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A High-Level Reference on Land Transfer Tax Deferral

September 28, 2020

Land Transfer Tax Considerations in a Section 85(1) Rollover

By Melissa Nowak

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Many business owners own their operating business and their real estate assets in the same company. Owners usually want to separate these assets to facilitate succession or sale of the business and to protect the real estate assets from potential claims by creditors of the operating business. However, separating these assets can trigger Land Transfer Tax unless a deferral of that tax is obtained.

Section 85 of the Income Tax Act permits a taxpayer to transfer certain assets on a tax-deferred rollover basis if certain conditions are met.  This article leaves the income tax structuring and analysis appropriately to the chartered accountants and addresses the portion of a tax plan that often states “seek advice from legal counsel on land transfer tax deferral” when transferring real property as part of a corporate re-organization.

Land Transfer Tax Deferral Conditions

Under Section 3(9) of the Land Transfer Tax Act, affiliated corporations can receive a deferral of land transfer tax for unregistered dispositions of real property between affiliated corporations so long as the following conditions are met:

  • Apply.  An application for deferral is submitted within 30 days of disposition.
  • 36 Month Affiliation.  The corporation making the disposition and the corporation that acquired a beneficial interest in the real property remain affiliates for 36 months following disposition and the beneficial ownership of the real property must continue to be held by the corporation that acquired the beneficial interest upon disposition or an affiliate of that corporation and the corporation that made the disposition of beneficial interest in the real property.
    • NOTE:  What happens if the corporation wants to sell the real property to a third party within 36 months of the disposition?  Under Section 3(11)(c), if the third party transferee pays land transfer tax for the acquisition of the real property, as it typically would in a purchase, the Ministry will return the letter of credit securing the deferral obligations thus there is no land transfer tax liability to the  seller.
  • No Registration of Transfer.  When the property is transferred pursuant to a Section 85 rollover, such transfer cannot be registered on title in the land registry.  This condition can have significant implications on the process and overall corporate structure of the re-organizations.  Title registration is addressed in the next section.
  • Security in form of Letter of Credit. To secure the transferee’s obligations under the application for deferral of land transfer tax, the transferee must provide an irrevocable letter of credit in the amount of the land transfer tax that would be payable on the fair market value of the real property (as supported by an recent appraisal or broker’s opinion of value).

The Purpose of a Nominee Corporation

There are two elements to owning any asset: legal title, for land this is basically the entity named as the owner on the most recent Transfer/Deed; and beneficial ownership, the right to receive the benefits, usually revenue or capital gains, from the asset. These two elements need to be split for a deferral of Land Transfer Tax.

As noted above, the deferral of land transfer tax applies only to unregistered dispositions.  This means that the transfer of beneficial interest in the real property pursuant to a rollover cannot be registered on title to the property.

Often, however, the original beneficial owner of the real property no longer wishes to be the registered owner on title after the transfer of beneficial interest to its affiliate.  This is where a nominee corporation plays a role.  A beneficial owner can separate beneficial and legal ownership of the property by transferring the legal ownership of the real property to a Nominee which holds title the property as bare trustee for the beneficial owner.  This enables the original beneficial owner to register the transfer to the nominee without jeopardizing the deferral of land transfer tax.  This transfer of legal ownership from the current owner to a nominee does not incur land transfer tax because the consideration for such transfer is NIL.

Transferring legal title to a nominee as bare trustee, as part of a re-organization, also insulates the beneficial owner from some types of liability, as well as insulating the real property from some liability arising within the operating business.

Thus, when a corporation wishes to change legal ownership of the real property being transferred, the sequence is:

Land transfer tax table

Transfer of Shares of a Corporation that Holds Title to Real Estate

Land transfer tax does not apply to a transfer of shares of a corporation which owns land.

The Ontario Ministry of Finance considers that it is well-established law that the property of a corporation is that of the corporation and not of its shareholders. Accordingly, the transfer of shares of such a corporation will not affect the ownership of the property.

Care must be exercised, however, with transfers of shares of the corporation which holds the registered or legal title to land but not the beneficial title to the land (i.e. a Nominee Corporation). Most of these transfers signal a change in the underlying beneficial ownership of the land. While the transfer of shares of the trustee corporation would not be of itself a taxable matter, the change in beneficial ownership of the land, which often occurs coincident with the transfer of the shares, incurs land transfer tax.

Seek Legal Guidance

This is basic description of land transfer tax considerations for a corporate re-organization, however, companies considering the transfer of real property within a re-organization should seek legal advice on land transfer tax implications for their specific circumstances.

If you would like to discuss your corporate re-organization, please contact Melissa Nowak at