B.C. just violated NAFTA with its foreign property tax — and we could all pay for it
The British Columbia government has suddenly introduced a penalty tax forcing non-Canadian purchasers of residential real estate in the Greater Vancouver Regional District to pay a 15 per cent tax on all purchases registered from Aug. 2, 2016. This penalty tax discriminates by definition against foreign investors buying residential real estate in the Greater Vancouver Area: Canadian citizens buying residential real estate are exempt; foreign buyers must pay the tax.
That discrimination is a glaring violation of our trade treaties. The North American Free Trade Agreement (NAFTA) and other Canadian trade agreements prohibit governments from imposing discriminatory policies that punish foreigners while exempting locals. NAFTA’s national treatment obligation requires that citizens from other NAFTA partners investing in B.C. receive the same treatment from the government as the very best treatment received by Canadian investors. Americans and Mexicans forced to pay the 15 per cent penalty tax would be able to pursue direct compensation for B.C.’s discriminatory tax from an independent international tribunal.
Canada has other treaties with similar protections for citizens and businesses with other trading partners. We have agreements with similar terms with: Argentina, Armenia, Barbados, Benin, Costa Rica, Cote d’Ivoire, Croatia, Czech Republic, Ecuador, Egypt, Hungary, Jordan. Kuwait, Latvia, Lebanon, Panama, Peru, Philippines, Poland, Romania, Serbia, Slovakia, Tanzania, Thailand Uruguay, Ukraine, and Venezuela. Investors from those states might also potentially challenge the B.C. tax. While the vast majority of Vancouver’s foreign property buyers might be Chinese, who were apparently the provincial government’s main target, enough investors from our dozens of treaty partners, comprising of hundreds of affected foreigners with trade rights, could be caught up in this tax, leading to mass claims. Those claims would be against the Canadian government, the signatory to NAFTA and the other international trade treaties, not B.C. Canadian taxpayers could be on the hook for hundreds of millions, or even billions, of dollars.
In addition, the anti-foreigner tax has the potential to lead to trade disputes, as the national treatment provision permits foreign governments to seek retaliation against Canada. For example, the recent Canada-China Bilateral Investment Treaty has the same national treatment protections that would allow the government of China to challenge B.C.’s tax. The U.S. government could also apply its trade muscle to demonstrate its resolve against anti-foreigner penalty taxes affecting American investors.
The foreign-buyer tax was announced in an arbitrary and unfair manner. The penalty does not exempt existing transactions legally concluded before the tax was announced. This arbitrary imposition disrupts predictable commercial relationships that may have been in place years in advance. It’s an unfair action that violates international legal norms of fairness, protected under treaties. All Canadians could well end up paying a heavy price for it.
Barry Appleton is managing partner at Appleton and Associates International Lawyers in Toronto and the author of two treatises on the North American Free Trade Agreement.