Tax Now, Ask Questions Later

In a press conference at the end of October 2016, Premier Wynne categorically rejected the adoption of British Columbia’s Foreign Buyer Tax which imposed a 15 per cent surcharge on foreign buyers in the Greater Vancouver area. At the time, she said “We’re not going to go down the road that British Columbia has gone down…I’m not interested in doing something that would have an unintended consequence in Ontario, something that was designed for a totally different market.”

Most commentators, this author included, determined that her statement was bold enough and unequivocal enough to dispel the rumors that Ontario might also soon impose a significant land transfer tax hit on foreign real estate buyers. Alas, how wrong we were. On April 21, 2017, the Ontario government reversed itself by introducing a 15 per cent Non-Resident Speculation Tax which, while having a different title, was, for all intents and purposes, identical to the British Columbian Foreign Buyer Tax.

Of course, the geographic scope changed somewhat. Instead of a “Greater [City] Area,” Ontario’s new Non-Resident Speculation Tax involves a broad swath of Southern Ontario called the Greater Golden Horseshoe, a geographic area running from Waterloo/Kitchener/Cambridge in the west, Midland in the north, Peterborough in the east, and along the Niagara Peninsula all the way to Niagara Falls in the south. The amount of the tax, a whopping 15 per cent above the regular land transfer tax payable, is identical to the amount charged to foreign buyers in Vancouver.

The name of the tax is also a bit of a misnomer. Although the Non-Resident Speculation Tax implies a “residency” criteria (which has, historically, meant “residency” based on connection to the province for income tax purposes), the tax is actually exigible based on a “nationality” criteria (in other words, on the colour of one’s passport, whether or not they are otherwise resident of the province for income tax purposes). Likewise, although the Non-Resident Speculation Tax implies that it is a “speculation” tax, it does not operate based on speculation principles because there is no trigger based on when the property is re-sold. The tax is triggered on acquisition only, whether the foreign buyer holds it forever or flips it the next day. Indeed, if anecdotal evidence is right, most foreign buyers are actually acquiring Canadian real estate as long term investments and are not actively flipping their properties, yet the Non-Resident Speculation Tax will be payable by those foreign buyers anyway.

The even greater irony, and one that is almost lost on the general public given the hoopla of the Non-Resident Speculation Tax, is the fact that the provincial government had announced a data-gathering exercise to determine, amongst other things, the extent of foreign ownership in the province. This data gathering exercise is colloquially referred to as the “5.0.1 Process” based on the section of the Land Transfer Tax Act that calls for comprehensive data collection. The 5.0.1. Process came into effect on April 24, 2017, three days after the Non-Resident Speculation Tax. So, the government mimics the British Columbia Foreign Buyer Tax before it has any hard data on the extent of foreign ownership in Ontario, and after it has publically stated that it would not implement such a tax! While resident Ontarians may feel immune to the process, they would be wrong. The 5.0.1 Process is not restricted to foreign buyers or to the Greater Golden Horseshoe: it collects data from all purchasers of Ontario residential or rural land, whether they are local or foreign buyers. Furthermore, the 5.0.1 Process goes far beyond residency and asks a host of questions about the proposed use of the real estate and the true beneficial ownership of the real estate, information that the government has never gathered before (Big Brother conspiracists take note!).

Unlike the British Columbia Foreign Buyer Tax, Ontario’s Non-Resident Speculation Tax grandfathered all binding agreements of purchase and sale that had been entered into prior to the announcement of the tax. This was well thought-out, and prevented the “race to the Registry Office” that followed the announcement of the British Columbia Foreign Buyer Tax and which almost crashed B.C.’s land registry office computers.

Finally, in Budget 2017 unveiled at the end of April, the provincial government announced that it would also be going after “flips,” which the budget defined as “the practice of entering into a contractual agreement to buy a residential unit and assigning it to another person prior to closing…[including] arrangements in which one party substitutes another party in a contract to buy a residential unit.” Again, this is not limited to foreign buyers or the Greater Golden Horseshoe: it seems like any flip, anywhere, by anybody is the behaviour being targeted. The exact mechanism of how the government is going to identify a flip was not announced in the budget, although it was clear that it would also be through the Land Transfer Tax process. Similarly, the penalties for “flips” were not disclosed, just the fact that the government would be gathering data on such transactions. Curiously, the definition for “flips” in the budget also expressly contemplates the simple re-direction of title on closing, something which happens frequently in residential deals and which most real estate observers would not intuitively have considered to be a “flip.”

The staggered timing of these amendments to Land Transfer Tax is also baffling, at least to this author. The 5.0.1. Process was announced first, in mid-April. The Non-Resident Speculation Tax was announced about a week later, but with an effective date making it payable before the 5.0.1. Process even started. The war against “flips” was announced as part of the budget, which came a week after the announcement of the Non-Resident Speculation Tax. There is surely some method to the madness, but I leave that strategizing to the political wonks.

In the meantime, Ontario’s real estate lawyers start the height of the 2017 residential closing season subject to a myriad of new Land Transfer Tax related provisions, none of which anybody saw coming.

Megan J. Lem is a corporate lawyer in the Toronto office of Oslers LLP. This article reflects the opinions of the author alone.

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