21 April 2017

Nonresident and speculation taxes: the return of an idea

The Grits in Ontario have announced a nonresident speculation tax that will be effective as of today, 21 April 2017. We'll have to wait until next week to see the implementing bill's details, as the Legislative Assembly is currently in recess, but the announcement can be seen here. Briefly, it will charge a tax of 15% of the purchase price upon closing, and will cover the following real estate transactions:
  •  the transfer of land which contains at least one and not more than six single family residences,
  • being acquired by an individual who is neither a Canadian citizen nor a permanent resident of Canada, or by a corporation not incorporated in Canada or which is incorporated in Canada but is controlled in whole or in part by a foreign national or other foreign corporation not listed on a Canadian stock exchange, or is controlled directly or indirectly by a foreign entity for the purposes of section 256 of the Income Tax Act (Canada).
A foreign national who receives confirmation under the Ontario Immigrant Nominee Program to immigrate to Canada, or who is conferred the status of “convention refugee” or “person in need of protection” (“refugee”) under the Immigration and Refugee Protection Act at the time of the purchase or acquisition, or who purchases a property with a spouse who is a Canadian citizen, permanent resident of Canada, “nominee” or “refugee, will be exempt from the tax.

Tax will be rebated where the foreign national:
  • becomes a Canadian citizen or permanent resident of Canada within four years of the date of the purchase or acquisition;
  • is a student who has been enrolled full-time for at least two years from the date of purchase or acquisition in an “approved institution”, as outlined in Ontario Regulation 70/17 of the Ministry of Training, Colleges, and Universities Act; or
  • has legally worked full-time in Ontario for a continuous period of one year since the date of purchase or acquisition.


We've been here before


The Land Speculation Tax

In 1974, Ontario imposed the Land Speculation Tax, which had a dramatic effect on a previous round of speculation. It had a short history, and was eliminated completely by 1979. The legislative history was as follows:
  • 3 June 1974: original imposition, retroactive to 9 April 1974, of a 50% tax on the capital gain of most real property;
  • 10 December 1974: technical amendments, together with a reduction of tax to 20%, after Ottawa refused to allowed it as a closing cost for purposes of calculating a capital gain under the Income Tax Act, all of which were retroactive to the original imposition;
  • 6 February 1975: further technical amendments retroactive to the original imposition;
  • 12 July 1977: various technical amendments, retroactive to 20 April 1977;
  • 24 November 1978: the tax ceased to be imposed as of 24 October 1977 with respect to transactions after that date, or which were in the process of being closed at that time. In addition, any statutory liens for tax liability not registered against title for any property as of 1 January 1979 were deemed to be discharged as of that date.
 Its scope was broad:
  • it covered the disposition of any real property in Ontario, other than
    • a mineral resource property, 
    • a principal residence, 
    • property less than 20 acres in size that was used as a principal recreation property,
    • property transferred from one family member to another,
    • property transferred to shareholders upon the winding up of a corporation in which more than 50% of the assets consisted of designated land,
    • a tourist resort, 
    • property upon which a building or structure was constructed (or where renovation occurred at a cost of at least 20% of the property's cost or fair market value), 
    • property disposed by a municipality, 
    • property acquired by statutory notice, or
    • property sold to the Crown or one of its agencies.
  • the proceeds of disposition consisted of:
    • the selling price of the property,
    • where transferred under the terms of an option, the total of the option price and the exercise value, or
    • the fair market value of any other type of disposition, but
    • transfer under the terms of a will was not included.
  • the proceeds were deducted from the fair market value of the property as at 9 April 1974, or at the selling price (or fair market value of the transfer) if acquired after that date, to arrive at the taxable value on which tax was charged.
  • a deduction was allowed for every 12 months the property was held, for the lesser of 10% of the starting value of the property or  the total of its maintenance costs and the closing costs upon its disposition;
  • where the land was used for farming, a further deduction of 10% of the starting value, calculated at compound interest, was allowed for periods preceding 9 April 1974 in which the property was held;
  • the liability for tax constituted a lien upon the property which did not need to be registered against title, which continued until the Minister issued a certificate that no lien would be claimed with respect to a specific disposition.
As noted at the top of this section, the effect was sudden and quite brutal, causing many deals to collapse. It was repealed at a time when mortgages shot upwards to over 20%, which proved to be a more effective damper on housing prices.

The Land Transfer Tax (nonresident rate)

This had a very interesting history.

At the same time in 1974, a rate of 20% was imposed on sales of real estate to non-residents occurring after 9 April 1974. In that regard:
  • a "nonresident person" was defined as:
    • an individual not ordinarily resident in Canada, or who, if ordinarily resident in Canada, was neither a Canadian citizen nor a permanent resident, and an individual ordinarily resident in Canada included those who had sojourned in Canada for 366 days in the 24 months preceding the transaction, those lawfully admitted into Canada for permanent residence, or members of the Canadian Forces, the foreign service or workers in an international development assistance programme required to be stationed outside Canada, including the spouses thereof;
    • a partnership, syndicate, association or any other kind of organization, where more than one-half of the members or in which beneficial interests of more than 50% of the partnership's property was held by nonresident persons;
    • a trust established by a nonresident person, or where nonresident persons held more than 50% of the beneficial interests in it; and
    • a nonresident corporation. being one where 50% of the voting rights were owned by nonresident persons or where 25% of the voting rights were owned by one nonresident person (or where direct or indirect control by one or more nonresident persons existed in such circumstances), or where more than one-half of the corporation's directors were nonresident persons.
  • such rate was also charged where a nonresident person held land in joint tenancy with a resident person, or where land conveyed to resident persons could not be readily distinguished from land conveyed to nonresident persons;
  • deferral or remission could be made where the Minister was satisfied that the land was being acquired for commercial, industrial or residential development with resale to persons who were not nonresident persons.
The scope of the tax was significantly restricted on 20 April 1977, when the nonresident rate was no longer applied to property designated under a zoning bylaw or order to commercial or industrial purposes, or was assessed for residential assessment, or was lawfully used or occupied for commercial, industrial or residential purposes. However, this did not cover land that was assessed or used for farming and agricultural purposes, woodlands, recreational land or as an orchard. The rate was finally abolished on 7 May 1997.

Then compared to now

The 1974 measures had a more pronounced effect, and were much broader in scope, when compared to the 2017 proposals. The newer ones appear to be tailored more for effect, and, dare I say, for pandering for votes in the coming 2018 election. It will be interesting to see what transpires in the coming weeks.

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