On February 18, 2016, the Ministry of Finance (Ontario) (the "Ministry") introduced a sweeping retroactive amendment to one of the principal exemptions from Land Transfer Tax ("LTT") with the introduction of Ontario Regulation 35/16 ("New Regulation").
LTT is exigible on the disposition of a beneficial interest in land, which includes any interest in a partnership that holds land. However, a variety of exceptions from LTT exist, including dispositions that are prescribed as being exempt. Prior to the recent amendment, a "de minimis" exemption existed for small accretions of partnership interests. In general, it exempted a disposition of a beneficial interest in land if it was a transfer of a partnership interest that represented no more than 5% of the interests in the partnership.
The New Regulation revoked the previous exemption and replaced it with an amended de minimis exemption in respect of the acquisition of an interest in a partnership. Notably, the de minimis exemption from LTT no longer applies where a trust or another partnership acquires an interest in a partnership. Persons other than a trust or partnership are still exempt from LTT on the acquisition of a partnership interest where the increase to the entitlement of profits from the partnership is no greater than 5%. The amendment took effect retroactive to July 19, 1989, the date the de minimis exemption became effective. The amendment appears also to apply in respect of the City of Toronto's Municipal Land Transfer Tax which effectively doubles the provincial rate for land in Toronto.
This amendment will have a significant impact on unitholders of REITs and private funds that invest in real estate. Any time a REIT or private real estate fund acquires an interest in a partnership holding real estate in Ontario, there will be liability for LTT, no matter how small the increase in the beneficial ownership of the underlying real property. Moreover, assessments may also be made in respect of trusts and partnerships that have acquired interests in partnerships that satisfied the former de minimis exception for transactions as far back as 1989.
The Ministry has stated that a person that would otherwise be liable for LTT as a result of the amendment may rely upon a written ruling received from the Ministry on or prior to February 18, 2016, such that the specific disposition is exempt from LTT. It seems arbitrary to penalize those that planned their affairs in accordance with the existing rules while continuing to exempt those that received written confirmation that the rules applied to exempt their disposition from LTT.
Tax and real estate practitioners will need to reconsider the planning and structuring of real estate transactions going forward to deal with the effects of this poorly considered amendment.