Seniors Muscle Province for Tax Breaks

Seniors Muscle Province for Tax Breaks

The latest Ontario budget had good news for seniors. The outcries of perturbed seniors effected by the application of land transfer tax to life lease dwellings seems to have hit its mark. A life lease is a relatively new housing type in Ontario that seniors have embraced where the owner does not acquire actual ownership of a dwelling unit, but rather the exclusive right to occupy the dwelling for life. Until the most recent budget, it looked like these units were going to be taxed under the Land Transfer Tax Act.

The Land Transfer Tax Actis a sleeping, but stirring, dog that was born in this province in 1921. It essentially taxes anyone who submits a deed for registration of real estate in Ontario. For the first 50 years land transfer tax rates hardly bothered anyone. But woe be it to any fool who would believe that this dog wouldn’t eventually wake up and bite us. Over the past thirty years the land transfer tax rates have skyrocketed, in some categories increasing up to five times their original rate, and expanding in their ambit to snare more transactions, to ensure that no commerce involving land in this province should go unscathed.

Every home owner has been annoyed with this tax, but it’s the seniors of this province, particularly those who purchased into life lease complexes, that have done what everyone else wanted to do, but for whatever reason never could - it looks like they may have gotten the tax reversed, at least as it applies to them. Paying land transfer tax was particularly aggravating to life lease owners because they don’t actually get a deed when they acquire a life lease unit. So when the provincial government tried to impose the tax on the growing number of life lease units being built in this province, the resistance was strong.

Here’s how we got to this point. Land transfer tax originally did not apply to leases in this province at all - it only applied to conveyances of land. But whenever any tax is created there’s an army of people who try to figure out how it can be avoided. The first strategy was long term leases. With long term leases people could enjoy the benefits of property ownership, without incurring the tax. So long term leases became popular. In response, in 1974 the government decided this was an abuse of the Land Transfer Tax Act and plugged this loophole by also making long term leases taxable under the Act (specifically, leases having a term in excess of 50 years).

The chess match continued and the next tax avoidance strategy was remarkably simple. If the government wanted to tax deeds and long term leases as they were being submitted for registration to the land registry office, the solution was simply not to register them. If long term leases weren’t registered, they couldn’t be taxed. In 1989 the government countered by declaring that any "disposition of a beneficial interest in land" was taxable. So, regardless of whether or not the lease was registered at the land registry office, it was subject to the tax. If the tax wasn’t paid, there would be additional penalties and interest.

That’s the short background to the evolution of the Land Transfer Tax Act. Then along came life leases. Life leases are a relatively recent concept that seniors have passionately embraced in this province over the past decade in increasing numbers; but the government has not kept up with the pace of change. So even though there are now over 4,000 life lease units in the province today, there still remains no comprehensive legislation that governs this new housing type. As a result there is a smorgasbord of various Acts that tangentially apply to life leases, many of which awkwardly fit the life lease concept. The Land Transfer Tax Act is one of those Acts that life leases seemed to fall under, perhaps by accident. The Land Transfer Tax Act is really meant to capture land owners, but as a result of the clever footwork by tax avoiders in the past, it has been expanded to capture long term leases as well. That’s why the Ministry of Finance tried to tax life leases.

At first life lease complexes in the province refused to accept that the Land Transfer Act applied to them. As a result, few life lease owners, if any, paid the tax. So the Ministry of Finance rattled the industry with spot audits and on September 27, 2002 bravely declared that they were "aware of a significant lack of compliance" of reporting the acquisition of life lease units. They reasoned that the purchase of an exclusive right to occupy a unit could exceed 50 years. Life leases therefore had to be taxed because they were "not limited by time" (perhaps, in the circumstances, there could have been a different choice of words).

It took only six months for the government to acknowledge that it had met its match. Filling tax loop holes for the general population is one thing, but taxing seniors is a whole different matter. On March 27, 2003 the government bowed to the pressure of seniors and promised to exempt life lease units from the tax. When you consider that the Income Tax Act was enacted during the war as a temporary tax, and it merrily barrels along today extracting mounds of cash from the pockets of the general populace, you only begin to fathom the power of the senior element in this province, who have successfully coerced the provincial government into capitulating on a tax position officially in existence for only six months.

The exemption, which is presently being reviewed by the government, would be retroactive to July 19, 1989. So if you’re one of the unfortunate that paid land transfer tax when acquiring a life lease unit, you may be able to afford a vacation this summer after all (assuming the government carries through on its promise). The exemption will only apply to charitable or non-profit life lease complexes. If you think you may qualify for a refund, you should contact the Ministry of Finance at 905-433-6361. If you’re buying a life lease unit in the immediate future, you’ve got a quandary. Until the new Regulation is filed, the tax continues to be payable and must be collected when registering a conveyance or an unregistered disposition of a "life lease" unit.

So the seniors won the battle on this tax. I’m thinking we should encourage the federal government to raise taxes for seniors... because if they can torpedo land transfer taxes in six months, just think what they may be able to do to income taxes, or GST. But the province has only really treated the symptoms, and the problem remains. Life leases need their own legislation, that’s designed specifically for their particular needs. There are too many life lease complexes in this province to continue to ignore them. The Land Transfer Tax Act is only one example of many pieces of legislation which touch upon life leases in a way that does not really work properly. In the worst case scenario if some of those Acts are enforced against life leases, they could have disastrous effects. This is a good example that it’s time for life leases to be properly regulated.

May 2003 David A. van der Woerd is a partner at Ross & McBride LLP.