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Real Estate MATTERSWelcome to Volume 3, Issue 1 of Real Estate MATTERS, a periodic publication of our B.C. Real Property & Planning Group. This publication is intended to give you a summary of recent developments in real estate law in British Columbia and, more importantly, what they mean to you.
We hope you will find Real Estate MATTERS informative and useful. Please let us know if you have any suggestions to make this publication even more helpful, or if there are topics or issues you would like to see covered in future issues.
Scott Smythe and Russ Benson (Editors)
In This IssueThe Importance of Amending the Certificate of Limited Partnership When Capital Contributions Change ..................................................................................................................... 1
Construction Completion Dates: There and Back Again ................................................................................... 2
The Supreme Court of Canada Applies “Central Management and Control Test” in Determining Residency of a Trust ..................................................................................................................... 5
Storm Water Management — Taking Sustainable Development by Storm .................................................... 8
Real Estate MATTERS
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The Importance of Amending the Certificate of Limited Partnership When Capital Contributions ChangeBy R. Cameron Whyte
It is common for developers to undertake real estate developments using limited partnerships formed specifically for that purpose. They generally do so in order to provide limited partners with limited liability, to allow for the pass through of profits and losses directly to limited partners and to facilitate raising capital from investors and financing from lenders. In British Columbia, limited partnerships are formed upon the filing of a certificate of limited partnership with the Registrar of Companies. The certificate must contain certain information prescribed by the Partnership Act (British Columbia) (Act) and third parties are entitled to rely on the information set out in the certificate.
The general partner of a limited partnership has unlimited liability for the debts and obligations of the limited partnership, whereas a limited partner’s liability is, subject to certain exceptions, limited to the amount of property (including cash) the limited partner contributes or agrees to contribute to the capital of the limited partnership. For this reason, the general partner is commonly a company with no assets (other than its interest in the limited partnership) and the limited partners contribute substantially all of the limited partnership’s capital.
The limited liability protection otherwise available to limited partners may be diminished if there is a change in the amount or character of the limited partners’ capital contributions, but the certificate is not amended to reflect the change. Unfortunately, the requirement to amend the certificate is often overlooked.
The Act provides that a limited partner is liable for:
¬ the difference, if any, between the actual amount of the limited partner’s contribution and the amount stated in the certificate as having been made; and
¬ any unpaid contribution that the limited partner agreed in the certificate to make in the future at the time and on the conditions, if any, stated in the certificate.
The Act also provides that a limited partner is not entitled to the return of any part of the limited partner’s contribution until the certificate is cancelled or amended to reflect the withdrawal or reduction. The potential liability arising from a failure to comply with this requirement can be significant. For example, it is common for a limited partnership to sell all the strata lots in a real estate development and use the proceeds to pay out all its known liabilities and return the limited partnership’s capital to its partners. However, if the certificate is not cancelled or amended to reflect the return of the capital contributions, and the limited partnership subsequently incurs an unanticipated liability (such as a claim for a construction defect), the limited partners could be compelled to return their capital contributions to the limited partnership to satisfy such liability.
In light of this, if there is to be any change to a limited partner’s capital contribution (including any return of capital to the limited partners), it is important to ensure that the necessary amendment to the certificate is prepared and filed or, if the limited partnership is being wound up, that the certificate is cancelled.
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Construction Completion Dates: There and Back Again By Scott Smythe, Virginia Wigmore
Many pre-sale cases decided by British Columbia courts under the Real Estate Development Marketing Act (REDMA) have emphasized that the REDMA is consumer protection legislation and have held developers to a standard of near perfection in respect of their disclosure obligations, regardless of whether a technical deficiency in the disclosure had any meaningful effect upon the purchasers. A number of more recent cases, however, have recognized that, although the REDMA is consumer protection legislation, a measure of common sense should be employed in determining whether a technical deficiency should render a purchase contract unenforceable. One of those cases is the British Columbia Supreme Court (BCSC) decision in 299 Burrard Residential Limited Partnership v. Essalat (299 Burrard). Another is Bosa Properties (Edgemont) Inc. v. Ban (Bosa), discussed below, where the BCSC held that a completion date that occurred earlier than what was contemplated in the developer’s disclosure statement did not negate the purchasers’ contractual obligations. Unfortunately, the trend suggested by these two cases has come to a grinding halt with the British Columbia Court of Appeal’s (BCCA) reversal of the decision in 299 Burrard.
