BC's foreign buyer tax has some buyers looking for a loophole

Theglobeandmail.com
Oct. 6, 2017
By Xiao Xu

British Columbia's introduction of a foreign-buyer real-estate tax dumped a bucket of icy water on Vancouver's smoking hot market just over a year ago. Average house prices immediately fell, declining for six months before showing signs of renewed vitality in April and May.

A Globe and Mail examination of court records and advertisements reveals several ways potential buyers are being told they can avoid the 15-per-cent tax. The analysis shows the methods can be straightforward but sometimes messy as they often rely on the quiet participation of friends, relatives or businesses with roots in British Columbia.

And such avoidance, as NDP Attorney General David Eby pointed out when he was the opposition housing critic, is extremely difficult to stop.

"They have absolutely no way of enforcing those rules," Mr. Eby said of the Liberal government. "They have no auditors available, they have no capacity to enforce this law. What they are relying on is people to act in good faith."

Mr. Eby is no longer in charge of the housing file and now that his party is in government, NDP ministers have declined to say what they plan to do to either strengthen enforcement, broaden the tax's reach or potentially kill it entirely. The housing ministry directed calls about the tax this week to the finance ministry. Finance officials said they cannot talk about potential future tax changes.

So, for the time being, the tax remains in place. The Ontario government has introduced a similar one for foreign buyers in an effort to calm the Toronto market.

Before the B.C. tax took effect in August of last year, foreign activity was estimated to account for about 10 per cent of sales in the Vancouver region. After the tax took effect, the percentage dropped to almost zero, but it has since increased to about 3 per cent. In Richmond, it has bounced between 8 and 12 per cent.

The province hasn't released data since June, a period that has seen prices for condos and townhouses recover and set records every month, although the average price of a detached home – at $1.67-million – was lower than the $1.76-million seen in July, 2016.

The lack of recent data means it's impossible to know whether foreign buyers have once again returned to the Vancouver market, rendering the tax ineffective.

Several sources told The Globe and Mail that the most common way of avoiding the tax is for a buyer to put the property's title under the names of family members or friends who are Canadian residents.

Disputes documented by the Supreme Court of B.C. show that real estate deals can be easily done between relatives and friends without written agreements but only based on trust, which can eventually result in unclear and hidden ownership of properties. Last month, a Hong Kong businesswoman filed a lawsuit against her ex-boyfriend over ownership of a home in Richmond.

Jennie Wu and Johnny Chu, a Canadian resident, were in a romantic relationship from last November to this summer. While they were dating, Ms. Wu decided to purchase a property in British Columbia because of her frequent business dealings here.

But as a Hong Kong resident, she was required to pay the foreign-buyer tax. To avoid the tax, the pair agreed to put the title under Mr. Chu's name, although Ms. Wu paid all the costs of the property.

The court document from B.C. Supreme Court notes that Mr. Chu knew that the home would be the sole property of Ms. Wu's, and Gary Ma, who was Ms. Wu's realtor, was "fully aware of the intention" of the two parties.

The lawsuit noted Ms. Wu paid cash for all the transactions, but after they broke up, Mr. Chu refused to move out and transfer the property back to her. Ms. Wu's allegations haven't been proven in court and Mr. Chu has not filed a response with the court.

Royal Pacific realtor Sunny Lee said any foreign investor with a relative in Canada can easily avoid the 15 per cent tax.

"It's hard for foreigners [to avoid the tax] if they want to buy a house. But if this foreigner has relatives in Canada, closely related, then things will be very easy," Mr. Lee said.

Mr. Lee said some foreign investors purchase properties in Vancouver in the name of their children, who came to Canada as international students first and then became Canadian residents. He added these students can afford a house within a few years after graduation, but whether it's for their own residence or whether it is to hold as an investment for their parents, is impossible for authorities to know.

"They got help from their parents, and it's legal," Mr. Lee said.

Among the 50 most expensive properties in Vancouver in 2016, The Globe found that two were owned by students and three were owned jointly by a student and a "housewife" or "businesswoman," as noted on the property title.

Kenneth Pazder, lawyer and owner of Pazder Law in Vancouver, said it's difficult to distinguish between who is on a property's title and who really owns the property, because the whole system "is predicated on people being truthful."

"Some of these things are sort of difficult to prove unless somebody took the person to court or made an assessment and the person had to challenge it," Mr. Pazder said.

For prospective foreign buyers without a local connection, Chinese-language online advertising has offered some solutions, but the advice can be questionable.

One ad, since taken down, suggested creating a legal partnership, registered in British Columbia.

