All About Estates

Ontario’s Non-Resident Speculation Tax – A Cautionary (Trust) Tale

This post reviews the Ontario “Non-Resident Speculation Tax” (“NRST”), and draws attention to an important possible effect to be aware of on land conveyances involving trusts in the province.  This post is a refresher and update to Corina Weigl’s post in June, 2017, which was posted shortly after the proposal for the tax was released as part of Ontario’s Fair Housing Plan[1] in April, 2017.

THE NON-RESIDENT SPECULATION TAX (“NRST”): A REFRESHER

On June 1, 2017, the new 15% “Non-Resident Speculation Tax” (“NRST”) on select residential land conveyances in Ontario came into force with the Royal Assent of Bill 134, Budget Measures Act (Housing Price Stability and Ontario Seniors’ Public Transit Tax Credit), 2017.[2] Bill 134 amended multiple sections of the Land Transfer Tax Act (“LTTA”).[3] As a result, the NRST became effective and retroactively applicable to all relevant purchases and sales of land that were entered into on or after April 21, 2017.[4] The NRST is computed on the value of consideration, must be paid either before or at the time the conveyance is tendered for registration, and is calculated on applicable conveyances as separate from land transfer tax under section 1 of the LTTA.[5]

The NRST was intended to cool the real estate market in Ontario and support housing affordability by targeting foreign speculators and purchasers of land in areas in and surrounding Toronto.[6] According to a study reported in Maclean’s in 2018, during the first quarter of 2017, about 1 in 6 low-rise houses purchased in the Greater Toronto Area were purchased by investors.[7] This figure was a dramatic nearly 300% increase from the 4.8% of investment purchases in that area only 5 years prior.[8] The data since 2017 do not definitively show a causal effect of the NRST on cooling speculation, but there is some indication that in at least some areas targeted by the NRST, real estate prices and sales have dropped since April 2017.[9]

WHAT TYPES OF CONVEYANCES ARE SUBJECT TO THE NRST?

The NRST only applies to relevant conveyances of “designated land”. That is, it applies only to land containing “at least one and not more than six family residences” in the “Greater Golden Horseshoe” (“GGH”), a specific region of Ontario surrounding Toronto.[10] Below is an image of the GGH provided by the Ministry of Finance, with affected municipalities highlighted.[11] As seen below, this includes some non-urban areas that some consider cottage country.

 

 WHO IS SUBJECT TO THE NRST?

Importantly, the NRST applies only to applicable conveyances to transferees considered a “foreign entity or taxable trustee.”[12] Amendments to section 1(1) of the LTTA provide guidance on who is subject to the NRST:[13]

FOREIGN ENTITY”

A “foreign entity” is defined as either a “foreign national” or a “foreign corporation.”[14]

A “foreign national” is defined in the Immigration and Refugee Protection Act, as either a “stateless” individual or an individual who is neither a permanent resident nor citizen of Canada.[15]

A “foreign corporation” refers to one of the following types of corporations:

“1. A corporation that is not incorporated in Canada

2. A corporation, the shares of which are not listed on a stock exchange in Canada, that is incorporated in Canada and is controlled, directly or indirectly in any manner whatever, within the meaning of section 256 of the Income Tax Act (Canada), by one or more of the following:

i.  A foreign national;

ii.  A corporation that is not incorporated in Canada;

iii.  A corporation that would, if each share of the corporation’s capital stock that is owned by a foreign national or by a corporation described in paragraph 1 were owned by a particular person, be controlled, directly or indirectly in any manner whatever, within the meaning of section 256 of the Income Tax Act (Canada), by the particular person.”[16]

“TAXABLE TRUSTEE”: IMPORTANT EFFECT ON LAND CONVEYANCES INVOLVING TRUSTS

For the NRST, a “taxable trustee” refers to either a trustee of a trust where either at least one trustee could be considered a “foreign entity”, or importantly, where the trustee is not a foreign entity but where the beneficial interest in the land is held by a foreign entity beneficiary.[17] In other words, if land is purchased using a trust, even if a trustee is not considered a foreign entity, the NRST rules imply that even if one beneficiary (even a potential one) could be considered a “foreign entity”, the conveyance could be subject to the NRST.

