S. 2(1) of Ontario’s Land Transfer Tax Act R.S.O. 1990, c. L.6, (the “Act”) states, that “every person” tendering for registration a conveyance by which “any land” is conveyed to or in trust for a transferee shall pay land transfer tax (“LTT”) upon registration of the conveyance.  This article explores instances in which the Act’s broad taxing mechanism does not apply. We begin with the premise that as long as quantifiable consideration changes hands, subject to regulatory exclusions, s. 2(1) applies to all transfers of property.

Exemption Regulations

The Act’s LTT obligations are tempered by various statutory exclusions to their application as denoted in the associated Regulations. A noteworthy exclusion is Regulation 696 which relates to transfers between spouses.  Specifically, LTT does not apply to conveyances where the transferor is the spouse or former spouse of the transferee and where:

(a)    the only consideration given for the conveyance apart from natural love and affection is the assumption of any encumbrance registered on the land described in the conveyance;
(b)    the conveyance is in compliance with the terms of a written agreement pursuant to which the parties have agreed to live separate and apart; or,
(c)    the conveyance is in compliance with the direction of an order or judgment made by a court of competent jurisdiction.²

There are specific exclusions in the Act’s other regulations regarding, for example, family farms, employee to employer transfers, partnership property transfers, etc…³

No Consideration

There are real estate transactions, with nominal or no consideration passing between parties.  While the Act does not specifically exempt gifts of land from LTT, if no consideration passes on a conveyance between natural persons, then the tax payable is quantified as nil⁴. Notwithstanding the foregoing, LTT is still payable on the value of any registered mortgages conveyed with the land.

Another area of note concerns, the transfer of property from corporations to any of their shareholders⁵.   Irrespective of the quantum of consideration, or even in the absence thereof, s. 1(1)(g) of the Act affords the Minister discretion to deem the transfer to have been effected at fair market value as at the date of the conveyance.

Transfers of Land Between Affiliated Corporations

S. 3(9) of the Act provides for the deferral and cancellation of LTT for unregistered transfers of land between affiliated corporations, subject to specific conditions, unless a transfer is registered.  Recent Ontario lower court decisions, however, have resulted in certain transfers between affiliated corporations being viewed as exempt from tax even if they are, in fact, registered.

This non-conformance with statute was addressed when the current government tabled its budget on March 23rd of this year.  Specifically, the Land Transfer Tax Act is slated to be amended to reinforce the original intent of the provision.  The amendments include clarification of the term “affiliate”⁶, and further specify that the deferred tax would become payable if a title document is registered during the deferral period as defined in the Act.  In addition, if a document is registered after the deferred tax is cancelled, land transfer tax would be payable on the registration based on the earlier, unregistered transfer.

Transfers of Land to a Family Business Corporation

Part of Regulation 697 of the Act declares that LTT does not apply to a conveyance of land from an individual(s) – each of whom is a member of the family of the other – to a “family business corporation”.

Corporate/commercial practitioners may be especially interested in the interpretation of this provision of Regulation 697.  This section has been judicially examined in Ontario only once in the decision involving Upper Valley Dodge Chrysler Limited v. The Minister of Finance.⁷ This case considered the transfer of real estate directly by the sole shareholder/officer to the appellant corporation (the “Corporation”).

The transferor in this case, a natural person, legally and beneficially owned the subject property.  He was the sole shareholder/officer of the Corporation, which was the operator of the dealership on the property both before and after the conveyance.  The transferor conveyed the property to the Corporation and claimed the exemption from land transfer tax on the strength of Regulation 697.

The Corporation was assessed for the tax by the Minister of Finance on the basis that it did not meet the exempting requirements in the Regulation.  The particular exempting Regulation requires, inter alia, that the transfer be a “conveyance of land from an individual … to a family business corporation provided that, … (a) prior to such conveyance the land was used predominantly in the operation of an active business which was operated exclusively by an individual …”

The issue in respect of the appeal to the Divisional Court was whether the term “individual” for the purpose of paragraph 3(1)(a) of the Regulations could include a “corporation”.  The majority of Court upheld the decision of the trial court that the Corporation fell within the meaning of the term “individual”; disregarding the Minister’s administrative publication, Information Bulletin 6-79 in the process⁸.  This decision is currently under appeal to the Ontario Court of Appeal.

Although it seems reasonable to assume that a natural person owning land on which a family business operates should be able to transfer said land to the corporation operating the business and fall within the Regulation 697 exemption, this issue appears to remain open pending consideration by Ontario’s high court.

Conclusion

It would appear that we begin with the position that LTT is always payable and then look to the facts of each conveyance to determine whether the deal somehow fits into an exemption. As lawyers, our role is to properly advise our clients and so it is incumbent upon us to be failiar with the various exemptions in order that we might apply them as often as practicable.

Jayson Schwarz, senior partner of  the Toronto law firm of  Schwarz Law LLP  together with Konstantine Chatzidimos associate lawyer both  practicing in the areas of real estate, corporate and commercial law.

__________

1. This article originally appeared in the June 30, 2006, issue of The Lawyers Weekly published by LexisNexis Canada Inc.”
2. R.R.O. 1990, Reg. 696, s. 1.
3. See Regulations 71/91; 676/98; 63/94; 697; 695; 88/04; 374/04; 70/91; 398/96; 700; 701; 310/97; 703. There are currently nine (9) specific Exemption Regulations supplementing the Act.  It is prudent for all solicitors practicing in the areas of real estate and corporate/commercial law to be familiar with all such exemptions and their associated qualifications.
4. Ontario Tax Bulletin No. LTT 10-2000, Ministry of Finance
5. Ibid.
6. Section 3(14) of the LTTA provides that in one of three instances, a corporation will be deemed to be an affiliate of another corporation if; one of them is a subsidiary of the other; both are subsidiaries of the same corporation; or, if each of them is controlled by the same person or persons.
7. (2003), 67 O.R. (3d) 196
8. Land Transfer Tax Exemption for Family Business Corporations.