Law Times

October 31, 2016

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Page 12 OctOber 31, 2016 • Law times FOCUS Amendment hurts property investment group members? BY MARG. BRUINEMAN For Law Times R ecent changes to Ontar- io's land transfer tax re- gime allow until the end of the year for voluntary disclosure of money owed as a result of any change of beneficial ownership involving real estate. Despite a revised administra- tive statement that reduces the retroactive period to four years, from the 27 years originally an- nounced earlier this year, some lawyers say the amendment plac- es a burden on property invest- ment group members that may not be worth anyone's efforts, in- cluding the government. Changes to Ontario's Land Transfer Tax will cause headaches for group members, they say. Due to the amendment, those with de minimis partner- ship (defined as partners that have five per cent or less of the total ownership of the overall structure) have been allowed an exemption of land transfer tax in property purchases. Over the years, investment funds and pools have been developed, which see a group of people buying parcels of land together. Members of these groups come and go regularly and the exemp- tion was seen as a way to accom- modate those small changes. So, for instance, if one person joined a group of 100 people, they did not have to pay land transfer tax if their ownership of the property represents less than five per cent of its value. But earlier this year, the On- tario government changed the rule of the de minimis. "Some taxpayers have at- tempted, inappropriately, to use this exemption to avoid tax, where the taxpayer is not a partner in the partnership," says Ministry of Finance spokesman Scott Blodgett. e "clarifying" amendments mean that the exemption is not available if the interest in a part- nership is either a trust, including REITs, or another partnership. Initially, any changes in own- ership dating back to 1989 would be subject to tax. at resulted in an outcry from a number of or- ganizations and the government retreated with a statement that the retroactive period would be just four years and extended the penalty-free filing period to the end of this year. "It is necessary to look through a trust to the beneficiaries to as- certain the land transfer tax li- ability on the acquisition of a ben- eficial interest in a property," says tax lawyer Ken Snider, a partner with Cassels Brock & Blackwell LLP. "Similarly, a partnership was not viewed as a separate legal per- son and, therefore, was viewed by the Ministry of Finance as not acquiring a real property. Rather, it was the partners who were treated as disposing or acquiring real property on the acquisition of partnership interests." e retroactive amendments were intended to clarify the use of the de minimis exemption, ac- cording to the finance ministry. e problem is that an invest- ment industry has developed and grown around pooled in- vestment vehicles that have been structured as partnerships to buy property. "Provided the partners owned less than this five-per-cent threshold, there's no land trans- fer tax payable on people coming in and out of the partnership," observes Toronto-based tax and business lawyer David Rot- f leisch, a partner at Rotf leisch & Samulovitch Professional Corporation. e decision to include a voluntary, interest- free disclosure program to run until the end of the year and reduce the retroactive period to four years is a reasonable com- promise, says Rotfleisch. But, he adds, that still leaves a great burden upon the businesses that must go through all their re- cords to determine what in and out transactions took place dur- ing the past four years and deter- mine the value of the property at the time of those transactions. But Michael Bussmann, a partner with Gowling WLG LLP where he is a commodity tax practitioner, says the amend- ment announced in February ig- nores the whole point of the de minimis relief introduced back in 1989. And, in the absence of financial projections, he says the benefits to the government re- main unclear. But he expects it will be small change compared with the im- pact it will have upon the many who will not only have to pay but will have to file new tax re- turns to reflect the change over the past four years. "Now even tiny changes in proportional interests could re- sult in one or more of the part- ners having to file a tax return," he says. "e lookback, going back four years, is a problem be- cause nobody ever anticipated having to track the value of as- sets at the time when there were changes in partnership interest. "e amount of tax you pay is a function of the value of the land at that time. It's not easy to value land and it's not without expense to value land, especially commercial." It's not unusual for real estate investment funds to see regular changes in the investors. And with every change, there will be an impact. Bussmann points to a partnership made up of 10 members. When an 11th mem- ber joins and becomes a partial owner of the property, that new partner must file a new tax re- turn. Similarly, when there are 10 partners and one leaves, his share is divided among the remaining nine partners who must all then file new tax returns. "en try it with 200 part- ners. en try it when your part- nership owns 10 properties," he says. LT STARTING FROM SCRATCH IS GREAT UNLESS YOU'RE WORKING ON A SHAREHOLDER AGREEMENT. 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