COMPANIES FACE LAND TRANSFER TAX HIT
Largest-ever transaction under scrutiny
• The Ontario government is threatening to go as far back as 1989 to target commercial entities, including two of Canada’s largest companies, that have been avoiding land- transfer taxes through what is now a disputed legal loophole, according to a ministry notice sent out this month.
The Financial Post has l earned that the l argest transaction in Canadian history, the $ 1.27- billion sale of Scotia Plaza in Toronto, and the $ 400- million real estate initial public offering in 2013 by Loblaw Cos. Ltd. that created Choice Properties Real Estate Investment Trust, are at the heart of the dispute.
Aird & Berlis LLP, a Toronto law firm, issued an alert to clients warning them about the far- reaching tax complications, which could see the province demanding millions of dollars in back taxes for commercial property transactions in which it alleges a land- transfer fee has yet to be paid.
Like residential properties, commercial transfers require a tax be paid to the province and, where applicable, also to the City of Toronto, which has its own assessment.
“It’s a tax grab,” said one source with knowledge of the dispute. “What was created (to avoid the taxes) was perfectly legal and now the province is going back retroactively to change the rules.”
Louise Summerhill, a lawyer with Aird & Berlis, said the provincial position will be very hard to administer.
“They are probably going back 17 years to give credibility to their position. Apparently there are some transactions that have occurred on the street they feel were flagrantly done to avoid land transfer taxes,” she said.
While Ontario’s land-transfer tax is payable on all transactions involving land, there are a few exceptions.
One e xception is an exemption, provided by regulation, for small changes in partnerships that hold land.
The Ministry of Finance contends some taxpayers have attempted, inappropriately, to use this exemption to avoid tax on large transactions, ministry spokesman Christian Bode said.
Amendments to the regulation clarify the use of the exemption in certain circumstances, “to ensure the integrity of the ( land- transfer tax) system and maintain a level playing field with those who have paid tax in similar situations,” he said.
The exemption specifically deals with situations where a person acquired an interest in a partnership that did not give rise to an entitlement of more than five per cent of the profits of the partnership in a particular fiscal year of the partnership. The reason behind the exemption is the province did not want to tax immaterial transfers of partnership interests.
Some firms appear to be using that interpretation to avoid land- transfer taxes. “As an example, you might have 20 companies each buy five per cent of a partnership and then amalgamate afterwards,” Summerhill said. In that scenario, the transaction would not result in any land- transfer taxes triggered because of the sale.
The lawyer said the new interpretation applies to any trust or partnership that has acquired a partnership interest of five per cent or less in a partnership that owns land.
The province specifically mentions that such purchasers as real estate investment trusts cannot take advantage of the exemption. Bank of Nova Scotia’s head office complex in Toronto was sold to REITs that fit that category, H& R Real Estate Investment Trust and Dundee Real Estate Investment Trust, which purchased onethird and two- thirds of the property, respectively.
H&R REIT and Dundee officials could not be reached for comment. Choice Properties REIT officials could also not be reached.
Summerhill s ai d s he doesn’t known how the province can take the position that it can go back 17 years, because there is a general law you can only go back four years to assess taxes unless a filer is negligent.
“If I go back five years and the law said I could rely on the exemption, how could I be negligent?” said Summerhill, adding that her understanding is some recent transactions have been structured to take advantage of the five-per-cent rule.
The impact is not small. On the Scotia Plaza deal, the 1.5- per- cent provincial tax would be almost $ 20 million. And that doesn’t include the city of Toronto’s land- transfer tax. The law firm expects the city will follow the province’s lead and seek retroactive taxes.
Choice Properties has a portfolio worth about $7 billion, so the tax implications could be enormous depending on how Loblaw structured the deal. A source indicated the province is looking at Choice Properties for land transfer owed retroactively.