A Glimmer of HopeThe BCSC’s decision in Bosa, released on January 12, 2012, provided purchasers and developers with greater certainty as to when a change to an estimated construction completion date set out in a disclosure statement will be considered a “material fact” and trigger an obligation for the developer to amend the disclosure statement. In that case, the developer sought damages of $157,336.36 (which included a deposit of $86,235) after the purchasers failed to complete their strata lot purchase. The disclosure statement provided that construction was scheduled to commence by May 2007, and that the estimated date for substantial completion of construction was 29 months thereafter (i.e., October 2009). The developer commenced construction in February 2007 and notified the purchasers that the completion date for the purchase and sale would be April 7, 2009, although that date was eventually extended to July 7, 2009 by agreement. The developer did not amend its disclosure statement to set out the revised commencement and completion dates, and the purchasers argued that the purchase contract was therefore unenforceable.
The BCSC analyzed several recent cases dealing with estimated construction commencement and completion dates and determined that, regardless of whether it applied the approach to materiality set out in Chameleon Talent Inc. v. Sandcastle Holdings Ltd. (Chameleon) (discussed in Volume 2, Issue 1 of Real Estate MATTERS) and Maguire v. Revelstoke Mountain Resort Limited Partnership (Maguire) or the approach to materiality set out by the BCSC in 299 Burrard (discussed in Volume 2, Issue 2 of Real Estate MATTERS), the result would be the same.
The BCSC stated that the materiality of the indefinite language in the disclosure statement and the developer’s failure to file an amendment to the disclosure statement was conditioned by the fact that, unlike the delays in completion dates addressed in Chameleon, Maguire and 299 Burrard, the completion date in this case was accelerated. The BCSC held that acceleration is “qualitatively different” than delay since an accelerated completion date does not have an “inevitable or irremediable” effect on the value, price or use of a development unit (i.e., the longer a purchaser has to live in or rent a development unit, the greater the unit’s value and use and the more integral the price of the unit will be) whereas, if completion is delayed, there is a period of ownership that is irrevocably lost. Consequently, the purchase agreement was found to be enforceable, and the developer was entitled to damages.
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In reaching its decision, the BCSC noted, somewhat puzzlingly, that any inconvenience suffered by the purchasers due to the acceleration of the completion date was mitigated by the three-month extension of the completion date. If, as the BCSC stated, an acceleration is “qualitatively different” than a delay and actually increases the value and use of a development unit, one would have expected that the extension of the completion date granted by the developer would have been irrelevant. In our view, the BCSC’s comment regarding the extension of the completion date may leave open the argument that, in some circumstances, an acceleration of the completion date may be material and, further, that a developer may need to agree to an extension if the acceleration of a completion date inconveniences a purchaser or risk the purchase agreement being unenforceable.
Notably, the BCSC did not discuss the decision in McEachern v. 752265 B.C. Ltd. (McEachern) (discussed in Volume 2, Issue 1 of Real Estate MATTERS), where the BCSC found that an eight-month acceleration of an estimated construction completion date was a “change of sufficient gravity” that it “materially” affected the offering and triggered the purchasers’ contractual rescission right. In Bosa, the actual construction completion date of April 2009 was six months earlier than the original estimate of October 2009 (although the developer extended the completion date such that the ultimate acceleration in the completion date was only three months).
The Bosa decision suggests, as a general principle, that the acceleration of a completion date will enhance, rather than diminish, the value, price or use of a development unit and, thus, will not trigger an obligation to amend a disclosure statement. However, because the BCSC also relied on the fact that the developer extended the completion date so that the effective period of acceleration was only three months, and because the BCSC did not address the eight-month acceleration that was held to be unacceptable in McEachern, it remains prudent for developers to ensure that their disclosure statements and pre-sale purchase contracts reserve the developer’s right to postpone and to accelerate closing, and to amend their disclosure statements if the completion date is accelerated by any material period of time, and certainly if that period is more than three months.
Hopes Dashed?The BCSC in 299 Burrard ordered that a developer was entitled to a $1,136,000 deposit after a purchaser refused to close on a strata lot, even though the developer had failed to disclose a delay in the estimated completion date by formally amending its disclosure statement. The purchaser had argued that the estimated completion date set out in the disclosure statement was a misrepresentation of a “material fact” and that, because the developer did not correct the misrepresentation by filing an amendment, the purchase contract was unenforceable pursuant to section 23 of the REDMA. In essence, the purchaser’s argument was that any failure to disclose a delay in completion (other than a “trivial” delay) will result in a misrepresentation and render a purchase contract unenforceable. However, following the common law test for “materiality” established by the Supreme Court of Canada (SCC) in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. (Sharbern) (discussed in Volume 2, Issue 2 of Real Estate MATTERS), the BCSC found that the delay was due to “normal” construction delays that any purchaser would reasonably expect to occur, that the delay would not have assumed “actual significance” to a reasonable purchaser and that the developer had given informal notice of the change in the completion date (without any complaint by the purchaser). As a result, the BCSC found that the statement in the disclosure statement was not “false or misleading” and, therefore, the purchase contract was enforceable.
