that their restoration obligations be subject to a “reasonable wear and tear” exception.

This language is regularly agreed to by the parties based on a mutual understanding that the tenant should not be required to deliver the premises in perfect condition at the end of the term or to eliminate all signs of aging to the premises. But this begs the question: how broadly will a court interpret a reasonable wear and tear exception in the event of a dispute?

The decision of the British Columbia Supreme Court (BCSC) in Griffin Holding Corporation v. Raydon Rentals Ltd., 2016 BCSC 2013 serves as a reminder of the legal interpretation given to the words “reasonable wear and tear” when considering a tenant’s restoration obligations in a commercial lease.

The Legal Test for “Reasonable Wear and Tear”

The common law defines reasonable wear and tear as “the reasonable use of the premises by the tenant and the ordinary operation of natural forces”. In Griffin, the BCSC confirmed that the following legal test applied when considering reasonable wear and tear in the context of a tenant covenant to restore leased premises:

(a) the landlord must prove that the premises were not in as good repair and condition at the end of the lease compared to the repair and condition at its commencement, and once proven, the burden shifts to the tenant to prove that the deterioration in condition falls within any “reasonable wear and tear” exception in the lease;

(b) what will amount to reasonable wear and tear is to be considered in light of the purpose for which the premises were leased, the nature of the business carried out thereon, the age of the building, and the length of the lease; and

(c) if a court accepts that the premises have been damaged beyond reasonable wear and tear, the landlord is entitled to the cost to restore the premises to the same state of repair as they were in at the commencement of the lease, regardless of whether the landlord ever intends to incur the cost of those repairs.

In Griffin, the salient facts were as follows:

in 2006 (prior to the lease being entered into), Griffin retained a commercial concrete polishing company to restore and resurface the concrete slab of the leased premises;

  • Griffin Holding Corporation (“Griffin”) leased commercial premises in North Vancouver to Raydon Rentals Ltd. (“Raydon”) for a term commencing in October, 2008 for the purposes of selling, renting and servicing new or used equipment for industrial, residential or farming operations;
  • the lease contained various clauses relating to Raydon’s maintenance and repair obligations, including a covenant from Raydon to restore the premises to the same condition as existed at the commencement of the lease, except for reasonable wear and tear;
  • in 2015, the lease was terminated in accordance with its terms, and at the end of the tenancy, Griffin found that the floors were damaged with paint, oil and rust stains and were embedded with holes and bolts; and
  • Raydon took certain measures to remedy the condition of the floor, but eventually took the position that the condition of the floor reflected “reasonable wear and tear” (which Griffin disagreed with).

The BCSC ruled in Griffin’s favour, primarily on the basis of the evidence provided by each party. Griffin provided first-hand accounts of the 2006 concrete polishing, which convinced the BCSC that the premises were in good condition at the commencement of the term. Accordingly, the burden shifted to Raydon to convince the BCSC that the reasonable wear and tear exception applied, but Raydon was unable to provide satisfactory evidence to the court.


Landlords and tenants should pay close attention to the tenant’s restoration obligations upon termination or expiry of the term (particularly with heavy users) to ensure that their expectations are aligned. Landlords and tenants are also well advised to conduct joint inspections at the commencement and expiry of the lease (and to record such inspections with notes, videos, photographs and other records which confirm the state of repair of the leased space) to ensure that there is adequate evidence in the event of any dispute.

BC Government Enacts New Exemption and Refunds For Foreign Entity Tax

Posted in Tax

On March 15, 2017, the BC Government issued Order In Council 152/17 (the “OIC”), which creates a retroactive exemption from the 15 percent Foreign Entity Tax (the “Tax“) for foreign nationals applying for permanent residency under BC’s Provincial Nominee Program, and provides refunds for certain purchasers who have previously paid or are required to pay the Tax and later become Canadian citizens or permanent residents. The OIC enacts these changes by way of amendments to the Property Transfer Tax Regulation. For additional information on the Tax, see our previous posts here and here.

