In general, land transfer tax is generally triggered both on the conveyance and on an unregistered disposition of a beneficial interest in real property. Section 2(1) of Ontario’s Land Transfer Tax Act R.S.O. 1990, c. L.6, (the “Act”) states that land transfer tax is payable by “[e]very person who tenders for registration in Ontario a conveyance by which any land is conveyed to or in trust for a transferee shall pay when the conveyance is tendered for registration or before it is tendered for registration…” Similarly, Section 3(2) of the Act states that “a disposition of a beneficial interest in land, tax at the rates otherwise determined under section 2 is payable to the Minister on the thirtieth day after the date of the disposition as if the disposition were a conveyance of land tendered for registration.”
For dispositions of real property where control of the transferor and transferee corporations as well as the interest in the real property remain within the same corporate group for thirty-six months following such disposition, the Act sets out a procedure for applying for a deferral of land transfer tax, with the potential of eventual land transfer tax cancellation provided certain criteria is satisfied.
The land transfer tax consequences of the dispositions between affiliated corporations discussed focus on Ontario’s land transfer tax. Note that properties situated in the City of Toronto will also be subject to municipal land transfer tax and similar consequences will follow.
Dispositions between Affiliates
It is not uncommon for corporate clients to incorporate a new corporation and subsequently transfer their beneficial interest in real property to the new corporation. Although the conveyance does not change the registered ownership of the real property, as noted above, the disposition of beneficial interest triggers land transfer tax payable within 30 days of said conveyance of beneficial interest.
Where the transfer of beneficial interest occurs between affiliated companies and thereby remains in the same corporate group, such transfer creates no change in the core economic interest of the real property. Recognizing this, the Act provides for the deferral and possible cancellation of land transfer tax otherwise payable on dispositions of real property.
Subsection 3(9) of the Act provides for deferral of land transfer tax payable for unregistered dispositions of beneficial interest in real property between affiliated companies, where “a corporation is an affiliate of another corporation if one of them is the subsidiary of the other, if both are subsidiaries of the same corporation or if each of them is controlled by the same person or persons.”
In order to qualify for the deferral, the disposition cannot be registered and within thirty days of such disposition, the affiliated corporations must file an application to the Minister of Finance. The application must include an undertaking that for a period of at least thirty-six consecutive months immediately following the date of the beneficial conveyance:
(i) the transferor and transferee corporations will remain affiliates of each other, and
(ii) the beneficial interest in the land will continue to be owned by the corporation acquiring the beneficial interest on the disposition or by a corporation that is an affiliate of that corporation and with the corporation which made the disposition of the beneficial interest in the land.
The deferral application also includes a Return on the Acquisition of a Beneficial Interest in Land and various real estate and corporate records of the affiliated transferor and transferee. The applicant must also submit security acceptable to the Minister, which at the present time, constitutes a letter of credit in the amount of land transfer tax payable together with applicable interest for the thirty-six month period. Where applicable, a similar application is also submitted to the City of Toronto for deferral of the municipal land transfer tax.
Cancellation of Land Transfer Tax
Deferral of land transfer tax may lead to an eventual cancellation of the land transfer tax and return of the security posted, provided that:
(a) the Minister is of the opinion that the undertaking has been satisfied and no conveyance or instrument evidencing the disposition of the beneficial interest in land has been registered;
(b) a conveyance or instrument or electronic document evidencing the disposition of the beneficial interest in land to the corporation has been registered and the tax payable under subsection 2(1) has been paid; or
(c) there has been a disposition of the beneficial interest in the land, or a conveyance of the land, by the corporation, or by an affiliate of the corporation, to a person who is not an affiliate of the corporation and tax has been paid by that transferee.
Any violation of the above conditions will invalidate the deferral application and land transfer tax will become immediately due and payable, resulting in the Ministry and the City of Toronto seizing upon the letters of credit.
Land Transfer Tax Savings
With careful planning and attention to the sequence of conveyances, transfer of real property between affiliated companies may be completed on a deferred land transfer tax basis and eventually the cancellation of land transfer tax, realizing significant savings for corporate clients.
This article should not be relied upon as legal advice - the comments may not be applicable to you and may not be up to date. If you have any questions, you should contact a lawyer.