OVERVIEW: TAX-IMPOSED RESTRICTIONS ON FOREIGN HOME BUYERS

Canada has traditionally been known for its welcoming stance towards immigrants, yet recent decades have witnessed the implementation of federal and provincial tax measures designed to curtail foreign non-residents from acquiring Canadian real estate. Commencing on January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act imposes a two-year restriction on many non-Canadians purchasing residential property in Canada. Individuals knowingly aiding a foreign home buyer in contravening this Act, and the foreign home buyer in violation, may be subject to fines of up to $10,000 per transaction. Moreover, a recent court decision upholds the authority to mandate the sale of the residential property or annul the transaction.

A foreign buyer eligible to acquire residential properties in Canada should verify whether there are supplementary tax responsibilities for foreign home buyers. Frequently, additional provincial taxes are applicable, distinct from the existing federal limitations on foreign home buyers. For example, in British Columbia, the first province to institute added taxes for foreign home buyers, the provincial government has enforced a 20% Property Transfer Tax on non-resident buyers since August 2016.

Ontario, a frequently chosen location for newcomers, initiated a 15 percent Non-Resident Speculation Tax (NRST) in 2017, subsequently elevating the tax rate to 25 percent in 2023. Initially restricted to the acquisition of residential property within the Greater Golden Horseshoe Region by foreign individuals and entities, the NRST expanded to apply across the entire province in 2022.

THE CASE OF BAKHTIARI V BRITISH COLUMBIA (MINISTER OF FINANCE), 2023 BCSC 1260

In a ruling on July 24, 2023, the British Columbia Supreme Court (“BCSC”) upheld the decision against Mr. Bakhtiari, affirming the requirement for the home buyer to pay a $1.32 million “foreign national” tax on a $6.6-million property in West Vancouver. Mr. Bakhtiari, who arrived in Canada as a refugee from Iran in 1995, was granted permission to stay and has been residing in British Columbia since then. Despite his long-term residence, he obtained Canadian permanent residence only on February 16, 2022, after encountering nearly 25 years of challenges navigating the Canadian immigration system, marked by extended administrative processes and “a morass of administrative delay.”

Mr. Bakhtiari, the sole shareholder of Technocorp Venture Capital Inc., submitted a Canadian permanent residence application on January 12, 2017. Anticipating the approval of his residence application, Technocorp, under Mr. Bakhtiari’s beneficial ownership, acquired a residential property on June 14, 2019. In July 2021, British Columbia conducted an assessment, imposing a $1.32 million Additional Property Transfer Tax, commonly referred to as the Foreign Buyer Tax, at a rate of 20% of the purchase price.

Mr. Bakhtiari contested the obligation to pay the Foreign Buyer Tax on constitutional grounds, contending that its imposition violated his rights under sections 7 and 15 of the Canadian Charter of Rights and Freedoms (“Charter”). Specifically, Mr. Bakhtiari argued that his rights under section 7, encompassing liberty and security of the person, and section 15, ensuring equality under the law without discrimination, were infringed. As an alternative argument, he asserted that the federal government displayed gross negligence by delaying his application for legal status as a permanent resident. Additionally, Mr. Bakhtiari claimed effective statelessness despite being a recognized refugee in Canada.

British Columbia sought to dismiss the claims, contending that Mr. Bakhtiari was attempting to assert an economic interest not protected by section 7 of the Charter. The Attorney General of Canada, representing the federal government, did not take a stance on the application to dismiss.

Mr. Bakhtiari’s constitutional challenge against the liability to pay the Foreign Buyer Tax on grounds of violations of his rights under sections 7 and 15 of the Charter was dismissed by the British Columbia Supreme Court as held in Li v British Columbia, 2021 BCCA 256. The court affirmed that “immigration status is not an analogous ground” of discrimination under section 15 of the Charter. While recognizing the economic consequence of the Foreign Buyer Tax, the court held that “purely economic rights” are not protected under section 7 of the Charter. Consequently, Mr. Bakhtiari’s claims were struck down, and he was deemed accountable for the $1.32 million ≈.

ANALYSIS OF THE CASE: “DISCRIMINATION” IN TAX POLICIES

Tax policies are typically crafted to serve as a primary source of government revenue, often with additional secondary objectives. Throughout history, Canada has implemented discriminatory tax laws, often intertwined with other legislation. An illustrative example is the Chinese Head tax and the Chinese Exclusion Act, which imposed extra taxes exclusively on Chinese immigrants entering Canada between 1885 and 1923. In this case, the tax was not primarily introduced for revenue collection but rather as a mechanism to regulate Chinese immigration in Canada.