Inclusion in BC’s Provincial Nominee Program (BC PNP) places a foreign national into a “fast track” stream with respect to its permanent residency application. The Program is divided into two categories: entrepreneurial nominees (i.e. foreign nationals with high net-worth and business or management experience) and skilled nominees (i.e. foreign nationals filling in-demand occupations). Current foreign national provincial nominees who purchased a principal residence on or after August 2, 2016 (the effective date of the Tax), and paid the Tax, have 18 months following the date of their purchase to claim a refund for the additional tax. The new exemption is available for provincial nominees who are foreign nationals purchasing principal residences in the Greater Vancouver Regional District. The exemption applies to the purchase of an improved residential dwelling, provided the provincial nominee intends to inhabit the dwelling as their principal residence. The exemption can only be used by provincial nominees once, and is not available for companies or taxable trustees.

The number of nominations under the BC PNP is based on annual nomination allocations from the Canadian federal government, and processing times at the BC Government. For 2017, the allocation is 6,000. In 2016, it was 5,800. Given that many nominees relocate to markets affected by the Foreign Entity Tax, the OIC may provide relief for a significant number of home buyers.

Starting August 2, 2017, a refund will be available for Canadian citizens or permanent residents who have previously paid the Tax and have obtained citizenship or permanent residency status in the period following the effective date of the Tax. Going forward, refunds will also be available for foreign national purchasers who become Canadian citizens or permanent residents within one year after purchasing their property, and is not available for companies or taxable trustees. In order to be eligible for the refund, the Tax must have been paid in respect of a residential property purchase which, on that date of registration of the applicable conveyance, included a permanently affixed improvement that was intended to be a dwelling; and the purchaser must continuously occupy that dwelling as his or her principal residence for at least a year beginning on a date that is at least 92 days after the acquisition date. As with the provincial nominee exemption above, each purchaser is only eligible to receive a refund of the Tax once, and must claim it within 18 months of purchasing the property.

Anecdotally, it appears that certain foreign buyers already in the process of applying for permanent residency have entered the market by way of purchasing presale condos and townhouses, with the plan that they would obtain permanent residency by the time of completion. This availability of a refund will provide another option for relief from the Foreign Entity Tax for foreign buyers who anticipate becoming permanent residents.

Insolvent Commercial Tenants – What Happens Now?

Posted in Commercial leasing

Recently, a number of retail enterprises have availed themselves of the protection of the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), Canada’s insolvency statutesThe BIA and CCAA, as federal statutes, have various provisions that allow a debtor to deal with their leases in a manner which may be inconsistent with the terms of the written lease agreement or BC’s Commercial Tenancy Act (CTA) and wishes of the landlord.

A necessary component of any insolvency proceeding is an evaluation of each business location, and any lease agreements pertaining to it, to determine which, if any, should be retained, disclaimed, or assigned, those being the three ways that a commercial property lease can be dealt with under the provisions of the BIA and CCAA.  This article is intended to provide a brief overview of how these options are implemented and what recourse, if any, a landlord has upon receiving notice from an insolvent tenant, or the court’s officer, of such steps being taken.

Retaining Leases: A debtor restructuring under the CCAA or BIA, or a trustee under the BIA, may wish to retain a real property lease, and continue to occupy the premises accordingly.  Landlords are in fact stayed from terminating leases after an insolvency event, solely because of that insolvency event (s. 65.1 BIA) notwithstanding that the lease may provide that such an act is a default (s. 65.5 BIA).  Absent a post filing default, a landlord can find themselves stayed for a considerable period of time while the insolvency proceedings take shape, as long as the current rent obligations are met. A restructuring business will generally wish to retain leases for two reasons, to maintain ones that are necessary for its restructured business to continue or to enable the debtor to assign it to a third party as part of its restructuring effort. In a bankruptcy scenario, a trustee may retain a lease (s. 30(1)(k) BIA), which it will generally do if there is value to the estate in its assignment (as described below).

Disclaiming Leases:  Both the BIA and CCAA provide for the disclaimer of a lease, whereby the landlord’s rights under the lease can be extinguished in the insolvency proceedings, leaving the landlord with only a provable claim against the estate assets which may be limited (as described below).  Where the debtor is restructuring its business under a BIA Proposal there are strict timelines for the disclaimer.  The debtor can only do so between its initial filing and the filing of the Proposal/Plan itself, on 30 days’ notice.  In a CCAA proceeding, a debtor has no specific time limits, although it would practically occur before the Plan is filed.  A landlord may object to any disclaimer, but must do so within 15 days of receiving the notice (s. 65.2 BIA; s. 32 of CCAA).  The onus then shifts on the debtor to establish that the disclaimer is necessary for a successful restructuring.

