Tax Concerns and Leased Property

Author: Warren Gilmore - Law Student
Edited By: Ryan Carson

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Within a real estate transaction, not all property is transferred in the traditional sense that both the dwelling and the subsequent land are conveyed in fee simple. An increasing number of transactions include purchases where the dwelling is conveyed in fee simple, but the land itself is merely leased to the occupant. Typical examples of these transactions include cottage property and mobile homes. Many of these properties involve ownership of the dwelling (the cottage or the trailer), however, the land remains leased. Due to the nature of the interests in these properties, they are subject to their own unique tax concerns.

Land Transfer Tax

Ontario’s Land Transfer Tax (LTT) works to tax each portion of your home’s value at a specific rate. When you purchase land or another interest in land you are required to pay a specified tax rate when the transaction closes. Typically, Land Transfer Tax is based on the value of the consideration paid for the land.

However, several exemptions exit with regard to the application of Land Transfer Tax and how it applies specifically to leased property.

The first of these exemptions deals with the conveyance of property that involves a lease term not exceeding 50 years. With regard to registered conveyances, Subsection 1(6) of the Land Transfer Tax Act states that no land transfer tax is owed on properties involving a lease term of 50 years or less. However, this 50-year term includes any renewal or extension to the terms provided for in the lease. In other words, any subsequent agreements that attempt to extended the initial term of the lease will be subject to tax. All agreements together must provide for a total term of 50 years or less in order for this exemption to be applicable.

When registering the conveyance for this particular interest, an Affidavit of Residence and Value of the Consideration is typically required. These supplemental documents should specifically provide that the conveyance is being registered as a lease, the terms of which do not exceed 50 years.

Conversely, for leases that involve a term that does exceed 50 years, value of the consideration is derived from what is deemed to be the fair market value of the subject property. Where the transfer of interest in leased land is not exempt from LTT as described in subsection (6) above, applicable LTT will be accessed based on the fair market value of the property, or the specific portion of the property involved in the conveyance. This market value will be used to determine exactly how much LTT is owed to the province for the transaction. These values are always subject to verification by the Ministry of Finance.

Harmonized Sales Tax

HST is also a concern when dealing with the transfer of interest in leased property. As a general rule, leases involving residential property are exempt from HST, property such as a detached house, townhouse, or condominium unit. Residential leases that are entered into for the purpose of providing occupancy to a tenant are exempt from HST as long as the occupancy period provided is at least one month. Different rules apply to short term rentals and to the leasing of commercial property.

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