Most people have heard of the Land Transfer Tax. But how many really understand what it is and how it works? Any purchase or transfer of a Canadian property triggers a payment of provincial and possibly municipal Land Transfer Tax. The calculation of this tax is based on the purchase price of the property. It is payable by your legal representative prior to the transfer of Title.
However, a few savvy real estate investors figured out a way to dodge the Land Transfer Tax (LTT). If they can’t dodge completely, a few will try to minimize its impact. We’ll tell you how.
Use of bare trusts to avoid Land Transfer Tax
You can purchase a property solely to capture the equity. This is done quite often either through the sale or transfer of the property. To reduce the taxes triggered by a transfer, some savvy real estate investors set up bare trusts. This is a particularly effective strategy when the property is located in B.C.
When a property is transferred or purchased in the province of British Columbia, the province applies a Property Transfer Tax (PTT). It is charged at the time the title is registered at the Land Title Office.
However, the PTT only applies if a change of title is registered. The structure of a bare trust allows the beneficial ownership to be transferred without registering a change of legal title. This means that real estate owners and investors with property in B.C. can use bare trusts to avoid paying Land Transfer Tax.
The use of bare trusts to avoid PTT (also known as LTT) appeared to come under scrutiny under the 2016 B.C. Budget. Buried in the budget document were the new reporting requirements that would force trustees to declare information in relation to beneficial ownership, including names, addresses and citizenship. At the time, experts believed the provincial government was beginning to set the stage to alter the treatment of transfers using bare trusts.
Once again, the use of bare trusts came under scrutiny with the 2018 B.C. NDP Budget. Despite a 30-point plan on housing affordability, the budget offered no immediate steps to applying the PTT to beneficial transfers of land. However, the collection of additional personal information began in September of 2018. The B.C. government now requires property buyers to disclose more information when they make a purchase through a corporation or trust. But, as yet, a full closure to the loophole does not exist.
Ontario’s Land Transfer Tax rules are different
A precedent for blocking a Land Transfer Tax dodge does exist.
According to Joseph Truscott, an Ontario tax specialist, a bare trust can be used to hold legal title to real property that is being transferred between multiple parties. However, Ontario implements a Land Transfer Tax that applies to both legal and beneficial transfers. A transfer of beneficial ownership of a trust (and legal ownership of a property) does not exempt the purchaser from having to pay LTT.
Feds throw a wrench in the works
The Federal Budget 2018 aims to alter how activity using corporations, shares, trusts and bare trusts is reported in Canada. Starting in the tax-year 2021, investors and asset owners are going to be required to disclose information on an annual basis regarding “certain trusts”. The term used is not defined in the Budget document. This initiative came after a December 2017 meeting where federal, provincial and territorial Finance Ministers agreed to amend regulations regarding the use of corporations, shares and trusts. So we know more information will be revealed. Either way, these proposed changes would require corporations to make some changes. They will now have to “hold accurate and up-to-date information on beneficial owners and to eliminate the use of bearer shares.”
First-time buyer tax rebate loophole
The use of legal entities and trusts is one way to dodge taxes. Another way is through the sin of omission. It turns out that first-time buyers’ land transfer tax rebate provides an effective loophole for buyers willing to omit certain facts.
In all provinces, except Alberta and Saskatchewan, property buyers must pay a Land Transfer Tax or LTT. (The two prairie provinces charge a much smaller transfer fee, instead). To offset the cost of land transfer taxes, the provinces of Ontario, British Columbia and Prince Edward Island as well as the City of Toronto, offer land transfer tax rebates for first-time homebuyers. Important to note that they must be Canadian citizens or permanent residents. They are also required to be at least 18 years of age. Most importantly, they must use the property as their principal residence.
Who qualifies as a first-time buyer?
The key here is that the purchaser is a first-time buyer. This doesn’t mean a first-time buyer in Canada, it means a first-time property purchaser. Period. In other words, the buyer (or their spouse or common-law partner) has never bought or owned an interest in a residential property anywhere in the world.
Yet, there is no quick, efficient and reliable way to check whether or not a buyer is truly a first-time buyer. There are no world-wide land registrars to check and no global title registration process. There is no way to confirm if someone continues to hold property in a foreign country. The rebate is based solely on the disclosure of the buyer.
And, anecdotally speaking, plenty of buyers end up claiming this rebate, even though they don’t actually qualify.
How does the LTT rebate help first-time buyers?
Granted, the LTT rebate is relatively small. Nonetheless, it’s still a loophole. It’s a loophole that takes hundreds of thousands away from municipal and provincial coffers.
For example, if a not-quite-first-time-homebuyer bought a home for $850,000 in the City of Toronto, the LTT would set them back $18,475. Half of this goes to the provincial LTT. The other half goes to the municipal LTT. Their rebate would put $8,475 back in their pocket. This sum could easily pay the buyer’s legal fees and at least a year’s worth of property taxes. Not bad.
Prior to March 1, 2017, non-resident buyers qualified for this rebate if they bought in the City of Toronto. The Toronto City Council closed this loophole after they voted to align with more stringent provincial. These rules came into effect on January 1, 2017. Now, a foreign buyer must become a permanent resident or Canadian citizen 18 months after the purchase of property, in order to qualify for the LTT rebate. Of course, there’s still no way to confirm that this buyer never owned property elsewhere in the world.