Assignment of Lease: In a bankruptcy, after electing to retain a lease a trustee may assign the lease to a third party (s. 29 of the CTA, and s. 30(1)(k) and 146 of BIA), notwithstanding that the lease contains a prohibition of such assignment.  Similarly, the CCAA allows for a debtor company to seek a court order assigning such rights, but all monetary defaults must be remedied before such an assignment can occur (s. 11.3).  A landlord can oppose such an assignment, but it will generally be granted when the assignee is able to establish that they are capable of performing the obligations and it is not otherwise inappropriate, upon depositing up to 3 months’ rent or guarantee bond to secure it. The lease is assigned on its existing terms, including any terms as to base and additional rent terms, or use clauses.  The landlord must consent to any amendments being sought by an assignee.

Proof of Claims against the Estate: In a bankruptcy, a landlord is entitled to a “preferred” claim (i.e. to be paid prior to other unsecured creditors, under a specific priority scheme) for the arrears of rent owing for a 3 month period immediately preceding the insolvency event, and accelerated rent, if provided for under the lease, for 3 months thereafter, up to the realizable value of the assets left on the premises.  To the extent that the realizable value of the assets in the premises is insufficient to pay the landlord’s claim in full, the landlord can claim as a general unsecured creditor for the shortfall arising from that. However, it is prohibited from claiming rent for the unexpired term of the lease over and above those amounts (s. 29(7) CTA).  If there has been a disclaimer of the lease in a proposal proceeding, the proposal must provide for the manner that the claim will be dealt with, the options for which are prescribed in the BIA, but can include full damages owing under the lease (s. 29(5)(6) CTA; s. 65.2(4)(5) of the BIA).

As the above illustrates, there are various remedies a commercial tenant has in an insolvency proceeding which can be imposed upon a landlord.  A landlord’s options in response are generally limited both in time and scope. As such, it is important that if any notice is received as to insolvency proceedings being commenced by or against a tenant as against the lease rights, legal advice is immediately sought to preserve and maximize all available rights and remedies arising therefrom.

BC Government Pushes Towards Foreign Ownership Restrictions on Agricultural Reserve Land With Bill M-205

Posted in Property Law

On February 16, 2017, Bill M-205 (Property Law and Land Title Amendment Act, 2017) passed first reading which, amongst other things, proposes to make amendments to the Property Law Act (British Columbia). Notably, Bill M-205 would restrict ownership of land within the Agricultural Land Reserve (the “ALR”) by foreign nationals or foreign corporations to a maximum of five acres. The ALR is a collection of approximately 11 million acres of land in British Columbia that has been designated for farming purposes. The proposed amendments would permit foreign nationals and foreign corporations to hold land within the ALR in excess of this amount with the permission of the Lieutenant Governor in Council. For a concise discussion of what constitutes a “foreign national” or a “foreign corporation”, see Ed Wilson, Peter Tolensky, and Stephanie Redding’s blog post here.

Although Bill M-205 has not yet become law, this Bill will be one to watch as it moves through the legislature.

Managing the Relationship between Landlord, Tenant and Tenant’s Lender

Posted in Commercial leasing

Landlords who enter into commercial leases with tenants accept, and expect in return, some degree of liability as spelled out in leases and commercial tenancy legislation. After all, leases are intended to be two-way streets: the landlord provides the tenant with a leasehold interest in real property, and the tenant pays rent in return. Understandably, landlords are in no rush to assume additional liability to any third-party lender of the tenant.

For many commercial tenants, however, business viability is dependent on obtaining financing. Tenants often require financing to fund the initial fit-out of their leased premises, and without financing they may be unable to open for business. In such situations, a tenant’s lender may require a security interest in the tenant’s trade fixtures and personal property located within the leased premises as a condition of advancing funds. Consequently, the lender often also requires the landlord to enter into a separate agreement with the tenant’s lender.

