Affiliated Corporations and the Land Transfer Tax Exception

By Jonathan Hureau

This article is intended to offer an overview of the exception for affiliated corporations provided for in subsection 3(9) of the Land Transfer Tax Act (Ontario) (the “Act”). Specifically, subsection 3(9) of the Act allows for the land transfer tax that would otherwise be payable on an unregistered disposition of land between affiliated corporations to be deferred and eventually cancelled in the event certain conditions are met. For reference, subsection 3(9) of the Act reads as follows:

Deferred payment

(9) If the disposition of a beneficial interest in land is from one corporation to another corporation, each of which is an affiliate of the other immediately before and at the time of the disposition, the Minister may defer the payment of the tax payable by virtue of this section by the corporation acquiring the beneficial interest if,

(a) before the thirtieth day after the date of disposition of the beneficial interest in the land, the corporation applies to the Minister for the deferral and submits a written undertaking satisfactory to the Minister, undertaking that for a period of at least thirty-six consecutive months immediately following the date of the disposition,

(i) the corporation making the disposition and the corporation acquiring the beneficial interest on the disposition will continue to be affiliates of each other, and

(ii) the beneficial interest in the land will continue to be owned by the corporation acquiring the beneficial interest on the disposition or by a corporation that is an affiliate of that corporation and with the corporation which made the disposition of the beneficial interest in the land;

(b) security for the tax in a form and of a kind acceptable to the Minister is furnished to the Minister; and

(c) no conveyance or instrument or electronic document evidencing the disposition has been registered. R.S.O. 1990, c. L.6, s. 3 (9); 1996, c. 18, s. 9 (3); 2004, c. 31, Sched. 21, s. 5 (5).

Unregistered Dispositions of Beneficial Interests

In accordance with the above, it is first critical to note that the disposition must be unregistered and of a beneficial interest in land. Accordingly, the registration of any instrument evidencing the disposition will prevent the applicant corporation from being eligible for the exception provided for in subsection 3(9). 

The requirement that the disposition be of a beneficial interest speaks to the rationale underlying subsection 3(9), which is an acknowledgement to one degree or another that it would be unfair to impose land transfer tax on a disposition between corporations where the economic interest of a taxpayer is maintained or essentially the same for each such entity.

Meeting the Definition of “Affiliate”

The second requirement that the transferor and transferee corporations be “affiliates” of each other is further crucial to passing through the gates for the exception provided for by subsection 3(9). In general terms, “affiliate” is used in the Act to describe that there is common ownership for the corporations between which the disposition occurring. Subsections 3(14) and 3(15) of the Act detail the criteria in this regard as below:

Affiliate

(14) For the purposes of this section, a corporation is an affiliate of another corporation if one of them is the subsidiary of the other, if both are subsidiaries of the same corporation or if each of them is controlled by the same person or persons. 2006, c. 33, Sched. P, s. 2 (2).

Same

(15) The following rules apply for the purposes of determining if corporations are affiliates:

1. 1. A corporation is a subsidiary of another corporation if,
1. it is controlled by,
1. that other,
2. that other and one or more corporations each of which is controlled by that other, or
3. two or more corporations each of which is controlled by that other, or
2. it is a subsidiary of a corporation that is that other’s subsidiary.
2. A corporation is controlled by another person or corporation or by two or more corporations if,
1. voting securities of the first-mentioned corporation carrying more than 50 per cent of the votes for the election of directors are held, otherwise than by way of security only, by or for the benefit of the other person or corporation or by or for the benefit of the other corporations, and
2. the votes carried by the voting securities described in subparagraph i are entitled, if exercised, to elect a majority of the board of directors of the first-mentioned corporation.
3. For the purposes of paragraph 2,
1. a person is deemed to own beneficially securities that are beneficially owned by a corporation controlled by the person or by an affiliate of that corporation, and
2. a corporation is deemed to own beneficially securities that are beneficially owned by its affiliates.
4. Unless the regulations provide otherwise, references in paragraphs 2 and 3 to securities are references to securities within the meaning of the Securities Act.  2006, c. 33, Sched. P, s. 2 (2).

In reviewing the preceding excerpt, it is important to note that coming to a final determination of whether corporations are “affiliates” may additionally require qualified practitioners to reference to other legislation including the Securities Act (Ontario) and the Income Tax Act (Canada). More generally, obtaining a complete understanding of the premises underlying subsection 3(9) of the Act can similarly require reference to the provisions of these statutes and potentially others.

Application Materials

Provided the above conditions are met along with any others applicable in the relevant circumstances, it may be advisable proceed to apply for a deferral of the land transfer tax that would otherwise be payable under subsection 3(9) of the Act. In this event, the following documentation must be submitted to the Ontario Ministry of Finance as described on the Ministry’s website:

1. Completed Return on the Acquisition of a Beneficial Interest in Land
2. Application and Undertaking for the Deferral of Land Transfer Tax;
3. Security acceptable to the Minister of Finance for the deferred tax;
4. Copies of all agreements between the parties;
5. Copies of the shareholders registers for both the transferor and transferee corporations and any corporate shareholders of those corporations;
6. Copies of any appraisals (where fair market value is the consideration);
7. Copies of the relevant abstract pages for the lands involved in the disposition in order to confirm no conveyance, or instrument or electronic document evidencing the disposition has been registered; and
8. Any other documentation the Ministry may require in support of the application for deferral.

It bears mention that at present the only forms of security acceptable to the Minister of Finance are (a) payment of the tax or (b) a letter of credit, for the amount of the tax together with applicable interest for the three year period. The Ministry website notes that the applicable branch at the Ministry can be contacted to calculate the said tax and interest.

Undertaking and Three Year Holding Period

In terms of the required undertaking referenced in item number 2 above, payment of the land transfer tax may, thus, be deferred and eligible for cancellation after three (3) years if the following terms of the undertaking to be given by the transferee corporation (i.e. the corporation receiving the beneficial interest in the land(s)) are met:

1. that for a period of at least 36 consecutive months immediately following the date of disposition;
1. the corporation that made or will make the disposition and the corporation making this application will continue to be affiliates of each other; and
2. the beneficial interest in the land will continue to be owned by the corporation making this application or by a corporation that is an affiliate of that corporation and the corporation which made the disposition of the beneficial interest in land;
2. that no conveyance or instrument evidencing the disposition has been registered;
3. that it will notify the Minister forthwith upon any disposition or registration of any conveyance which occurs within the period referred to in (1); and
4. that it will provide the Minister with further information as the Minister may require.

Summary

The determination of whether or not to apply for a deferral of land transfer tax under subsection 3(9) of the Act can be complex and involve consideration of various relevant authorities. At SorbaraLAW, we can assist with a review of the law and advice in your unique corporate circumstances. Once a decision is made to proceed with an application to the Ministry of Finance, we can further help with preparing the required materials and management of the application process on behalf of corporate clients.

Sources:

Ministry of Finance, “Land Transfer Tax and the Treatment of Unregistered Dispositions of a Beneficial Interest in Land” (6 April 2022), online: <https://www.ontario.ca/document/land-transfer-tax/land-transfer-tax-and-treatment-unregistered-dispositions-beneficial#section-6>

Ministry of Finance, “Transfers Involving Corporations” (6 April 2022), online: <https://www.ontario.ca/document/land-transfer-tax/transfers-involving-corporations>

Legal Disclaimer: The above article is for informational purposes only. It does not constitute legal advice on any matter or create a solicitor-client relationship.