When are events permitted to allocate the truthful market worth for actual property for the aim of remitting property switch tax? Here’s a refresher on the rules of truthful market worth (FMV) in actual property transactions following a latest BC Supreme Court docket case through which the events have been entitled to allocate FMV to a property at lower than the assessed worth.
1184369 B.C. Ltd. v. British Columbia, 2023 BCSC 546
The BC Supreme Court docket (BCSC) lately upheld a property switch tax (PTT) enchantment in reference to the acquisition and sale of a small enterprise in Vancouver through which each the enterprise, and the 2 properties that the enterprise was located on, have been included within the buy and sale settlement.
The settlement was initially drafted utilizing the BC Actual Property Affiliation (BCREA) customary kind residential contract of buy and sale and later amended to change into a share buy settlement. The events included a easy allocation clause within the settlement, which said:
“Purchaser and Vendor hereby agree, performing moderately, to allocate the Buy Worth between the Property and the Enterprise.”
The properties have been held via an organization, moderately than being held personally by the sellers. The overall buy value beneath the settlement was roughly $9.3 million. In accordance with the allocation provision, the events attributed $7.78 million to the properties. This attribution assumed that the mixed worth of the properties can be equal to the worth of the shares within the company entity that owned them. The overall worth was then divided on a professional rata foundation for every property primarily based on the 2018 assessed worth, and PTT remitted accordingly.
The Province argued that PTT ought to have been assessed utilizing the 2019 assessed worth for the property topic to the enchantment, which was roughly $9.1 million, moderately than the worth of roughly $5.7 million that the events allotted to it.
Having concluded that the events have been the truth is arm’s size and the transaction occurred within the open market, the only situation on enchantment grew to become a willpower of truthful market worth (FMV).
What’s FMV for PTT functions?
The Property Switch Tax Act defines “truthful market worth” in Part 1:
“(a) for a transaction referred to in paragraph (a) (i) of the definition of “taxable transaction”, the quantity that will have been paid for the charge easy curiosity within the land had it been bought on the date of registration of the taxable transaction within the open market by a prepared vendor to a prepared purchaser freed from any belief and unencumbered […]”
Within the Court docket’s view, the truth that the events decided the worth between them in an arm’s size open market transaction, and the shortage of proof that the authorized relationship between the events was a sham, was conclusive that the quantity allotted was the suitable FMV for PTT functions. Accordingly, the Province’s evaluation was dismissed.
BCSC Stays Cognizant of Financial Realities
In circumstances the place purchasers pay a premium for actual property in an arm’s size transaction (e.g. as a part of a land meeting), the worth paid is FMV beneath the definition beneath the Property Switch Tax Act. The worth paid in these situations usually exceeds the assessed worth for these properties as a result of it represents a willingness to pay that specific quantity on the open market in reference to the pursuit of a profitable improvement alternative. Conversely, in circumstances the place purchasers could also be taking up some stage of danger with the acquisition of the lands (equivalent to assuming possession and the operation of a enterprise), the Court docket appears to acknowledge that such danger justifies a reduced evaluation of the FMV.
This choice reinforces the well-developed proposition in tax legislation that events are entitled to construction their authorized relationships and transactions as they see match, and these authorized relationships are to be revered by the courts in most situations.
When structuring arm’s size transactions on the open market that embody the acquisition of actual property amongst different asset courses, events ought to think about incorporating an allocation clause. Even probably the most primary allocation clause, very similar to the one relied on by the taxpayer on this case, will put the events in the very best place to attain an environment friendly tax final result.
When you have any questions associated to the Property Switch Tax, please contact a member of our Actual Property Group.