Such agreements typically set out a number of standard consent provisions, such as:

  1. the landlord waives any right to seize the tenant’s property for which the lender has a security interest;
  2. the landlord allows the lender to enter the leased premises to seize the tenant’s property; and
  3. the landlord provides the lender with notice when the tenant has defaulted under the terms of the lease.

Financing may be unavailable without this separate agreement between the landlord and tenant’s lender, and while it is ultimately a business decision whether or not the landlord agrees to enter into such an agreement, the landlord’s refusal could result in a deal going south.

While entering into agreements with third-party lenders may be a necessary burden for landlords in the business of commercial leasing, landlords should ensure that they engage legal counsel to review the agreement and make any revisions necessary to ensure lenders do not obtain rights that are unnecessarily detrimental to their interests, for example:

  1. The lender may ask that the landlord provide them with written notice if there is any amendment to the terms of the lease, or if the tenant is in default under the terms of the lease. A landlord should proceed with caution when presented with such a provision, and instead may consider agreeing only to use commercially reasonable efforts to provide the lender with notice of any amendment or default. The landlord should also ensure that this provision unequivocally specifies that the landlord will have no liability to the lender should the landlord fail to provide notice.
  2. The lender may require entry onto and possibly possession of the leased premises in connection with removing any tenant property over which they have taken security. In this case, the landlord should require that the lender:

a.  promptly repair, or, at the landlord’s option, reimburse the landlord for any damage caused by the lender to the leased premises (or any adjacent premises owned by the landlord);

b.  follow all reasonable directions of the landlord to minimize disruption and maximize safety during the removal;

c.  pay all arrears of rent and continuing rent obligations on taking possession of the property; and

d.  not conduct any public auction or private sale on the landlord’s premises.

3.  The agreement with the lender should also specify that the landlord is not the lender’s agent and owes no duty of care to the lender with respect to protecting the lender’s interest in the tenant’s property located in the leased premises. Additionally, the landlord should insist that the lender indemnify the landlord against all claims arising from such interest.

City of Vancouver Issues Standard Form Letter of Credit Policy

Posted in Development, Lenders, Municipal law

The City of Vancouver (the “City”) has issued a new corporate policy on Letters of Credit that sets out the requirements that must be met where applicants for City approvals are required to provide security to the City for development or non-development projects.

The policy provides that the City will not accept any form of cheque (whether certified or not) or bank draft as an alternative form of security and that the City will only accept letters of credit from the following financial institutions:

  • Bank of Montreal
  • The Bank of Nova Scotia
  • Canadian Imperial Bank of Commerce
  • Canadian Western Bank
  • National Bank of Canada
  • Royal Bank of Canada
  • The Toronto Dominion Bank
  • HSBC Bank Canada
  • BlueShore Financial Credit Union
  • Coast Capital Savings Credit Union
  • Vancouver City Savings Credit Union

The policy also includes a copy of the only form of letter of credit that will be accepted by the City going forward. A copy of this form of letter of credit can be found at the link here: City of Vancouver – Letter of Credit Template.  The City has advised that the form of letter of credit has been vetted by the major national banks on the above list.  The application of the City’s new policy along with the approved form of letter of credit should streamline the process of settling security with the City when required as part of the City’s approval process.


British Columbia Law Institute Publishes Consultation Paper on Complex Stratas

Posted in Condominium (strata) law

The British Columbia Law Institute published on September 1, 2016 its Consultation Paper on Complex Stratas seeking public comments on proposed reforms to the Strata Property Act and its regulations concerning sections, types, and phases.

The BCLI carries out scholarly research, writing and analysis for law reform, collaborating with government and other entities, and providing materials and support for outreach and public information.

Sections and types allow a strata corporation to manage cost sharing between owners, while phases permit the development of a strata property in segments over tended time. These tools are important in creating and sustaining sophisticated, architecturally varied, or mixed-use stratas. With the publication of the consultation paper, the public has an opportunity to consider and comment on a comprehensive list of needed reforms to sections, types, and phases.

The consultation paper has 68 tentative recommendations for reform, including:

  • 29 tentative recommendations on sections, which propose clarifying the process for creating and cancelling sections, spelling out section powers and duties strengthening section governance, budgets, and finances;
  • 14 tentative recommendations on types, which propose clarifying the process for creating and cancelling types and fine-tuning the operation of types; and
  • 25 tentative recommendations on phases, which propose enhancing the phasing process, simplifying governance in a phased strata corporation and providing additional protections for the financial interests of owners in a phased strata.