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On June 21, 2012, the BCCA reversed the decision of the BCSC in 299 Burrard and, in doing so, made the following key findings:
¬ In Sharbern, the SCC was required to formulate a common law test for materiality under the (now-repealed) Real Estate Act, which contained no statutory definition of “false or misleading” statements; however, because the REDMA provides statutory definitions of “misrepresentation” and “material fact,” Sharbern is not a binding precedent. (This conclusion is an extremely important one, as Sharbern made it clear that, although disclosure of material information is important for consumer protection, the materiality standard should not be set so low as to require excessive disclosure of unimportant facts, thereby subjecting a developer to liability for trivial omissions. This common sense approach to materiality is no longer the law in British Columbia).
¬ Although not bound by Sharbern, the trial judge was bound (but failed) to follow Chameleon where the BCCA held that whether there has been a misrepresentation of a material fact is not dependent upon the purchaser’s state of mind (i.e., the requirement to disclose material facts is a statutory obligation that is not affected by what a purchaser knows or does not know).
¬ Except where an incorrect completion date is “trifling” in nature (the BCCA expressly stated that a discrepancy of roughly four months is not “trifling”), an incorrect completion date is a material fact that must be corrected immediately by way of an amendment to disclosure statement, and informal construction updates or newsletters will not satisfy the requirements of the REDMA.
¬ The REDMA balances the rigour of the disclosure regime as a consumer protection measure against the flexibility given to developers to amend disclosure statements whenever necessary to address unforeseen circumstances. According to the BCCA, the strictness of the filing regime must be maintained in order for the protection to be meaningful for consumers.
In summary, the BCCA ruled that the REDMA requires developers to file amendments to their disclosure statements immediately if they become aware that the estimated completion date set out in a disclosure statement is no longer accurate, and they will only be relieved from that obligation where the delay is “trifling.”
Lastly, the BCCA declined an invitation to provide judicial guidance as to the appropriate margin for error in disclosing the estimated completion date of a development. Given the abundance of litigation over the past few years with respect to discrepancies between estimated and actual completion dates, the BCCA noted that the issue could be addressed by the Superintendent of Real Estate, which has been delegated the administrative authority to prescribe the form and content of disclosure statements. Hopefully, the Superintendent of Real Estate will see fit to address this issue (and other issues that continue to create uncertainty in the real estate disclosure context), for the benefit of consumers and developers alike.
CommentaryWhile the Bosa and 299 Burrard cases can rightly be distinguished on the basis that Bosa involved an accelerated completion date and 299 Burrard involved a delayed completion date, the reasoning of the BCCA in 299 Burrard is broad in scope and could, at least arguably, be applied to any change in the estimated construction completion date that occurs in the course of construction. Whether the BCCA would agree with the BCSC in Bosa that an accelerated completion date is not a material fact is uncertain. As such, until the matter is addressed either by legislative amendment or, as the BCCA suggested, by policy statement or directive issued by the Superintendent of Real Estate, a developer has no practical choice but to consider amending its disclosure statement whenever it becomes aware that the estimated construction commencement or completion date set out in the disclosure state has changed. This may require multiple amendments to address construction schedule changes with no meaningful impact upon purchasers, each coming with the attendant risks relating to proof of delivery.
Real Estate MATTERS
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The Supreme Court of Canada Applies “Central Management and Control Test” in Determining Residency of a Trust By TJ Kang, Brian O’Neill
A recent decision of the Supreme Court of Canada (SCC) may have significant tax implications for real estate ownership structures that involve a trust and that were implemented on the assumption that the trust is resident in a jurisdiction outside of Canada, or in a particular province within Canada, due to the trustee being resident in such jurisdiction or province.
In Fundy Settlement v. Canada (Fundy) (also known as St. Michael Trust Corp. and Garron), the SCC confirmed the reasoning of the lower courts, which favoured a central management and control test typically applied in determining residency of a corporation under common law, over residence of the trustee in determining the residency of a trust for purposes of the Income Tax Act (Canada) (ITA). While there had not been a significant amount of jurisprudence on the issue of how to determine the residency of a trust, the prevailing view had generally been that it is determined by the residence of the trustee. Any tax planning or tax structure that relies on determining the residency of a trust based on the residency of the trustee, particularly where the trustee does not exercise discretion over substantive decisions in relation to the trust, should be revisited in light of the ruling by the SCC.
