B.C. claims millions in property transfer taxes at stake in battle over debt-ridden projects

The province of B.C. claims buyers of massive debt-ridden real estate projects are trying to dodge millions in property transfer taxes through a unique financial mechanism supposedly designed only for "exceptional circumstances."

With cash-strapped developers facing stiff economic headwinds, the province wants Canada's top court to weigh in on the increased use of so-called "reverse vesting orders" in insolvency proceedings — claiming both the public purse and Indigenous consultation are at stake.

"The views of [the Supreme Court of Canada] ... are required before reverse vesting orders become even more widespread and have an even greater impact on regulators, Indigenous Peoples, and the provincial and federal treasuries," the province says in an application to the court.

"Until this court addresses the matter, B.C. and other governments with similar tax regimes will lose millions of dollars in tax revenue, and Indigenous Peoples will be forced to expend more resources defending their rights than otherwise would be the case."

$3.5 million property transfer tax avoided

The province has asked the court for leave to appeal a 2024 B.C. Court of Appeal ruling on a battle over insolvency proceedings involving the proposed $72 million sale of Southview Gardens, an 18-building, 140-unit rental property in Vancouver's Champlain Heights neighbourhood.

The receiver overseeing the deal wanted the purchase made through a reverse vesting order, which involves placing a debtor company's unwanted assets and liabilities in a shell corporation and transferring shares for the ownership of the desirable assets that remain.

The end result is that the shell company stays in receivership, and the buyer ends up with beneficial control of the debtor company and its property — without having to register a transfer of title with B.C.'s land title office.

In the sale of Southview Gardens, that meant avoiding $3.5 million in property transfer taxes — money the receiver argued would be better placed in the pockets of creditors than the government.

At the appeal court, the judges said granting of a reverse vesting order in the Southview Gardens case met the goals of Canada's Bankruptcy and Insolvency Act: "namely by maximizing return for creditors while balancing other risks."

The receiver's arguments were grounded in a fact not widely known to people only familiar with residential home sales: multi-billion dollar commercial properties change hands in B.C. all the time without any payment of property transfer tax.

The court file includes an affidavit from one of the province's top investment sales brokers claiming it's "highly commonplace" for commercial real estate transactions to occur through the transfer of shares — without the need to incur a change of land title.

'To blatantly circumvent the required approval'

In its application to the Supreme Court of Canada, the province points to four development projects — including Southview Gardens — that would cost it $9 million in taxes if reverse vesting orders are granted.

The properties include two aging beachside motels in Penticton, 87 townhouses planned for Langley and a huge 150-unit 80s-era residential building and commercial space in Vancouver's West End.

But beyond real estate deals, the province also claims reverse vesting orders could be used in insolvency proceedings involving mines or forestry companies to avoid the need for new buyers to go through their own licensing and consultation assessments.

In effect — the province argues that federally and provincially mandated Indigenous consultation and regulatory approval become part of the unwanted liabilities and assets the new owners of a property avoid through the transfer of shares.

The court materials include the example of a case that would have seen a multi-million dollar deal to salvage a northern B.C. sawmill, a bio-energy plant and three forestry licences through a reverse vesting order.

In that situation, the receiver argued that 129 jobs and a variety of taxes and debts would be at stake if the forestry licences were to change hands through a normal sale.

The Gityanyow First Nation, which claims Aboriginal Title to the timber in the licence areas, objected to the move, arguing that "the Gitanyow lose their right to be consulted regarding the licence under the reverse vesting order structure."

"The effect of the reverse vesting order is to blatantly circumvent the required approval of a disposition or change in control which a receivership would typically trigger and thereby avoid consultation between the Gitanyow and the province with respect to the disposition of the licence," the Gityanyow argued.

According to court documents, the question was never settled because another First Nation put in a higher offer to buy the properties before the court could issue a decision.

'It's all Peakhill from here'

Though virtually unreported outside industry publications, the reverse vesting order drama has been keenly followed by Canada's 'insolvency community,' which has had a field day with the court case title — commonly known by the name of one of its parties: Peakhill.

'Is this the Peak for Reverse Vesting Orders?' asks one law firm.

'It's All Peakhill From Here,' quips another.

And the Canadian Legal Information Institute weighed in with its commentary contribution: 'A Hill Too Far.'

University of Alberta law professor Roderick Wood's work is cited in the province's Supreme Court of Canada filings. He told the CBC he would be surprised if the top court didn't hear the case.

"I would expect that because of the importance of this issue, that they will grant leave," Wood said in a telephone interview.

Wood said reverse vesting orders originated during restructuring processes meant to help debtor companies avoid bankruptcy before morphing into a vehicle to transfer the attractive assets of a debt-plagued entity through the sale of shares in receivership.

"In terms of why, really it facilitates asset maximization — maximizational recovery for creditors," he said. 

"Because it's faster and cheaper."

Wood says reverse vesting orders are particularly attractive as a way to deal with the dissolution of mining companies and cannabis companies — both of which have seen a wave of insolvency in B.C. in recent years.

"In an asset purchase, you'd have to transfer the licences. The licences are specific to the particular debtor company, so if you sell the assets to somebody else, they have to get the licences, so that can be costly and time-consuming," he said.

"Whereas if you use this reverse vesting order, there is no change in the identity of the debtor company. So that's the attractive of the use of the reverse vesting order."

Past courts have said reverse vesting orders should be reserved for "unique and exceptional circumstances" and regarded as an "extraordinary measure."

But in its arguments, the province of B.C. claims "there is significant pressure to make them the norm."

Wood wouldn't predict where the Supreme Court of Canada might land — if it agrees to hear B.C.'s arguments.

"All I can say is that there's really been a massive increase," he said.

"It's come from somewhere that no one really has even heard of it to just seeing case after case after case dealing with it. So it's been a real growth, and it opens up a lot of questions."