Trustees acting for three types of trusts are exempt from the NRST: a mutual fund trust[18], a real estate investment trust[19], and a SIFT trust.[20]

ALL-OR-NOTHING

Following from this, in Ontario, if even one transferee of the conveyance is considered a foreign entity, the entire value of the consideration for the conveyance is subject to the NRST.[21] For trusts specifically, this suggests that a trust used to purchase property with even one foreign beneficiary would trigger the 15% tax on the entire value of consideration. Additionally, all transferees are jointly and severally liable for the NRST payment.[22]

One small caveat to the Ontario rule is that, subject to section 6 of the LTTA as amended by Bill 134, there is some discretion as to how much of a conveyance is subject to the NRST if only part of the conveyance is for designated land as defined in the Act. For example, if a conveyance contains property that is part residential property and part commercial land, only the residential component will subject to the NRST.[23]

EXEMPTIONS

Transferees who are Canadian citizens or permanent residents are not subject to the NRST (unless they fall under the taxable trustee definition). Exemptions and rebates are available under sections 4 and 5 of the LTTA for those who may be subject to the NRST. The details of the qualifying criteria for these exemptions and rebates are described in sections 2 to 4 of Ontario Regulation 182/17.

There are three main exemption categories; for all exemptions to be applicable, another transferee must exist who is not subject to the NRST either as a Canadian citizen, permanent resident, or exempt as a nominee or protected person, and the transferees must occupy the property as their principal residence.[24]

The exemptions include (with additional qualifying criteria as applicable at the time of purchase and sale):

1) Nominees (under the Ontario Immigrant Nominee Program): if the nominee either intends to or has already applied for permanent residency.[25]

2) Protected Persons (under the Immigration and Refugee Protection Act).[26]

3) Spouse:[27] if one spouse is not subject to the NRST due to Canadian citizenship or permanent residency, or one of the above exemptions.[28]

Recall, however, that any one transferee qualifying as a foreign entity or taxable trustee and not falling under any of the above exemptions, will subject the purchase and sale to the NRST regardless of whether the other transferees qualify under the above exemptions or would not otherwise be subject to the tax. For example, if a couple applies under the spouse exemption, and if they purchase applicable land with a third party who is a foreign national, the conveyance becomes subject to NRST.[29]

REBATES

For those subject to the NRST who do not qualify for an exemption, there are limited opportunities for a rebate as described in sections 5 to 8 of Ontario Regulation 182/17. For those affected, the person is obligated to pay NRST up-front. Rebates can be requested by writing within four years if the person has occupied the property as a principal residence since at least 60 days after closing.[30]

The three types of rebates include (with additional qualifying information):

1) Permanent Residency: if a foreign national attains permanent residency within four years of the purchase and sale and applies for the rebate within 90 days of attaining permanent residency.[31]

2) Foreign Nationals Working Full-Time in Ontario: if a foreign national has worked full time for one year after tendering the conveyance for registration and if the foreign national is the only transferee (with the only exception that a spouse can be a second transferee).[32]

3) International Students: if the student attends an “approved institution”[33] for two years after tendering the conveyance for registration and if the student is the only transferee (the spousal exception also applies here).[34]

“PRINCIPAL RESIDENCE”

As noted by Corina Weigl in 2017, Ontario has provided no guidance on what “principal residence” means in the context of the NRST. As of the time of publication, to the knowledge of the author, there has been no case law on this point.

The only guidance present is the federal definition and qualifying criteria of “principal residence” for income tax purposes, which can be found here and here, and the British Columbia definition of “principal residence”, which applies to their parallel tax. “Principal residence” is defined in the British Columbia legislation as, “the usual place that a person makes their home…where they live and conduct their daily affairs, like paying bills and receiving mail…generally the residence used in government records for things like income tax, Medical Services Plan, driver’s license and vehicle registration.”[35] It remains to be seen what is required to qualify under the exemption and rebate rules for the NRST in Ontario with respect to the requirements to demonstrate that a property has been used as a “principal residence.”

HOW MUCH NRST HAS BEEN COLLECTED?

