From time to time, people ask us to put family members on title to their property as a 1% owner.
One of the more common reasons for doing this was to take advantage of the First Time Homebuyer exemption for Property Transfer Taxes. Another reason was because younger buyers couldn’t qualify for a mortgage on their own.
The Provincial government has now taken away a loophole that many couples with a first time home buyer used to use, by including “general anti-avoidance” language in the Property Transfer Tax Act.
Anti-avoidance rules
An “anti-avoidance” rule is a rule that says “if the only reason you are doing things this way is to avoid taxes, then you can’t do it.”
There are several exemptions from Property Transfer Tax, and each of these exemptions has criteria that you and the property must meet in order to get the exemption.
For example, if you and your spouse are buying property, and your spouse has never owned real property before, they may be eligible for the First Time Home Buyer’s exemption from Property Transfer Tax.
When someone is eligible to claim this whole exemption, they do not pay Property Transfer Tax on the interest in the property they are buying. This can be a significant savings.
What many people have done in the past is to have the spouse who is eligible for the exemption go on title for the majority of the ownership share – on paper, they will own 99% of the property, and they then claim an exemption from the Property Transfer Tax of 99%.
But in reality, the spouses really share the interest in the property jointly. So the spouses have gotten the benefit of a bigger tax exemption by pretending that the ownership interests are 99% and 1% (when they were really joint), and the government has now shut this down.
So what does this mean?
You are allowed to arrange your affairs in a tax-effective way, but the government doesn’t want you using exemptions meant for one purpose for some other purpose.
So, in our previous example, if one spouse has owned property before, and the other has not, then you end up with a mix of Property Transfer Tax eligibility.
Only the spouse who is eligible for the exemption gets the exemption – not both spouses. And that exemption can only be applied against the portion of the property that the qualifying spouse actually has an interest in.
So if the intention of the spouses was that they truly own the property as joint tenants, then each spouse is responsible for 50% of the Property Transfer Tax. If one of the spouses is eligible for an exemption, that’s great, but that spouse can only claim that exemption for their true interest in the property.
The new anti-avoidance rule in the Property Transfer Tax Act says:
If a transaction is an avoidance transaction, the administrator may determine the tax consequences to a transferee or transferor in a manner that is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
Property Transfer Tax Act, s.2.001(2)
In other words, the government can deny your application for an exemption from Property Transfer Taxes if the only reason you are doing things this way is to avoid paying taxes you are required to pay.
Adding parents on title
What happens if you are a first time home buyer, and you are putting your parents on title to your property as a 1% owner because you can’t qualify for a mortgage yourself?
That is a different scenario, because the primary reason for setting up the ownership structure this way is not tax avoidance – it is to qualify for a mortgage
So each situation will be very fact-specific.
Getting Assessed
You may have to prove why your situation is not an “anti-avoidance” plot.
When you are buying property, and that property is subject to Property Transfer Tax, we will ask you whether you qualify for any exemptions with respect to the Property Transfer Tax.
When you give us your answer, it is important to understand that if you are applying for an exemption, and you are using that exemption in a way that wasn’t originally intended, the government can audit your Property Transfer Tax application, and can deny you the use of that exemption.
Interest is payable on the amount which you should have paid, and is calculated from the 30th day after the date shown on the notice of assessment sent to you, at the rate set out in law.
Other penalties are also payable, specifically with respect to the First Time Home Buyer’s program, if you claimed a tax benefit for which you were not eligible.
So what’s the answer?
If you are buying a home, and you are eligible for a Property Transfer Tax exemption, great!
But you can only claim that exemption in the manner in which it was intended, and the government can assess, or audit, your application, and not only deny you the exemption, but also require you to pay the taxes, penalties and interest on the amount you should have paid.
When you are buying your home, and we ask you about whether you qualify for an exemption, make sure you understand the qualification criteria, and that you do not claim an exemption you are not in fact eligible for.
If you are not certain, ask us and we will give you the criteria for that exemption.
And always be prepared to justify the reasons you felt you were eligible for that exemption if the government decides to assess you.