Ed Wilson, senior partner of our Real Estate Group is a member of the BCLI’s Strata Property Law Project Committee, which commenced its review of the Strata Property Act in October of 2013 and will continue its review of other important issues into 2017.  Lisa A. Peters, head of Lawson Lundell’s Research and Opinion Group is the incoming Chair of the BCLI.

The full consultation paper, a summary consultation, a response booklet, a background and a link to BCLI’s survey are all available at The consultation period ends January 15 2017.


New Real Estate Tax Leads to Collapsed Deals

Posted in Tax

The provincial government’s new 15 per cent tax on foreign purchasers of residential property is the talk of the town in Metro Vancouver.  While many local residents have spent the last several days debating about the likely effect of the tax, others are already facing the consequences as buyers respond to the tax by failing to complete on binding agreements of purchase and sale.

To read more, click the original post from our Western Canada Business Litigation Blog here.

Strata Wind Up Amendments Come into Effect

Posted in Condominium (strata) law, Strata wind up

On July 28, 2016 highly anticipated changes to the British Columbia Strata Property Act came into effect by regulation. The following news release from the government provides more information about these amendments.

Of key importance to strata corporations, developers and owners alike is the reduction in the voting threshold required to terminate a strata corporation. Prior to these amendments, the Strata Property Act required a unanimous vote of all strata lot owners to terminate a strata corporation. With the coming into effect of the regulations, this voting threshold has been lowered to 80% with a court order. For more information regarding this amendment please see our previous blog post that examined a proposed amendment to the Strata Property Act.

Although these amendments to the Strata Property Act make it easier for owners to vote to wind up a strata corporation, a strata wind up is a technical, complicated process. Legal advice should be sought early on in the process to help ensure a successful wind up. Lawson Lundell’s Strata Wind Up Group assists strata corporations, developers, strata management firms, appraisers and real estate agents in all aspects of strata corporation wind ups. We have valuable experience dealing with strata wind ups, including the first court-approved wind up in British Columbia, and can assist strata corporations, developers and real estate agents in navigating this process.

For more information, please contact a member of the Strata Wind Up Group:

Digging Deeper into the New Foreign Entity Tax

Posted in Tax

In our blog post from July 25, 2016 we highlighted the provincial government’s introduction (effective August 2, 2016) of the new 15% property transfer tax (the “Foreign Entity Tax“) on foreign buyers of residential property in the Greater Vancouver Regional District (“Metro Vancouver“).

The Foreign Entity Tax has been introduced by way of an amendment to the Property Transfer Tax Act (British Columbia) (the “Act“).

Foreign Entity Tax applies in respect of a “taxable transaction“, where such transaction includes “residential property” located either wholly or in part within a “specified area” and where a transferee is a “foreign entity” or a “taxable trustee“, or both.

This article examines each of these key elements to determine those transactions that will trigger the required payment of this Foreign Entity Tax and provides further details of these new rules.

1. What is “Residential Property”?

The Foreign Entity Tax will be triggered by any registered transfer of “residential property” to a foreign entity or taxable trustee.

The Act defines “residential property” to include any of the following:

i) lands or improvements that are described as “Class 1 property” under the Prescribed Classes of Property Regulation (British Columbia). BC Assessment places properties within one or more of 9 classes of property, typically based on the property’s type or use. The class of a particular property is set out on both the BC Assessment Roll Report and Property Tax Certificate. Class 1 property is defined to mean land or improvements, or both, used for residential purposes and includes not only single family residences but also duplexes, multi-family residences, apartments, condominiums, manufactured homes, nursing homes and resthomes. It is important to note that “Class 1 property” also includes bare, undeveloped land that currently has no use and is neither specifically zoned nor held for business, commercial or industrial purposes; and

ii) an area of land, not including improvements, that is not larger than 0.5 hectares in area and which is classified as a farm under the Assessment Act (British Columbia) because the land is used either for: (i) an owner’s dwelling (meaning a dwelling that is occupied as the principal residence of the owner of the property and where the owner is a retired farmer, the spouse of a retired farmer or a person who was the spouse of a retired farmer at the time of the retired farmer’s death and such owner has reached the age of 65 years); or (ii) a farmer’s dwelling (meaning a dwelling located on or adjacent to the farm and is occupied by a person who is actively involved in the day-to-day activities of that farm).