Over the past two years, almost $400 million in NRST has been collected for 3,181 land conveyances subject to the NRST under the Land Transfer Tax Act.[36] Of this collected, $201 million has been collected for 1,618 conveyances subject to the NRST in the City of Toronto (about 51%).[37] Another popular location for these conveyances is York, where just over $100 million in NRST was collected on 651 conveyances subject to the NRST (about 25%).[38]

LOOKING FORWARD

As noted, it may be too early to tell what role the NRST has played in adjusting the real estate market. However, there is some indication that the real estate market has cooled in the targeted areas.[39]

As of April 24, 2017, as part of the Fair Housing Plan, Ontario now requires persons purchasing or acquiring property of the same type as is subject to the NRST to disclose additional information.[40] For example, persons may be required to disclose information about the property itself, the person’s intended use for the property (e.g. to be used as principal residence, rented out, etc.), or if applicable, information about related trusts or corporations.[41] The province hopes to collect this information to shed light on trends in the real estate market to “support evidence-based policy development” and enforce land transfer tax.[42]

For more general information and frequently asked questions about the NRST, please the consult the Ministry of Finance Bulletin.

BUYER (ADVISORS) BEWARE!!

As advisors, it has always been important to carefully consider with clients who should be included in the class of beneficiaries when drafting a trust. As noted in recent blog posts, this will have an even larger import in light of the new trust reporting rules in the Income Tax Act which will come into effect in 2021. Added to this now is the additional consideration merited with respect to any acquisitions of relevant real estate by non-exempt trusts, including cottage trusts and residence trusts, whether newly-drafted or already-existing. Defaulting to an over-inclusive class of beneficiaries may be ill-advised in certain circumstances, as it could have unanticipated and potentially quite costly consequences.

 

[1] See Ontario, “Ontario’s Fair Housing Plan” (20 April 2017), online: Ontario <news.ontario.ca/mof/en/2017/04/ontarios-fair-housing-plan.html>.

[2] See Schedule 1 in Budget Measures Act (Housing Price Stability and Ontario Seniors’ Public Transit Tax Credit), 2017, SO 2017, c 17 [Bill 134].

[3] See ibid, amending the Land Transfer Tax Act, RSO 1990, c L 6 [LTTA].

[4] See LTTA, ibid.

[5] See ibid at s 2(2.1); Ministry of Finance, “Non-Resident Speculation Tax” (1 April 2019), online: Ministry of Finance <www.fin.gov.on.ca/en/bulletins/nrst/> [MOF – NRST].

[6] See Ontario, supra note 1; and for articles on the Fair Housing Plan, Ontario Chamber of Commerce, “Ontario’s Fair Housing Plan” (20 April 2017), online: <occ.ca/rapidpolicy/ontarios-fair-housing-plan/>;  The Canadian Press, “The 16 measures in Ontario’s new housing plan”, Maclean’s (20 April 2017), online: <www.macleans.ca/economy/the-16-measures-in-ontarios-new-housing-plan/>.

[7] Joe Castaldo, “How speculators inflated the Toronto housing bubble”, Maclean’s (12 April 2018), online: <www.macleans.ca/economy/realestateeconomy/how-speculators-inflated-the-toronto-housing-bubble/>.

[8] See ibid.

[9] Alexandra Posadzki, “Greater Toronto Area home sales plummet after foreign buyers’ tax”, CTV News (5 June 2017), online: <www.ctvnews.ca/business/greater-toronto-area-home-sales-plummet-after-foreign-buyers-tax-1.3443782>; Greg Bonnell, “Winners and losers from Ontario’s Fair Housing Plan, one year later”, BNN Bloomberg (20 April 2018), online: <www.bnnbloomberg.ca/winners-and-losers-from-ontario-s-fair-housing-plan-one-year-later-1.1062034>.

[10] See LTTA, supra note 3 at ss 1(1), 2(2.1).

[11] See MOF – NRST, supra note 5; the GGH includes: City of Barrie, County of Brant, City of Brantford, County of Dufferin, Regional Municipality of Durham, City of Guelph, Haldimand County, Regional Municipality of Halton, City of Hamilton, City of Kawartha Lakes, Regional Municipality of Niagara, County of Northumberland, City of Orillia, Regional Municipality of Peel, City of Peterborough, County of Peterborough, County of Simcoe, City of Toronto, Regional Municipality of Waterloo, County of Wellington, and Regional Municipality of York.

[12] See LTTA, supra note 3 at s 2(2.1); PTTA, supra note 6 at s 2.02.

[13] Very similar definitions are found in the British Columbia PTTA, supra note 6 at s 2.01.

[14] See LTTA, supra note 3 at s 1(1).

