Allocation, Allocation, Allocation: Court Sides with Purchaser’s Allocation of Purchase Price Below the Assessed Value

When are parties permitted to allocate the fair market value for real property for the purpose of remitting property transfer tax? Here is a refresher on the principles of fair market value (FMV) in real property transactions following a recent BC Supreme Court case in which the parties were entitled to allocate FMV to a property at less than the assessed value.

1184369 B.C. Ltd. v. British Columbia, 2023 BCSC 546

The BC Supreme Court (BCSC) recently upheld a property transfer tax (PTT) appeal in connection with the purchase and sale of a small business in Vancouver in which both the business, and the two properties that the business was situated on, were included in the purchase and sale agreement.

The agreement was initially drafted using the BC Real Estate Association (BCREA) standard form residential contract of purchase and sale and later amended to become a share purchase agreement. The parties included a simple allocation clause in the agreement, which stated:

“Buyer and Seller hereby agree, acting reasonably, to allocate the Purchase Price between the Property and the Business.”

The properties were held through a corporation, rather than being held personally by the sellers. The total purchase price under the agreement was approximately $9.3 million. In accordance with the allocation provision, the parties attributed $7.78 million to the properties. This attribution assumed that the combined value of the properties would be equal to the value of the shares in the corporate entity that owned them. The total value was then divided on a pro rata basis for each property based on the 2018 assessed value, and PTT remitted accordingly.

The Province argued that PTT should have been assessed using the 2019 assessed value for the property subject to the appeal, which was approximately $9.1 million, rather than the value of approximately $5.7 million that the parties allocated to it.

Having concluded that the parties were in fact arm’s length and the transaction occurred in the open market, the sole issue on appeal became a determination of fair market value (FMV).

What is FMV for PTT purposes?

The Property Transfer Tax Act defines “fair market value” in Section 1:

“(a) for a transaction referred to in paragraph (a) (i) of the definition of "taxable transaction", the amount that would have been paid for the fee simple interest in the land had it been sold at the date of registration of the taxable transaction in the open market by a willing seller to a willing purchaser free of any trust and unencumbered […]”

In the Court’s view, the fact that the parties determined the price between them in an arm’s length open market transaction, and the lack of evidence that the legal relationship between the parties was a sham, was conclusive that the amount allocated was the appropriate FMV for PTT purposes. Accordingly, the Province’s assessment was dismissed.

BCSC Remains Cognizant of Economic Realities

In cases where purchasers pay a premium for real property in an arm’s length transaction (e.g. as part of a land assembly), the price paid is FMV under the definition under the Property Transfer Tax Act. The price paid in these scenarios often exceeds the assessed value for these properties because it represents a willingness to pay that particular amount on the open market in connection with the pursuit of a lucrative development opportunity. Conversely, in cases where purchasers may be taking on some level of risk with the purchase of the lands (such as assuming ownership and the operation of a business), the Court seems to recognize that such risk justifies a discounted assessment of the FMV.

This decision reinforces the well-developed proposition in tax law that parties are entitled to structure their legal relationships and transactions as they see fit, and these legal relationships are to be respected by the courts in most scenarios.

When structuring arm’s length transactions on the open market that include the purchase of real property among other asset classes, parties should consider incorporating an allocation clause. Even the most basic allocation clause, much like the one relied on by the taxpayer in this case, will put the parties in the best position to achieve an efficient tax outcome.

If you have any questions related to the Property Transfer Tax, please contact a member of our Real Estate Group.

  • Ben  Westerterp

    Ben is an associate in the Mining and Real Estate Groups at the Vancouver office of Lawson Lundell. He assists clients on a broad range of commercial and project development matters in the commercial real estate and natural resource ...

  • Lisa  Harder

    Lisa is an associate in Lawson Lundell’s Tax Group. She advises clients on a variety of corporate tax matters, including tax planning, pension fund investment taxation, personal tax and estate planning, and tax compliance issues ...

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