2. What is the “Specified Area”?

The Foreign Entity Tax will apply to registered transactions in respect of residential property located, either in whole or in part, within Metro Vancouver (aka the GVRD), which includes Anmore, Belcarra, Bowen Island, Burnaby, Coquitlam, Delta, Langley City and Township, Lion’s Bay, Maple Ridge, New Westminster, North Vancouver City and District, Pitt Meadows, Port Coquitlam, Port Moody, Richmond, Surrey, Vancouver, West Vancouver, White Rock and Electoral Area A (ie. UBC).

Although Tsawwassen First Nation is included within Metro Vancouver, the new rules explicitly exempt these treaty lands from the “specified area”, and as such the Foreign Entity Tax will not apply to treaty lands of the Tsawwassen First Nation unless such treaty lands are later prescribed as part of the specified area by the Lieutenant Governor through regulation (as set out in more detail below at Item 12).

3. What is a “Taxable Transaction”?

Currently, property transfer tax is only payable with respect to registered transactions. Therefore, only transactions that are taxable within the meaning of the Act, including the transfer of a fee simple interest in land or a registered lease of land with a term longer than 30 years, will attract Foreign Entity Tax, subject to the anti-avoidance rule as described at Item 11 below.

4. What is a “Foreign Entity”?

Under the new rules, a foreign entity includes both a “foreign national” and a “foreign corporation“.

Foreign National

A “foreign national” means a person who is not a Canadian citizen or a permanent resident, and includes a stateless person.

Foreign Corporation

For purposes of determining which corporations are “foreign corporations”, the new rules adopt the “de facto” control test in section 256 of the Income Tax Act (Canada). De facto control occurs where a person or group of persons has a clear right and ability to effect the composition or decision of the board of directors of the company, or can directly influence the shareholders of a company that can elect the board of directors. Many factors are taken into account in determining de facto control, common examples include family relationships, economic influence over the company or its shareholders, degree of involvement in the operation of the company and contractual relationships, and is therefore a fact based test that has a broad scope.

A corporation that is incorporated in Canada but is “controlled” by one or more of the following is considered to be a foreign corporation to which the Foreign Entity Tax applies:

i) a foreign national;

ii) a corporation that is not incorporated in Canada; or

iii) a corporation that is controlled by a foreign national or by a corporation that is not incorporated in Canada.

Corporations whose shares are listed on a Canadian stock exchange are explicitly excluded from the definition of a foreign corporation, and therefore will not attract Foreign Entity Tax even if such corporation is controlled by a foreign entity.

5. What is a “Taxable Trustee”?

Taxable Trusts

A “taxable trustee” will attract Foreign Entity Tax and includes any trustee of a trust that is a foreign national or a foreign corporation, but also includes a trustee of a trust that is not a foreign entity but, immediately after the registration of the taxable transaction, a beneficiary of the trust who is a foreign entity holds a beneficial interest in the residential property to which the taxable transaction relates.

Exempted Trusts

Under the new rules, real estate investment trusts, specified investment flow-through trusts and mutual fund trusts, all as defined in the Income Tax Act (Canada), do not qualify as “trusts” for the purposes of the Act, and therefore are not subject to Foreign Entity Tax.

6. Calculating Foreign Entity Tax

Currently, the amount of the Foreign Entity Tax is 15% of the fair market value (the “FMV“) of the residential property that is the subject of the taxable transaction. The Foreign Entity Tax applies in addition to the general property transfer tax (“PTT“) payable on a taxable transaction under the Act. Therefore, the total amount of property transfer tax payable will range depending on the FMV of the residential property that is the subject of the transaction.

By way of example, if a foreign entity decides to buy a multifamily apartment building in Burnaby for $5,000,000, that entity would be required to pay $878,000 in taxes under the Act at the time the transfer is filed in the land title office ($750,000 for the 15% Foreign Entity Tax and $128,000 for the traditional PTT – being 1% for the first $200,000, 2% for the FMV that exceeds $200,000 but does not exceed $2,000,000, and 3% for the FMV exceeding $2,000,000).