[15] See ibid; Immigration and Refugee Protection Act, SC 2001, c 27 at s 2 (1); “permanent resident means a person who has acquired permanent resident status and has not subsequently lost that status under section 46.”

[16] As directly cited from the LTTA, supra note 3 at s 1(1).

[17] See ibid.

[18] As defined in the Income Tax Act, RSC, 1985, c 1 at s 132 (6) [ITA].

[19] As defined in ibid at s 122 (1).

[20] As defined in ibid.

[21] See MOF – NRST, supra note 8.

[22] See ibid. This contrasts with the similar tax in British Columbia, which is applied only to the foreign entity transferee’s “proportionate share” of the fair market value of the property, which is defined as  “the percentage interest that you are registering on the title with the Land Title Office.”

[23] See MOF – NRST, supra note 8.

[24] See O Reg 182/17.

[25] See O Reg 182/17, s 2; see MOF – NRST, supra note 8 for an illustration.

[26] See O Reg 182/17, s 3; see MOF – NRST, supra note 8 for an illustration.

[27] Spouse is defined under the Family Law Act, RSO 1990, c F 3, s 29; see MOF – NRST, supra note 5.

[28] See O Reg 182/17, s 4.

[29] See MOF – NRST, supra note 5.

[30] See O Reg 182/17.

[31] See O Reg 182/17, s 5.

[32] See O Reg 182/17, s 7; “full time” is defined in s 7(3).

[33] See O Reg 70/17, s 8 for the definition of “approved institution”.

[34] See O Reg 182/17, s 6.

[35] See British Columbia, “Glossary for Property Taxes”, online: British Columbia <www2.gov.bc.ca/gov/content/taxes/property-taxes/glossary-faq/glossary#principal-residence> [BC – Glossary].

[36] Calculated up to March, 2019, as per: Ministry of Finance, “Non-Resident Speculation Tax Collected January 1, 2019 to March 31, 2019” (14 May 2019), online: Ministry of Finance <www.fin.gov.on.ca/en/bulletins/nrst/nrst-collected.html>; Ministry of Finance, “Non-Resident Speculation Tax Collected April 21, 2017 to November 17, 2017” (14 May 2019), online: Ministry of Finance <www.fin.gov.on.ca/en/bulletins/nrst/nrst-collected-archive.html>; Ministry of Finance, “Non-Resident Speculation Tax Collected November 18, 2017 – February 16, 2018” (14 May 2019), online: Ministry of Finance <www.fin.gov.on.ca/en/bulletins/nrst/nrst-collected-archive2.html>; Ministry of Finance, “Non-Resident Speculation Tax Collected February 17, 2018 to December 31, 2018” (14 May 2019), online: Ministry of Finance <www.fin.gov.on.ca/en/bulletins/nrst/nrst-collected-archive3.html>.

[37] See ibid.

[38] See ibid.

[39] Alexandra Posadzki, “Greater Toronto Area home sales plummet after foreign buyers’ tax”, CTV News (5 June 2017), online: <www.ctvnews.ca/business/greater-toronto-area-home-sales-plummet-after-foreign-buyers-tax-1.3443782>; Greg Bonnell, “Winners and losers from Ontario’s Fair Housing Plan, one year later”, BNN Bloomberg (20 April 2018), online: <www.bnnbloomberg.ca/winners-and-losers-from-ontario-s-fair-housing-plan-one-year-later-1.1062034>.

[40] See Ministry of Finance, “Prescribed Information for the Purposes of Section 5.0.1 Form” (12 July 2017), online: Ministry of Finance <www.fin.gov.on.ca/en/tax/ltt/prescribedinfo.html>.

[41] See ibid.

[42] See ibid.

About Maureen Berry
Maureen Berry is a partner in the Trusts, Wills, Estates and Charities group at Fasken. Maureen’s practice is focused on wills, estate planning, domestic and international trusts, private corporation taxation, and executive compensation. Maureen also advises charities and non-profit organizations. Working with Canadian and international families, firms, corporations and charitable organizations, she provides advice on all aspects of private client matters. She is a leading expert in the fields of tax law and estate planning. As an Adjunct Professor at Osgoode Hall Law School, she teaches Advanced Estate Planning. Maureen has previously taught corporate tax and international tax at the University of Toronto and Western University, along with the Bar Admission course for up-and-coming lawyers.

0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *