A person who purchases or acquires real property in Ontario is typically required to pay land transfer tax. However, there are a number of exceptions to this general rule. One exception can arise when real property is transferred from an estate to a beneficiary. No land transfer tax is payable where there is only one beneficiary entitled to the real property (i) under the terms of a Will or (ii) in cases where there is no Will, pursuant to the laws of succession.
For example, a Will might provide for only one beneficiary, or there might only be one person entitled to an estate’s property through the operation of the Succession Law Reform Act. In these cases, the real property can be transferred to the beneficiary without incurring land transfer tax. Alternatively, a Will might provide for multiple beneficiaries, but with only one beneficiary entitled to the residue of the estate. If the real property forms part of the residue, it can be transferred to the sole residuary beneficiary without incurring land transfer tax. In other cases, a Will might provide for multiple beneficiaries, but expressly state that certain real property is to be devised to only one particular beneficiary. In that case, the property can be transferred to the named beneficiary without attracting any land transfer tax. The emphasis in all cases is that the transferee is the sole beneficiary entitled to the real property under the terms of the Will or the laws of succession. Whenever that occurs, no land transfer tax is payable.
In many cases, however, there will be multiple beneficiaries entitled to real property. Where the beneficiaries agree that the real property will be transferred to only one of these beneficiaries, land transfer tax will be payable by that one beneficiary on the transfer. Nevertheless, there is a partial exception available which can result in significant savings for the beneficiary who receives the real property.
Consider a common situation where a parent’s Will provides that all of the estate’s assets are to be distributed to his/her three children in equal shares. In addition to personal property, the estate’s assets include a cottage property with a value of $1.5 million. The three children therefore each hold 1/3rd beneficial interests in the cottage and agree that the cottage will be transferred to only one of them, named Alex. In exchange for receiving title to the cottage alone, the children also agree that Alex will relinquish her right to certain other assets in the estate. In this situation, does Alex have to pay land transfer tax upon the transfer of the cottage?
Since Alex is not the sole beneficiary entitled to the land under the terms of the Will, the answer is yes: there will be land transfer tax payable. Depending on the circumstances, however, the partial exception can reduce the amount of the tax.
Land transfer tax is calculated by a formula which is based on the value of the consideration for the conveyance. In a simple purchase/sale transaction, the tax is typically calculated based on the purchase price. An estates transfer can be different. When more than one beneficiary is entitled to the real property and there is an agreement whereby one of the beneficiaries takes the real property in lieu of other assets in the estate, the tax’s formula is calculated with reference to the value of the other assets surrendered to the other beneficiaries.
Suppose that, in exchange for receiving title to the cottage in her name alone, Alex agreed that her two siblings would each receive an extra $500,000 worth of personal property from the estate (relative to Alex). In this case, Alex would be deemed to have surrendered assets in the amount of $1 million in exchange for the cottage.
Alex’s land transfer tax will therefore be calculated with reference to consideration of $1 million, even though the property is valued at $1.5 million.
The savings can be fairly significant. A purchaser who pays $1.5 million for real property in Ontario (though outside of Toronto) would typically be required to pay land transfer tax in the amount of $26,475. In our case, while Alex is receiving a property valued at $1.5 million, the land transfer tax can be calculated based on the $1 million in assets that she surrendered to her siblings. Accordingly, the tax would equal only $16,475, resulting in savings of $10,000 through reliance on this lesser known partial exception.
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