The Ontario Government began to tax beneficial transfers of real property in Ontario under the Land Transfer Tax Act on July 19, 1989. The objective was to prevent the avoidance of land transfer tax where the seller would transfer the beneficial interest in real property along with the shares of a special purpose corporation holding the legal or registered title to the real property. However, a partnership is not a legal entity for land transfer tax purposes. As a result, the taxation of beneficial transfers resulted in tax being payable each time the interests of partners in a partnership changed, for example, when a new partner entered a partnership or partners contributed to the partnership disproportionately.
The Ontario Government realized that this would result in an excessive administrative burden on such small changes in partnership interest. For this reason, it provided an exemption from the taxation of a beneficial transfer of real property in the Regulations to the Land Transfer Tax Act. The exemption has provided that when the interest of a partner does not increase by more than 5% in the fiscal year of the partnership, there is no obligation to file a return or to pay the land transfer tax. This was a practical solution and this so-called de minimis has remained in place until recently.
On February 18, 2016, the Ontario Government announced that it had amended the de minimis exemption, and done so retroactive to its inception in 1989. The amendment provided that the de minimis exemption is not available if the partner acquiring the interest in a partnership is either a trust, or another partnership.1 In an administrative statement released with the amendment, the Ontario Ministry of Finance (the “Ministry”) described it as “clarifying” in nature, even though the amendment was an obvious reversal from the past advice of the Ministry. This was clear as the Ministry confirmed that it would honour past rulings on the availability of the exemption for partnerships and trusts.
The response of the business, legal and tax communities has been focussed and fierce. The Ministry received detailed critiques of the amendments from the Real Property Association of Canada and the Tax Section of the Ontario Bar Association. By March 24, 2016, the Ministry had retreated, though only somewhat. The Ministry issued a revised administrative statement advising the Ministry would:
- Limit assessments to dispositions in the four years since February 18, 2012, rather than assessing up to 27 years in the past;
- Not prosecute dispositions before the announcement on February 18, 2016, though it is unclear how it could establish the required mens rea on a retroactive change in law;
- Extend the filing deadline for returns on transfers after the announcement to December 31, 2016, which was a necessary and practical concession given the Ministry’s lack of consultation prior to amendment; and
- Permit one partner to file on behalf of other partners, though this streamlining measure is likely to benefit the Ministry as much as taxpayers.
While these administrative changes did address the retroactive application beyond a four year period in the past, and did provide some time for taxpayers to address their compliance, the Land Transfer Tax Act now no longer has an effective de minimis rule to assist partnerships and trusts that invest in partnerships that hold land in Ontario. This leaves many legitimate businesses, including pension plans and investment funds, holding real estate in Ontario with challenging compliance obligations.
The amendment results in land transfer tax effectively being paid a second time, first, on the acquisition of real property in Ontario and, second, on changes in partnership interest. And finally, to make matters worse, the same amendments will apply for purposes of the Toronto land transfer tax.
It appears the Ontario Government has simply ignored why it provided the de minimis relief back in 1989.