Comments have been made in some quarters about the recently-announced 15% tax imposed by the BC government on non-resident purchases of residential property to the effect the measure might offend Canada’s obligations under the NAFTA.
These come as a surprise, since few would have thought that an internal measure like this would even remotely involve matters of international trade and investment.
But it’s true that the NAFTA basically requires equal tax treatment of nationals and foreign investors, in this case, investors from the US and Mexico. The TPP agreement, recently signed by Canada (although not yet ratified), contains similar provisions.
However, like all things legal, it’s not nearly as cut-and-dried as might first appear.
For starters, there are exceptions for tax measures under Article 2103 of the NAFTA that could apply to the new BC measure as an “equitable and effective” tax that doesn’t “arbitrarily” discriminate between resident and non-resident persons.
Given the background, it may be difficult to prove the tax is “arbitrary”, a term that means – take your pick – autocratic, dictatorial, undemocratic, despotic, tyrannical, authoritarian, high-handed. Does any of this apply in this case? This is a possible defense should a NAFTA challenge be launched.
That’s the lawyer-like, technical response. But there are other reasons why any NAFTA issue (like any concerns under the TPP) is quite theoretical and likely not much of a real concern to the BC government.
First, NAFTA rights, if any, only apply to US investors. Chinese-based persons that are BC home buyers, which seem to be the major focus of concern, have no rights under the Agreement. Even if the newly-signed TPP eventually enters into force, it won’t apply to investors from China, which is outside the TPP region.
Second, the US government isn’t going to challenge the BC tax under the NAFTA. Why?
Because there are US states that have similar non-resident taxes and many have outright restrictions on non-resident property ownership. Many, for example, prevent any purchase of agricultural land by non-residents.
So the US is hardly likely to open the door to NAFTA litigation involving non-resident ownership rights, taxes or other restrictions.
Third, even in the highly remote possibility that the US government took this to a NAFTA panel, it would have to show that US trading interests – as opposed to those of private interests – have been “nullified or impaired”. Clearly not so. What we have here are merely individual, personal financial interests being affected.
Finally, as to American home buyers challenging the tax, each dispute under the NAFTA investment chapter has to be brought separately by each individual investor, alleging that their investments have been unfairly treated.
The taxes here are just not large enough to warrant any American purchaser considering such a move. A tax of a few hundred thousand dollars would pale in comparison to even the first round of legal fees in getting a case started, let alone the millions involved in proceeding to arbitration.
Added to the enormous legal expense involved is the not inconsiderable hurdle noted earlier that potentially exempts the BC tax from NAFTA coverage anyway.
The result is that while there may be some highly theoretical NAFTA issues here, I wouldn’t think there is anything of major concern to the BC or Canadian governments.