Canada: New Land Transfer Tax Regulations Enable Quarterly Reporting Periods For Certain Trust And Partnership Unit Trades

On April 26, 2018, the Ontario Ministry of Finance (the "Ministry") released new regulations (the "Regulations") under the Land Transfer Tax Act (the "LTTA") with regards to "qualifying entities," which are trusts or partnerships with 50 or more beneficiaries or partners. The new Regulations appear to be designed to provide an easier means to comply with the LTTA in certain situations involving transacting interests in widely distributed partnership and trust structures. The Regulations are effective retroactive to January 1, 2018.

Existing Rules

Generally, where a partnership or trust owns real property, land transfer tax ("LTT") applies to the transfer of an interest in that partnership or trust unit. This is because the LTTA ignores trust and partnership structures when determining the LTT consequences of transferring beneficial ownership of land. Instead, the LTTA looks through each trust or partnership and imposes LTT on the ultimate corporate or individual partners or unitholders of a trust or partnership structure, who are considered to hold trust or partnership-owned land as tenants-in-common with each other in proportion to their interest in the trust or partnership.

Accordingly, a sale, transfer, or assignment of any part of a beneficial interest in land, including alterations to the ownership structures of trusts and partnerships, or any change in entitlement to or any accretion to a beneficial interest in land (collectively, a "disposition"), trigger the obligation to pay LTT. This obligation rests on the transferee that receives such a disposition, who must report and pay LTT on the disposition by filing a return with the Ministry within 30 days of the disposition. Additionally, every trustee is required under the LTTA to file an informational return with the Ministry within 30 days of becoming aware of such a disposition by the trust's beneficial owners.

New Rules

The Regulations provide for quarterly reporting and payment periods for LTT obligations arising from a disposition resulting when a person acquires an interest in a qualifying entity or when a person's interest in a qualifying entity is increased whether directly or indirectly through a tiered structure involving trusts or partnerships ("Qualifying Dispositions"). For such Qualifying Dispositions, LTT is payable within 30 days after the end of the calendar quarter in which the disposition occurred as opposed to within 30 days of the disposition. Notably, the Regulations apply solely to the dispositions of interests in the qualifying entities themselves; the existing transaction-by-transaction rules continue to apply to actual acquisitions of real property by that qualifying entity.

Administratively, the Ministry has stated that it will accept "consolidated filing" by a representative of a qualifying entity on behalf of partners and beneficiaries who hold an interest in a qualifying entity. Presumably, the province expects such qualifying entities to cause their investors to delegate filing responsibilities to the entities' investment managers.

Applying the Regulations to Partnership Structures

Partnerships benefit from preferential treatment through the de minimis exemption applicable on the acquisition of a less than 5 per cent interest in a partnership in any given fiscal year (the "De Minimis Exemption").1 If the De Minimis Exemption applies to a transfer in partnership interests, that transfer is ignored for LTT purposes. In the event that a partnership is widely distributed such that the De Minimis Exemption typically applies, LTT reporting and payment obligations are significantly reduced.

Where a partner acquires more than a 5 per cent interest in any given fiscal year (through one transaction or several), the exemption is not available and the value of all that partner's acquisitions in that year is subject to LTT (the De Minimis Exemption does not provide for a rebate for the first 5 per cent increase). In such circumstances, if the partnership is a qualifying entity, the new Regulations provide that this LTT can be paid and reported on a quarterly basis for each partner for whom the interest increased beyond the 5 per cent threshold (and the Ministry states that such reporting and payment can be delegated to a representative).

Application for Trust Structures

Generally speaking, dispositions effected through trust structures (with the exception of mutual fund trust as described in subsection 132(6) of the Income Tax Act) do not benefit from any comparable de minimis LTT exemption. To the extent that a given trust structure is a qualifying entity, the beneficiaries of the trust can take advantage of the quarterly reporting periods introduced by O Reg 343/18.

Practical Issues with the New Regulations

One unresolved issue with the new Regulations concerns trustees' informational reporting obligations.

The Regulations' new quarterly payment and filing obligations only extend to those obligations of the beneficiaries. However, the LTTA also requires a trustee holding legal title in land to file an informational return within 30 days of a disposition of a beneficial interest. As the Regulations do not deal with a trustee's obligations to file an informational return, the Regulations may effectively double a Qualifying Entity's compliance obligations — the trustee or nominee of a Qualifying Entity must file transaction-by-transaction informational returns with respect to each acquisition or transfer of a beneficial interest in the trust, then the trust's unitholders (or their delegated representative) may file quarterly returns and payments.

For more information, view the Ministry's commentary on the new regulations.

Footnote

1 O Reg 70/91.

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