The following article has been generously provided to me to share with all of you. It was written by a dear friend and a great client, Simon Thang. Simon who has been a tax lawyer for many years has just started his own tax consulting firm, Thang Tax Law, so we wish him all the best in his new endeavour. And thanks for the following very timely and valuable information.
Guide to Ontario Non-Resident (Foreign Buyer) Speculation Tax
1. What is the Non-Resident Speculation Tax?
The NRST is a new 15% tax that the province of Ontario has imposed on certain foreign buyers of real estate. The NRST applies to all affected purchases that close on or after April 21, 2017 (“closing” refers to the formal transfer of title which takes place after signing the agreement of purchase and sale). With the average price of a detached home in Toronto in the $1.5 M range, foreign buyers may be required to pay over $200,000 in the new NRST simply because they buy after April 21, 2017. However, buyers who signed a binding purchase agreement before April 20, 2017 will NOT be required to pay the NRST.
The NRST will normally be paid through the buyer’s real estate lawyer. It applies in addition to the provincial land transfer tax (and, where applicable, the Toronto municipal land transfer tax) generally applicable to sales in Ontario. New or substantially renovated homes in Ontario may also be subject to the federal Goods and Services/Harmonized Sales Tax (GST/HST).
2. Why is Ontario Imposing the NRST?
The government of Ontario has stated it is imposing the NRST in response to concerns about the housing market and rapidly rising prices. The stated purpose is to deter speculation in the Ontario housing market, particularly by foreign buyers. In words of the Minister of Finance upon introducing the province’s Budget on April 27, 2017: “The government is concerned that non-resident investors – who are not planning on living in the province – have been purchasing Ontario homes primarily for speculation purposes.” Interestingly, the province has not cited any data or statistics to support introduction of the NRST.
3. Do I Have to Pay the NRST?
Although legislation has not been enacted yet, all indications are that the rules will be worded broadly to catch foreign buyers whether they purchase directly, through corporations, or by using a Canadian citizen or permanent resident to hold title.
You will likely have to pay the NRST if you answer “Yes” to EACH of the following three questions:
Question 1: Are you a foreign entity or a trustee for a foreign entity (“Taxable Trustee”)?
- You are “foreign entity” if you are an individual who is not a Canadian citizen or permanent resident under Canadian immigration laws. This is not the same as whether you are Canadian-resident for tax purposes.
- Foreign entity includes corporations that are not incorporated in Canada (except public companies listed on Canadian stock exchange), corporations are incorporated in Canada but that are wholly or partially controlled by foreign entities, and corporations controlled directly or indirectly by a foreign entity for income tax purposes.
- You are a Taxable Trustee if you are a foreign entity and hold title to the property for someone else, the beneficial owner. You are also a Taxable Trustee if you are a Canadian citizen, permanent resident of Canada, or a corporation holding title in trust for foreign entity beneficiaries (there is an exception for trustees of widely-held investment vehicles such as real estate investment trusts).
These rules have the potential to catch buyers by surprise. The province provides the following example:
If a transfer of residential property is made to four transferees, one of whom is a foreign entity that acquires a 25 per cent share in the land, the NRST would apply to 100 per cent of the value of the consideration for the transfer.
In other words, a single foreign entity “taints” the purchase and makes the entire price subject to the NRST. You, as the Canadian citizen buyer, are jointly and severally liable with the foreign entity to pay the NRST. Guess who the government is more likely to go after. Therefore, if you are buying property with someone else (other than your spouse – see exemption below), check if they are a foreign entity, foreign corporation or Taxable Trustee. Buyers who need someone on title to qualify for financing should get legal advice on the consequences if that person is a foreign entity.
Note the NRST also applies to unregistered transfers of a beneficial interest to foreign buyers. This may occur, for example, if a Canadian citizen initially purchases a property without being required to pay NRST and subsequently gives a beneficial interest to a foreign entity without putting them on title.
To assist in enforcing the NRST, the government has made it mandatory after May 5, 2016 to provide a statement on (among other things) buyers’ citizenship, immigration status, and information about any beneficial owners. This statement will be required in order to close a purchase.
Question 2: Are you are buying a residential property with 6 or fewer units?
- The NRST applies to purchases of residential properties that contain at least one and no more than six single family residences such as detached and semi-detached houses, townhouses and condominium units.
- This would also include duplexes, triplexes, fourplexes, fiveplexes and sixplexes. Buyers who purchase more than six units at the same time, e.g., multiple units in a condo, should get legal advice on whether the NRST applies.
- The NRST is not intended to apply to multi-residential rental apartments, agricultural land, or commercial land.
Question 3: Are you are buying within the Greater Golden Horseshoe Area?
- The so-called GGHA is a broad area surrounding Toronto comprised of the following towns and cities: Brant, Dufferin, Durham, Haldimand, Halton, Hamilton, Kawartha Lakes, Niagara, Northumberland, Peel, Peterborough, Simcoe, Toronto, Waterloo, Wellington and York.
Ontario’s new 15% non-resident speculation tax will apply to certain sales of real estate within Toronto and surrounding areas, dubbed the Greater Golden Horseshoe Area.
4. Are there any Exemptions?
Yes. Foreign entity purchasers who refugees at time of purchase are exempt. Foreign entities who are confirmed as “nominees” under special Ontario immigration programs at time of purchase are also exempt, provided the property is to be used as their principal residence. It seems unlikely these exemptions will apply to many home buyers.
The spousal exemption will probably be more relevant for most foreign buyers. This applies if a foreign entity purchases property jointly with a spouse who is a Canadian citizen, permanent resident, or a refugee or nominee exempt from the NRST (it is not clear at this point if jointly means “joint tenancy” or “tenancy in common,” which are two different ways to legally hold title).
5. Are There Rebates If I Paid the NRST?
Yes. A rebate (paid with interest) may be available for the NRST paid if a foreign entity:
- becomes a Canadian citizen or permanent resident within four years of purchase;
- is a student who has been enrolled full-time for at least two years from the date of purchase in a qualifying academic institution; or
- has legally worked full-time in Ontario for a continuous period of one year since the date of purchase.
In order to be eligible for the rebates, the foreign entity must exclusively hold the property, or hold the property exclusively with his or her spouse. The property must also have been used as the foreign entity’s (and if applicable their spouse’s) principal residence for the duration of the period.
Based on experience with federal income tax and GST/HST issues concerning real property, it will be critical for foreign entities to have sufficient documentation to prove that they qualify for rebates.
6. Are You Concerned About the NRST?
The NRST has significant implications for people wishing to purchase homes in Ontario. Yet it is being imposed with a troubling lack of data and clear rules, let alone legislation.
For more information, please contact Simon Thang at Thang Tax Law at firstname.lastname@example.org