If a property consists of both residential property and also commercial property, only the value of the residential portion of a transfer is used for calculating the Foreign Entity Tax. Also, if a foreign entity or taxable trustee acquires only a portion of the residential property that is the subject of the taxable transaction, that entity will be responsible for its proportionate share of the taxable transaction’s FMV.

7. Implications for Canadian Entities doing Business with Foreign Entities

Each transferee under a taxable transaction is jointly and severally liable to pay the total amount of the Foreign Entity Tax owing. If a Canadian entity goes into business with a foreign entity, for example by way of a joint venture or a partnership, and taxable residential property is purchased collectively by the parties, the foreign entity, but not the Canadian entity, will attract Foreign Entity Tax. However, because the obligation to pay the tax is joint and several, the Canadian company will be liable for the payment of the Foreign Entity Tax if the foreign entity fails to do so.

8. Exemptions under the Act that do not apply to the Foreign Entity Tax

Under the Act, certain transactions are exempt from the payment of PTT. However, the same exemptions do not apply to exempt the payment of the Foreign Entity Tax.

For example, while an amalgamation of two companies under the Business Corporations Act (British Columbia) or the Canada Business Corporations Act is typically exempt from PTT, Foreign Entity Tax will be payable if the amalgamated company is controlled in whole or in part by a foreign national or foreign corporation.

Other transactions that are otherwise exempt from PTT but which attract Foreign Entity Tax include, but are not limited to:

i) a transfer between related individuals;

ii) a transfer to the survivor of a joint tenancy of the land; and

iii) a transfer from a transferor to a transferee, each of whom is registered under the Land Title Act as a trustee of land, if the change in trustee is for reasons that do not relate, directly or indirectly, to a change in beneficiaries or in a class of beneficiaries or to a change in the terms of the trust.

In these circumstances, while PTT would not be payable, the transferee would still be required to pay the Foreign Entity Tax in the amount of 15% of the FMV of such transaction.

9. Revisions to Notice of Assessments

With respect to PTT generally, the government must issue any notice of assessment providing for the corrected determination of the FMV or tax owing within one (1) year after the date the transaction was registered in the land title office. With respect to the Foreign Entity Tax, the government will be able to issue a notice of assessment with respect to Foreign Entity Tax within six (6) years after the date that the transaction was registered in the land title office.

10. Increase in Financial Penalties

The new rules make it an offence for any person to make a false and misleading statement with respect to information required to be provided under the Act.

Additionally, the fines payable under the Act with respect to an offence related to the Foreign Entity Tax is significantly higher than the fines under the Act payable with respect to an offence related to PTT. The following table summarizes these fines:

Fines for an Offence by a Corporation Fines for an Offence by an Individual
Foreign Entity Tax
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $200,000
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $100,000
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $50,000
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $25,000

11. New Anti-Avoidance Rule

There is also now a new anti-avoidance rule whereby the government is given the power to determine the tax consequence to a transferee though an assessment under the Act if it determines that a particular transaction, or part of a series of transactions, resulted either directly or indirectly in a reduction, avoidance or deferral of the Foreign Entity Tax. Similar anti-avoidance rules have not existed previously under the Act with respect to the payment of PTT, and still do not apply to PTT under the Act.

As this anti-avoidance rule is only intended to capture avoidance transactions, an exception has been created for transactions that are reasonably considered to have been undertaken or arranged primarily for bona fide purposes other than for the purpose of obtaining a reduction, avoidance or deferral of Foreign Entity Tax.

The government is also granted the power to investigate whether the information required to be provided under the Act is accurate. This expands the government’s current investigative powers under the Act.

12. Legislative Flexibility

Under the new rules, the Lieutenant Governor may, by regulation, amend certain elements of the Foreign Entity Tax, including the following:

i) Prescribing other areas in British Columbia as being located within the “specified area”. In such case the Foreign Entity Tax would apply to these areas even though they are not located within Metro Vancouver.

ii) Prescribing a new tax rate that is not less than 10% and no greater than 20% of the FMV of taxable residential property.