Sutton Premier Realty agent Zheng Zhao had an ad on VanSky.com for months, maintaining the foreign-buyer tax doesn't apply to partnerships. Mr. Zhao said he could form a B.C.-registered partnership with a foreign buyer and then purchase a property in the name of the partnership without the obligation to pay the tax. The buyer pays the full price of the home with the right to lease and sell the home later, while Mr. Zhao and the partnership do not shoulder any legal or financial responsibility.

In exchange for entering into the partnership, Mr. Zhao required payment of 3 per cent of the property's purchase price and an annual partnership fee of $1,000. He maintained in several media interviews that the practice was legal.

Now, though, the agent says he will not offer the service since receiving advice not to do so, although he wouldn't say from where.

"I've taken a renewed look at my partnership agreement and have indeed come to the realization that there are flaws in the legal aspects of my original plan," he said in an interview this week. "Knowing what I know today, I would have had second thoughts about the soundness of my whole idea."

A Craigslist ad posted in May, now deleted, also alleges that business partnerships can be a way around the foreign-buyer tax. The ad said: "We offer entering into business partnerships with British Columbia based business and getting into contractual relationships for buying residential property." The ad noted that it is "completely legal."

The Globe tried to reach the publisher of the ad, but didn't receive a response.

A spokeswoman with the Ministry of Finance declined to comment specifically on whether such partnerships are legal, but said in a statement that "the government takes tax avoidance attempts extremely seriously."

"We will ensure that anti-avoidance rules carefully applied to ensure the appropriate tax is applied."

Alexander Ning, a Vancouver notary public, said he has heard of people attempting to use partnerships to avoid the tax but the scheme is absolutely illegal because it involves hiding who the beneficial owner of the property actually is. "It's definitely not legal by the actual law and also the spirit of the law."

The Globe uncovered other types of ads using tax avoidance as a selling point for foreign investors, such as that of Apex Western Homes Ltd., which notes its exclusive rent-to-own program is a way for overseas buyers to avoid the tax. In this case, foreign investors can be renters first and, ultimately, own the property.

The Vancouver company's program, which launched in February, requires investors to sign a five-year contract with a fixed purchase price. The potential buyers pay the seller a one-time, 5-per-cent non-refundable down payment, which grants the buyers the right to purchase the property at any time in the five years. Following the down payment, the buyer pays monthly rent, which includes payment toward loan principle and interest. If the potential buyers are newcomers to the country, they can use the five years to become a Canadian resident, and then they will no longer be subject to the tax when purchasing the home.

"It delays that time so you can get your PR [permanent residency], and you don't have to pay the 15 per cent," said CEO Ray Vesely. "It does give another option … I think it's a great idea to help people enter into the market."

Mr. Vesely said the program has attracted lots of interests and the company is planning a campaign to advertise it, but before that, he said, he needs to make sure everything about the program is "perfectly legal."

The finance ministry statement specifically said "rent-to-own models cannot be used" as a way of avoiding taxes.

Social media has also presented some potential solutions to the tax. Local realtor Tiffany Tseng wrote on her Facebook page last July, in a posting that is still available, that "there are many ways for foreign buyers not to pay the 15 per cent tax."

Ms. Tseng cited two examples: One is purchasing and reassigning a presale home. Presale homes are not subject to the foreign-buyer tax. The other, she said, is to establish a trust company.

But Ms. Tseng said in an interview she hasn't actually used these methods, adding that she posted these ideas to help dissolve fears among her clients.

"The announcement of the foreign-buyer tax caused panic among a lot of people. I hope to tell many of the local buyers, who are also my main clients that the market is not going to collapse."

Simon Fraser University finance professor Andrey Pavlov said any entity for which the ultimate beneficiary is a foreign person is subject to the tax, and he suggested establishing a trust would not be a legal way to avoid it.

"The foreign buyer tax clearly states that it is the ultimate beneficiary that matters, not the intermediate entity purchasing the property," said Prof. Pavlov.

Mr. Pazder said many of the tax avoidance advertisements are just "schemes," used to attract buyers.

"All kinds of people put all sorts of stuff on the Internet which is not true or correct."

Not paying the tax could result in a penalty of the unpaid tax plus interest and a fine of $200,000 for corporations or $100,000 for individuals and/or up to two years in prison.

Marilee Peters, spokeswoman for the Real Estate Council of British Columbia, said the council takes "immediate and appropriate" action against any licensees who advertise or advise clients on ways to avoid the tax.

"We have taken action in some cases to have licensees remove advertising that promotes methods to avoid the tax, and we have opened investigations," said Ms. Peters.

She added the council advises all consumers to obtain independent professional legal or accounting advice before entering into any transaction promoted as a measure to avoid the tax.