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Ontario Land Transfer Tax: Some Basics
The first general anti-avoidance rule relating to Ontario land transfer
tax (LTT) was proposed in the 2014 Ontario budget, and received royal
assent on July 24, 2014. The Ontario Ministry of Finance is concerned
that some structures attempt to use Ontario regulation 70/91 of the Land
Transfer Tax Act (LTTA) (a regulation exempting certain transfers from
LTT, as discussed below) in a manner inconsistent with its intent. The
ministry is also reviewing aggressive tax-avoidance structures and
issuing assessments as appropriate.
Given the ministry’s enhanced focus on aggressive LTT planning, it is
worthwhile to revisit certain rules relating to Ontario LTT, including
some of the LTT exemptions available to taxpayers. Although the
exemptions outlined below were enacted to provide fairness and
practicality in applying LTT, an understanding of these rules will
provide a high-level overview of planning opportunities that may be
appropriate, depending on the circumstances.
In Ontario, LTT is generally triggered when there is a change of
registered title to, or a change of beneficial interest in, real
property situated in Ontario. Under both scenarios, LTT is imposed on
the value of the consideration.
Often, real estate owners use nominee corporations to hold the legal
title to land to maintain anonymity of ownership or to ease an
administrative burden (in a joint venture context). When a purchaser
acquires shares of a nominee corporation, legal title to the land is
maintained by the nominee corporation; however, Ontario LTT applies if a
purchaser acquires a beneficial interest in real property through, for
example, a sale of the shares of the nominee corporation.
Although one cannot avoid Ontario LTT simply by using a nominee
corporation, specific relief provisions in the LTTA exempt certain
transfers from LTT:
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Interaffiliate deferral: section 3(9) of the LTTA allows
unregistered transfers of land between affiliated corporations. This
exemption is granted if the beneficial interest remains with the
affiliated corporation for at least three years. The transferor is
required to submit a deferral application along with security for the
tax otherwise payable. The security is returned if and when the
three-year holding period requirement is satisfied. The holding-period
rule is intended to ensure that the exemption is not used to transfer
land to an affiliated corporation whose shares are then sold to a third
party in order to circumvent LTT.
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Amalgamation: for LTT purposes, an amalgamated corporation is
considered to be a continuation of the predecessor corporations. If the
predecessor corporations were affiliates before the amalgamation, then
they are considered affiliates after the amalgamation. Thus, on the
basis of the ministry’s published policy, Ontario LTT will not apply to
land transfers that occur in the course of an amalgamation (Bulletin LTT-4, September 25, 1974).
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Mutual fund trust exemption: Ontario looks through a trust and
imposes LTT at the beneficiary level. As a result, a purchase or sale of
a trust unit triggers LTT to the extent that the trust holds real
estate properties. This result would be problematic for mutual fund
trusts such as real estate investment trusts; however, section 1(1)(b)
of regulation 70/91 of the LTTA exempts transfers of mutual fund trust
units from LTT.
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Partnership de minimis exemption: similarly, Ontario looks
through a partnership and imposes LTT on the partners; this raises a
concern when a change in partners gives rise to unintended LTT,
especially when the change is insignificant. However, section 2 of
regulation 70/91 exempts the transfer of a beneficial interest from LTT
if it is an interest of a partner in a partnership and the partnership
interest entitles the partner to 5 percent or less of the profits of the
partnership.
Ontario LTT can be complex, and taxpayers need to be cautious when
applying the LTT rules. In particular, taxpayers should be mindful of
two common traps:
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When registered title is transferred for no consideration, LTT
should generally not apply. However, an affidavit must be filed to
support the assertion that no consideration applied, and the affidavit
must contain a statement that no change in beneficial ownership occurred
prior to the transfer of the legal title. (See “Guide to the Requirements To Evidence NIL Value of Consideration for Conveyances Involving Trusts—Land Transfer Tax Act.”)
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No deferral is available under section 3(9) of the LTTA if there
has been a previous change of registered ownership to an affiliate
corporation at any prior time.
For more information on the Ontario LTT, see Kathleen V. Penny,
“Ontario/Toronto Land Transfer Taxes: A Primer on Related Party
Transfers and an Update,” 2014 Ontario Tax Conference.
Henry Shew and Jonathan Newton
KPMG LLP, Toronto
hshew@kpmg.ca
jdknewton@kpmg.ca
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