Avoiding Property Transfer Tax when transferring between family members
Nobody likes to pay tax and the Property Transfer Tax (“PTT”) can be a very expensive tax. It is important to know that there are certain exemptions that are available for transfers between family members.
The Property Transfer Tax is a sales tax payable to the Government of British Columbia by purchasers of real estate. Generally it applies to all transactions, unless they are exempt under section 14 of the Property Transfer Tax Act (the “Act”).
On transactions that are not exempt, most purchasers pay the PTT on the Fair Market Value (FMV) of the land when the transaction is registered at the Land Titles office. The PTT payable is 1% on the first $200,000.00 of the property’s FMV and 2% on anything over $200,000. For a general overview on PTT and how it is applied, you may wish to look at the B.C. Government webpage, called Understand Your Taxes.
The Fair Market Value of land is defined in the Act, and broadly, means the amount that would have been paid had the land been sold in the open market by a willing seller to a willing purchase with no encumbrances. In most transactions, the purchase price is an accurate reflection of the FMV of the property.
There are a few types of transactions, however, that are exempt from PTT if they meet all of the requirements set out in the Act. These include first time buyers (to be discussed in another post) and family exemptions, which allow for transfers within a family without having to pay PTT. Transfers between family members are commonly used for simple transfer purposes, estate planning purposes or during a marriage breakdown.
The basic family exemption applies when a related individual transfers a principle residence or interest in a principle residence to another related individual. Here, the transaction must meet the definitions and requirements set out.
“Related individual” is defined in the Act as:
(a) a person’s spouse, child, grandchild, greatgrandchild, parent, grandparent or greatgrandparent,
(b) the spouse of a person’s child, grandchild or greatgrandchild, or (c) the child, parent, grandparent or greatgrandparent of a person’s spouse;
For a property to be a “principle residence”, the following criteria must be met:
- Before the transfer, at least one of the transferor or the transferee must have lived on the property and used it as their home for a minimum period of six months immediately prior to the transfer occurring;
- the transferee is a Canadian citizen or permanent resident; and
- the property must be classified as residential by BC Assessment Authority, contain three or less living units and be less than 0.5 hectares in size.
PTT may be payable in a family transfer due to circumstances that the family may not have considered. If the transfer involves an investment or rental property of both the transferor and the transferee, the exemption will not apply and tax may be payable.
It could also be the case that, even though the property is a principal residence, the family relationship between of the transferee and transferor does not qualify them as “related individuals” under the Act. This can be a problem if the transfer is between sisters, brothers, cousins, nieces, or nephews as the Act does not define these relationships as “related individuals”.
Regarding transfers due to marriage breakdown, a transfer to a spouse or former spouse under a written separation agreement or court order under the Family Law Act qualifies for exemption. In this type of transfer, a spouse is defined as a person who is: married to another person, or living with another person in a marriage-like relationship, and has been living in that relationship for a continuous period of at least 2 years. To qualify, the spouse must also be a Canadian citizen or a permanent resident.
Further family exemptions are available in the cases of transfers between family of recreational residences and family farms.
It is important to be aware of the exemptions that exist when planning for transfers within the family, as the PTT can be a significant cost that may not be anticipated. In addition, it is important to consult with a lawyer you trust so you claim for those exemptions for which you are eligible.