A newly filed provincial regulation hints that Ontario’s Ministry of Finance plans to pursue REITs and limited partnerships for retroactive land transfer tax dating back nearly 27 years. The February 18 amendment to the Land Transfer Tax Act cancels the ‘de minimis’ tax exemption that individual or corporate taxpayers previously enjoyed when they acquired a beneficial interest in land through trusts or partnerships, provided their acquired new interest equated to no more than 5 per cent of the annual profits of that partnership.
“The exemption is not available when a REIT or another type of trust becomes a partner in a partnership that holds land. Similarly, the exemption is not available when a partnership becomes a partner in another partnership that holds land,” states a background document posted on the Ministry of Finance website.
The suddenness of the new ruling and the regulation’s backdating of tax obligations to July 19, 1989, have caught both tax experts and real estate industry advocates off guard. “This was announced without consultation, stakeholder input or advance notice,” says Brooks Barnett, manager of government relations with the Real Property Association of Canada (REALpac).
“It is highly unusual for the government to make such a significant change to tax legislation on a retroactive basis,” note lawyers Andrew Spiro and Bryan Bailey in an advisory from Blake, Cassels & Graydon LLP.
Lawyers Louise Summerhill and Jack Bernstein with Aird & Berlis LLP estimate the heretofore permissible exemption has been legitimately employed thousands of times in the decades since David Peterson’s Liberal government enacted it. This potentially translates into hundreds of millions of dollars — calculated at 1.5 per cent of sales values — provincial tax collectors could now be targeting.
“We view the retroactivity as particularly offensive as a matter of public policy,” asserts REALpac’s chief executive officer, Michael Brooks. “We continue to gather impact statements from our members, and liaise with members of the accounting and legal communities to develop our position.”
Looking to the future, Summerhill and Bernstein foresee still more costs. “There is no word yet as to whether the amendment will be mirrored in the legislation for the City of Toronto land transfer tax, but we presume that it will be,” they state in a February 22 bulletin.
Meanwhile, the land transfer tax exemption will remain in place for land deals involving family businesses or related to pipelines and/or surface and mineral rights.