Any purchase or transfer of a Canadian property will trigger a payment of provincial and possibly municipal Land Transfer Tax. The calculation of the Land Transfer Tax is based on the purchase price of the property and 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) — and if they can’t dodge it a few will try to minimize its impact. We’ll tell you how.
Use of bare trusts to avoid Land Transfer Tax
Quite often, a property purchase is made with the sole intention of capturing the equity 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 western province of British Columbia, the province applies a Property Transfer Tax (PTT) at the time that the change of title is registered at the Land Title Office.
However, the PTT only applies if a change of title is registered. Since the structure of a bare trust permits the beneficial ownership to be transferred without registering a change of the 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.
Initially, 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. But, as of February 2018, no changes were made.
Once again, the use of bare trusts came under 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. Again, experts predict the province is setting the stage for potential changes.
Ontario’s Land Transfer Tax rules are different
Thing is a precedent for blocking a Land Transfer Tax dodge was already set.
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 — so 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 will be required to disclose information on an annual basis regarding “certain trusts.” The term used wasn’t defined in the Budget document, but given that this initiative came after a December 2017 meeting between federal, provincial and territorial Finance Ministers agreed to amend regulations regarding the use of corporations, shares and trusts, it’s certain that more will be revealed. Either way, these proposed changes would require corporations 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 to avoid taxes is one way to dodge taxes, another way is through the sin of omission.
Turns out the 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 and the City of Toronto offer land transfer tax rebates for first-time homebuyers (who are Canadian citizens or permanent residents, at least 18 years of age and will use the property as their principal residence).
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 or not. There are no world-wide land registrars to check; no global title registration process; and certainly 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.
Granted, the LTT rebate is relatively small, but it’s still a loophole, a loophole that puts thousands of dollars back into a person’s pocket and 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 to the provincial LTT and half to the municipal LTT. Their rebate would put $8,475 back in their pockets — a sum that 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, even non-resident buyers could qualify for this rebate if they bought in the City of Toronto — but this specific loophole was closed after the Toronto City Council voted to align with more stringent provincial rules that 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.