BackgroundSt. Michael Trust Corp. (St. Michael) was a trust company resident in Barbados and the trustee of two trusts, Fundy Settlement and Summersby Settlement. The trusts were settled in Barbados by an individual resident in the Caribbean. The beneficiaries of both trusts were resident in Canada. After the sale by the trusts of shares in two Canadian-resident holding corporations, St. Michael claimed refunds of the portion of the purchase prices withheld by the purchaser and remitted to the minister of National Revenue (Minister) under section 116 of the ITA on the basis that:
¬ the trusts were resident in Barbados because the trustee was resident in Barbados; and
¬ capital gains realized by the trusts on the disposition of the shares were exempt from Canadian tax under the Canada-Barbados tax treaty since the treaty provides that tax is payable only in the country in which the trusts are resident.
The Minister reassessed St. Michael, in its capacity as trustee, and denied the refunds on the basis that the trusts were resident in Canada. The appeals from the reassessments were dismissed by the Tax Court of Canada in Garron Family Trust v. The Queen and by the Federal Court of Appeal in St. Michael Trust Corp. v. Canada on the basis that, because all the substantive decisions in relation to the trusts were made in Canada by the beneficiaries (and not in Barbados by the trustee, which exercised a limited role in an administrative capacity), the trusts were resident in Canada.
ArgumentsOn appeal to the SCC, the primary issue was whether the trusts were resident in Barbados, as was argued by the appellant, or in Canada, as was argued by the Minister. St. Michael submitted that the residence of a trust must be the residence of the trustee for two reasons:
¬ since a trust is not a legal person, the central management and control test for determining residency of a corporation, which is a legal person, is inapplicable to trusts; and
¬ subsection 104(1) of the ITA links the trustee to the trust for all attributes of the trust, including residency.
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In contrast, the Minister submitted that since the central management and control of the trusts were carried out in Canada by the beneficiaries, the trusts were resident in Canada. If the trusts were found not to be resident in Canada, the Minister submitted two alternative arguments:
¬ the trusts were deemed to be resident in Canada under subsection 94(1) of the ITA; and
¬ the general anti-avoidance rule (GAAR) applied to deny treaty benefits.
DecisionIn a short, unanimous judgment, the SCC dismissed the appeals and agreed with the lower courts that the trusts were resident in Canada for purposes of the ITA because the beneficiaries exercised the central management and control of the trusts in Canada.
In respect of the appellant’s first proposition, the SCC held that, while a trust is not a person at common law, subsection 104(2) deems a trust to be an individual under the ITA. The Court added that the reference to a “person” in subsection 2(1), which provides that income tax is to be paid on the taxable income for each taxation year of every person resident in Canada at any time in the year, must be read as a reference to the taxpayer whose taxable income is subject to income tax which, in the present case, was the trust and not the trustee. In respect of the appellant’s second proposition, the Court held that, although subsection 104(1) provides that a reference to a trust in the ITA must be read to include a reference to the trustee, there is no provision in the ITA that links the trust and the trustee for purposes of determining the residency of the trust or that requires that the residence of a trust must be the residence of the trustee.
The Court concluded that the established test for determining the residency of a corporation (i.e., where the exercise of central management and control actually takes place) is to be used in determining the residency of a trust. The Court provided two key reasons for its conclusion. First, the Court observed that there are many similarities between a trust and a corporation, which justify treating them in the same manner for determining residence, including that both:
¬ hold assets that are required to be managed;
¬ involve the acquisition and disposition of assets;
¬ may require the management of a business;
¬ require banking and financial arrangements;
¬ may require the instruction or advice of lawyers, accountants and other advisors; and
¬ may distribute income.
Second, the adoption of the central management and control test for determining the residency of a trust promotes consistency, predictability and fairness. The Court held that:
As with corporations, residence of a trust should be determined by the principle that a trust resides for the purposes of the [ITA] where “its real business is carried on” […], which is where the central management and control of the trust actually takes place. As indicated, the Tax Court judge found as a fact that the main beneficiaries exercised the central management and control of the trusts in Canada. She found that St. Michael had only a limited role — to provide administrative services — and little or no responsibility beyond that […]. Therefore, on this test, the trusts must be found to be resident in Canada. This is not to say that the residence of a trust can never be the residence of the trustee. The residence of the trustee will also be the residence of the trust where the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident. These, however, were not the facts in this case.
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Since the SCC held that the trusts were resident in Canada by applying common law principles, it did not consider the Minister’s alternative arguments.
