Written By Jane C. Helmstadter and Martin A.U. Sorensen
Since 1989, the transfer of a partnership interest has been treated by the Ministry as a transfer of an interest in the land owned by that partnership, leading to the transfer being taxable under Section 3 of the Act. The old regulation (O. Reg. 70/91) provided for an exemption, known as the de minimis exemption, if the transferred interest in the partnership did not carry with it a right to an increase of more than five percent of the profits of the partnership. This permitted land to be purchased indirectly without payment of land transfer tax if the interest purchased was a partnership interest so long as the purchasers each acquired a five-percent or smaller interest. This was most often achieved by making the purchaser of the partnership interest a partnership or a trust. Although the purchasing partnership or trust would be treated as a single entity for many purposes, it would be treated as a co-ownership of the partners or the trust beneficiaries for the purposes of the Act, allowing a purchasing partnership or trust to be treated as multiple separate purchasers of the land held by the target partnership.
In its 2014 provincial budget, the province implemented a general anti-avoidance rule (GAAR) effective for transactions completed after May 1, 2014. The new rule was primarily intended to curb what the Ministry perceived as abuses of the de minimis exemption. In particular, the related budget materials expressed concern that some transaction structures attempted to use the de minimis exemption in a manner inconsistent with its intent as the exemption was meant to apply to small changes in the ownership of partnerships that held land and was not to be used as a means to acquire land without payment of tax.
Evidently, the GAAR provision was not viewed as adequate to stop the use of de minimis exemption as a means of reducing the burden of land transfer tax on the taxpayer and so the new retroactive regulation has been promulgated.
The new regulation provides that if a partnership or trust, such as a REIT, acquires an indirect interest in land by purchasing an interest in a partnership, the de minimis exemption does not apply. The purchasing partnership or trust is treated as a single entity and the tax is payable. It appears that this result applies even if the purchasing partnership or trust acquires less than five percent of the target partnership in the aggregate.
This regulation not only has an impact on future commercial transactions involving partnerships and trusts, but means that parties may be required to re-examine transactions completed from July 19, 1989, onward by partnerships in which they were partners. The Ministry has a period of four years after the day tax became payable to reassess tax. If reassessment does not take place during this four-year period then the Ministry loses the ability to reassess unless the taxpayer has made a negligent or fraudulent misrepresentation or has failed to deliver a tax return. The exception relating to failure to deliver a tax return may give rise to significant issues in the context of the new retroactive regulation. Under the old regulation, since section 3 of the Act did not apply if the de minimis exemption was applicable, no tax return was required.
One result of making the regulation retroactive is that the filing of a tax return may now be viewed as having been required within 30 days after completion of the transaction. Since this would not typically have been done, it is possible that the Ministry will take the position that the limitation period has not yet started to run. If the Ministry takes this position, parties who completed their transactions in compliance with the old regulation will now find themselves subject to taxes and interest (and perhaps even penalties) under the new regulation for transactions stretching back to 1989.
City Of Toronto By-Law No. 1423-2007, imposes municipal land transfer tax that parallels the provincial tax. The by-law has its own de minimis exemption. While the city has not yet amended the by-law to change its de minimis exemption retroactively, it seems likely that it will do so, compounding the problem.
Canadian courts have generally acknowledged that retroactive legislation by the legislature is legal, even as in many cases they have described it as "undesirable" and "inappropriate". It is less clear whether the Lieutenant Governor in Council (who makes the regulations under the Act) can use regulations to retroactively change the fundamental rules that have been in place for the last 26 years, to the clear detriment of taxpayers. We would certainly expect challenges to be made if the Ontario Ministry of Finance seeks to assess additional tax, interest or penalties in relation to completed transactions on this basis.
We understand that certain professional organizations are already considering making a submission to the Ontario Minister of Finance regarding this fundamental change to Ontario's land transfer tax regime.