Modern tax policies and legislation must adhere to constitutional validity. Section 15(1) of the Charter asserts that “every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.” This provision applies to government actions and those of government agents, including the Canadian Revenue Agency (“CRA”), when conducted under lawful authority. However, as demonstrated in Bakhtiari, tax policies related to economic rights are seldom deemed discriminatory, even if a specific group is subject to a particular tax. Notably, taxes linked to immigration status are commonly deemed constitutionally valid, as immigration status is not considered an analogous ground for discrimination. For instance, using the Chinese Head tax as a reference, it would likely not be constitutionally valid in its original form. However, if a “head tax” applied to all immigrants without permanent residence, the tax policy would probably be considered non-discriminatory. Presently, under the Canadian immigration system, immigrants are required to pay additional fees for admission to Canada, with the amount contingent on their immigration status and nationality.

Mr. Bakhtiari’s situation was notably unfortunate. Despite having legally and physically resided in Canada for over 25 years at the time of the property purchase, he was neither a Canadian citizen nor a permanent resident due to administrative delays beyond his control. However, the court has consistently maintained that, at least in British Columbia, individuals in similar circumstances as Mr. Bakhtiari are deemed less deserving than Canadian citizens and permanent residents. On a positive note, the federal government and the Ontario provincial government have acknowledged the distinction between “actual residence” and “residence immigration status” in shaping tax policies. Consequently, the additional prohibitions and taxes imposed on foreign home buyers have, to some extent, exempted those who have spent a significant amount of time living in Canada.

TAX PRO TIPS – UNDERSTAND YOUR TAX RESPONSIBILITIES PRIOR TO ACQUIRING CANADIAN REAL ESTATE

In a similar vein, spouses and common-law partners of Canadian citizens and permanent residents are likely to encounter comparable regulations. However, as a “foreign home buyer,” it is crucial to be proactive in understanding your tax responsibilities before making a purchase. Firstly, ensure that you are compliant with the Prohibition on the Purchase of Residential Property by Non-Canadians Act. Secondly, if your property is in British Columbia or Ontario, carefully assess whether additional taxes for foreign buyers are applicable to your situation. Familiarize yourself with the distinct criteria used by these provinces to identify a “foreign” buyer. Lastly, be mindful of claiming benefits and tax credits designed for Canadian home buyers in your tax return. While the determination of tax residence differs from immigration residence, consulting with a knowledgeable Canadian tax lawyer is advisable for the filing of tax returns and foreign property accurately. Failure to comprehend your tax obligations may lead to penalties and interest charges.

Furthermore, foreign home buyers should be cognizant of additional federal, provincial, and municipal tax responsibilities. Starting January 1, 2022, a residential property that isn’t a foreign home buyer’s principal residence may be liable to the Underused Housing Tax. This is an annual federal tax of 1% on the ownership of vacant or underused housing in Canada. For detailed insights into the Underused Housing Tax, please consult our article titled “Everything You Need To Know About The Underused Housing Tax (2022).” Additionally, owners of residential properties in Toronto may encounter a 3% Vacant Home Tax imposed by the City of Toronto.

For comprehensive details on the Vacant Home Tax (VHT), kindly peruse our article titled “A Toronto Tax Lawyer’s Guide for Toronto Vacant Home Tax.” If you are a recent immigrant to Canada seeking insights into “How the Canadian Taxation System Works: A Canadian Tax Lawyer Explains Benefits, Taxes, and Credits to Immigrants,” you can find more information on the subject.

For additional tax-related guidance, reach out to our proficient Canadian tax lawyers. Tax Law Canada and Taxpage take pride in being your go-to resources for tax law services and knowledge. In fact, we have been recognized among Feedspot’s 60 Best Canadian Tax Blogs and Websites.

FAQs

WHAT CONSTITUTES A FOREIGN HOME BUYER?

A foreign home buyer typically denotes an individual who is neither a Canadian citizen nor a Canadian permanent resident when acquiring a residential property in Canada. Nevertheless, the definition of a foreign home buyer can vary based on the applicable legislation. As an illustration, under the Prohibition, individuals with an eligible refugee claim or those who have secured refugee status in Canada are exempt from the restriction.

In Ontario, a foreign spouse of a Canadian citizen or permanent resident is excluded from the Non-resident Speculation Tax. To ascertain whether you qualify as a foreign home buyer, it is advisable to review the relevant legislation. If you seek confirmation regarding your residence status in Canada for tax purposes, don’t hesitate to reach out to our knowledgeable Canadian tax lawyers.

IS IT LEGAL TO IMPOSE ADDITIONAL TAXES ON FOREIGN HOME BUYERS?

Unfortunately, as of October 2023, it remains legally permissible for both federal and provincial governments to levy extra taxes on foreign home buyers. As evidenced in Bakhtiari, taxes linked to immigration status have been deemed constitutionally valid, given that immigration status is not a recognized ground of discrimination under section 15 of the Charter. In contrast, taxes based on religion, gender, or race are discriminatory and can be invalidated by Canadian courts. Negotiating the foreign home buyer tax can prove challenging, as both foreign individuals and entities are liable to these additional taxes.

DISCLAIMER:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”