CommentGiven the SCC’s conclusion in Fundy, it is important to ensure that the trustees or other persons who in fact control a trust actually exercise their powers (i.e., carry out the central management and control of the trust) in the jurisdiction in which the trust is intended to be resident. Although the decision was made in the context of non-resident trusts, it may also have an impact on interprovincial tax planning involving trusts (e.g., the use of Alberta-resident trusts to access Alberta’s lower tax rates). The lessons learned in respect of ensuring corporations are resident in non-Canadian jurisdictions for common law purposes will be useful in ensuring trusts are resident and subject to tax in the appropriate jurisdictions.
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Storm Water Management — Taking Sustainable Development by Storm By Elizabeth Yip
Developers are increasingly faced with requirements from local governments to incorporate sustainable features into their developments. Provided that sustainable features do not cost substantially more than a comparable, non-green technology, they are generally embraced by condominium purchasers in the Lower Mainland.
One of the most effective sustainability strategies is to improve storm water management. Proper storm water management reduces both the quantity of storm water runoff released into municipal drainage systems and water consumption by reusing storm water for other purposes on site.
What Is Storm Water Management?A typical storm water management plan calls for the developer to install a filtration facility that collects and stores storm water. The filtration process removes sediments and other impurities from the storm water so that it may then be reused for non-potable purposes. In some developments, the water is released as irrigation water on site, while in others it is incorporated into design features, such as fountains or pools. Treated storm water may also be used for flushing toilets.
Storm water management is a relatively cost-effective way for developers to score points and achieve desired levels under the Leadership in Energy and Environmental Design (LEED) Green Building Rating System®. Whether or not the developer is following LEED or other rating systems, storm water management is a frequently used tool in sustainable construction.
Once installed, the storm water management facility is relatively easy to maintain and generally requires only occasional servicing and upkeep.
Legal Mechanisms and Other ConsiderationsLocal governments may require developers to enter into the following legal instruments to ensure that storm water management obligations in respect of a development are satisfied:
¬ Section 219 Covenant (Covenant): The Covenant will set out the developer’s obligation to install the storm water management facility in accordance with a plan approved by the local government’s engineering department. To ensure that the facility functions properly over the initial operating period, the developer may have certain monitoring and reporting obligations (often fulfilled by an engineer or another qualified professional).
¬ Statutory right of way: The local government may also require a statutory right of way allowing it to access the land, as well as operate and maintain the storm water management facility if the developer fails to do so.
To ensure that the strata corporation complies with the Covenant and that the obligations under the Covenant are performed properly and to the local government‘s satisfaction, the developer, on behalf of the strata corporation, should contract with the professional who will carry out the maintenance, monitoring and reporting obligations before turning over the strata corporation’s affairs to the purchasers. In addition, the developer could determine the maintenance costs to be inserted in the strata corporation’s budget forming part of the disclosure statement.
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Disclosure Obligations for Strata DevelopmentsIn the case of a strata development, monitoring and reporting obligations relating to the storm water management facility will generally be assumed by the strata corporation, as the obligations typically continue after the filing of the strata plan.
Under the Real Estate Development Marketing Act (British Columbia), the developer must plainly and fully disclose all material facts in the disclosure statement. Accordingly, the developer should disclose at a minimum:
¬ any expense associated with the maintenance, monitoring and reporting obligations with respect to the storm water management facility;
¬ any encumbrance to be registered on title to the lands, such as the Covenant and statutory right of way required by the local government; and
¬ any contract with the professional carrying out the maintenance, monitoring and reporting obligations with respect to the storm water management facility.
The developer may also consider adding a section in the strata corporation’s bylaws reflecting its obligations with respect to the storm water management facility.
In terms of sustainable features, installing a storm water management system is low-hanging fruit. With relatively low incremental construction and operation costs, a developer can afford to include such a system and still make sense of the pro forma budget. A storm water management system may also pay dividends, given the ever-increasing scrutiny of the environmental footprints of new developments.
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Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not constitute legal advice in any manner whatsoever. Readers are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.
Scott Smythe604-643-7152
Elizabeth Yip604-643-7198
Michael Mitchell604-643-7937
Lisa Vogt604-643-7935
Conrad Rego604-643-5882
Gillian Piggott 604-643-7151
R. Cameron Whyte604-643-5933
Russell Benson604-643-7101
Beverly Ellingson604-643-7122
Jonathan Carter 604-643-5880
Keith Burrell, QC604-643-7939
John Doolan604-643-7938
Glenn Leung604-643-7108
Greg Fabbro604-643-7190
Natalie Garton604-643-5960
Jennifer Hayes604-643-5892
Craig Shirreff604-643-5955
Virginia Wigmore604-643-7164
Vanessa Lunday604-643-5981
Jeffrey Knowles604-643-7194
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