Overview of the Tax
As expected, the Government of Ontario has introduced a new non-resident speculation tax ("NRST") that takes effect on April 21, 2017. The NRST is a 15% tax payable on the purchase of an interest in residential property located in the "Greater Golden Horseshoe" area (which includes Toronto and surrounding areas) by "foreign entities" and "taxable trustees" (as described below). The NRST applies in addition to any land transfer tax in Ontario real estate transactions.
The Government of Ontario confirmed that deals entered into under a binding agreement of purchase and sale signed before April 21, 2017, will not be subject to the NRST.
Who is Affected by the Tax?
The NRST will apply to "foreign entities" or "taxable trustees" that purchase residential real estate in the Greater Golden Horseshoe area. A foreign entity is either a foreign national or a foreign corporation. A foreign national is an individual who is not a Canadian citizen or a permanent resident of Canada. A foreign corporation is a corporation that is either:
- not incorporated in Canada;
- incorporated in Canada but is controlled, in whole or in part, by a foreign national or other foreign corporation, unless the shares of the corporation are listed on a Canadian stock exchange; or
- controlled, directly or indirectly in any matter whatever, by a foreign entity (i.e., controlled in fact by a foreign entity).
For the purposes of the NRST, a taxable trustee is:
- a foreign entity holding title in trust for beneficiaries; or
- a Canadian citizen, permanent resident of Canada, or a corporation holding title in trust for foreign entity beneficiaries.
Application of the Tax
The NRST applies to the value of the consideration paid for a registered or unregistered transfer of residential real estate if any one of the transferees is a foreign entity or taxable trustee. If a transfer of residential property is made to more than one transferee, one of whom is a foreign entity or taxable trustee that acquires an interest in the land, the NRST would apply to the entire value of the consideration for the transfer.
The NRST does not apply when a person purchases or acquires residential property as a trustee of a mutual fund trust, real estate investment trust or specified investment flow-through trust.
Each transferee is jointly and severally liable for any NRST payable. If a foreign entity or taxable trustee does not pay the tax, the other transferees are required to pay the tax, notwithstanding that they may be a Canadian citizen, permanent resident or Canadian corporation.
In certain situations, the NRST may be refunded with interest to the purchaser after payment, provided certain conditions are met (e.g., if a foreign national becomes a Canadian citizen or permanent resident of Canada within four years of the date of purchase; if a foreign national is enrolled as a full-time student for at least two years at an approved institution; or if a foreign national has legally worked in Ontario for one full year since the date of acquisition).
What Properties are Affected by the Tax?
The NRST applies to the transfer of land that contains at least one and not more than six single family residences. For example, detached and semi-detached houses are both considered to be lands that contain one single family residence. Condominium units and townhomes are also considered one single family residence. Examples of land containing more than one single family residence include duplexes, triplexes, fourplexes, fiveplexes and sixplexes.
The NRST does not apply to multi-residential apartment buildings that have more than six units. The NRST also does not apply to the purchase of agricultural, commercial or industrial land.
Tax Avoidance and Offences
The Government of Ontario has announced that it will introduce anti-avoidance provisions to ensure that the NRST is reported and paid as required. This includes examining circumstances where Canadian citizens or permanent residents of Canada, as taxable trustees, hold property in trust for a foreign entity or are trustees where a beneficiary may be a foreign entity.
A failure to pay the NRST may result in a penalty, fine and/ or imprisonment.