Foreign Property Buyer Tax Traps: Taxable Trustees and Resulting Trusts

I. Introduction

Applicable to contractual obligations arising or assumed as of January 1, 2023,[1] pursuant to the Federal Prohibition on the Purchase of Residential Property by Non-Canadians Act,[2] (the “Federal foreign buyer ban”) non-Canadian citizens, non-permanent residents, and others deemed to be “non-Canadian”[3] have been barred from purchasing residential property across Canada for two years.

Prior to this recent Federal foreign buyer ban on direct and indirect purchases, and the Federal Underused Housing Tax Act,[4] some provinces instituted taxes to discourage foreign buyer purchases of property in order to keep housing affordable, available to Canadians (both for lease and sale), and to slow rapidly rising prices.

II. Provincial Foreign Property Buyer Taxes

The provinces of Ontario and BC each introduced a foreign buyer’s tax. The tax is in addition to the ordinary land transfer tax and is calculated on the fair market value (“FMV”), or the purchase price, of the proportionate share of the purchased property.

As of October 25, 2022, Ontario’s non-resident speculation tax (“NRST”) is 25%,[5] pursuant to the Ontario Land Transfer Tax Act[6] (the “LTTA”). BC’s equivalent “additional property transfer tax” (“ATT”) remains at 20% in 2023, pursuant to the BC Property Transfer Tax Act[7] (the “PTTA”).

The Ontario NRST is payable when a foreign national, foreign corporation (collectively “foreign entities”) or a “taxable trustee”, purchases or acquires specific land in Ontario. The BC ATT is payable under similar circumstances for purchases of property in BC.

Although determining whether the Ontario NRST or BC ATT apply to foreign nationals and foreign corporations is relatively straightforward, it is more difficult when Canadian citizens or permanent resident individuals purchase real property with the help of foreign entities.

III. Trust Relationships and “Taxable Trustees”

Canada’s relative proximity to countries in the Asia-Pacific region naturally results in net-positive gains in immigration through contracts for work and in international students who eventually become Canadian permanent residents, and ultimately Canadian citizens.

It is not uncommon for these new Canadians and/or new Canadian permanent residents to receive financial assistance from their friends, family, or businesses resident outside of Canada. Effectively, these persons may not have been “foreign entities” but were definitely able to purchase property with the assistance of a “foreign entity”, as defined in subsection 1(1) of the Ontario LTTA[8] and section 2.01 of the BC PTTA.[9]

This resulted in a conundrum for Canadian provinces as it was perceived that these new Canadians were purchasing property, less so for themselves in their personal capacity and more so as “taxable trustees” on behalf of foreign entities. With rapidly rising prices, up to the first Bank of Canada policy interest rate hike on March 2, 2022,[10] real property dispositions were possible for far more than the cost of the property, resulting in significant gains.

The purpose behind including “taxable trustees” in the legislation means to catch foreign buyers who use a Canadian citizen or Canadian permanent resident to hold title.

The subsection 1(1) of the Ontario LTTA defines “taxable trustee”[11] as follows:

[1(1)] “taxable trustee”, in relation to a conveyance of designated land, means a trustee of a trust with at least one trustee that is a foreign entity, or a trust with no foreign entity trustees if, immediately after the conveyance is tendered for registration, a beneficiary of the trust who is a foreign entity holds a beneficial interest in the designated land to which the conveyance relates, but does not include a trustee acting for the following types of trusts:

1. A mutual fund trust within the meaning of subsection 132 (6) of the Income Tax Act (Canada).

2. A real estate investment trust as defined in subsection 122.1 (1) of the Income Tax Act (Canada).

3. A SIFT trust as defined in subsection 122.1 (1) of the Income Tax Act (Canada); (“fiduciaire imposable”).[12] [Emphasis added].

Similarly, pursuant to the BC PTTA, as defined in section 2.01, a “taxable trustee”[13] means a trustee of a trust who acquires property on behalf of a foreign entity who holds a beneficial interest in the property. For absolute clarity, the provision states:

[2.01] “taxable trustee”, in relation to a taxable transaction, means a trustee of a trust in respect of which

(a) any trustee is a foreign entity, or

(b) no trustee is a foreign entity but, immediately after the registration of the taxable transaction, a beneficiary of the trust who is a foreign entity holds a beneficial interest in the residential property to which that taxable transaction relates;[14] [Emphasis added].

It should be noted that a trust does not need to be established by a written or notarized document. Even an intention communicated orally or demonstrated through conduct to create a trust may create a trust relationship. In some cases, the existence of a trust relationship is presumed, for example in the case of a resulting trust.

Effectively, especially in the context of Canada’s consistent net-positive gains in immigration, a new Canadian citizen, permanent resident, or a corporation holding title in trust for “foreign entity” beneficiaries (subject to some exceptions for widely held investment vehicles like REITs), would be liable to the Ontario NRST and the BC ATT as a “taxable trustee”.

Further, it should also be noted that the “taxable trustee” purchaser is jointly and severally liable with the foreign entity to pay the Ontario NRST and the BC ATT. More likely than not, provincial tax authorities may attempt to collect from the Canadian-resident persons first before any legal action is taken against any “foreign entity” beneficiaries, for practical reasons.

IV. Audits of “Taxable Trustee” Beneficial Interest Holders

Because of the primacy of beneficial interest and ownership at law, joint, titled ownership of property is not the definitive threshold for the application of the Ontario NRST, the BC ATT, and any other foreign buyer taxes in other provinces.

The term “beneficial interest” refers to a right or expectancy in relation to property of the trust that is distinct from legal title. Whether a trust relationship exists, and a corresponding beneficial interest was given, or transferred is a mixed question of fact and law in the circumstances and is subject to audit by provincial tax authorities, such as the Ontario Ministry of Finance Tax Office, or the BC Ministry of Finance Property Taxation Branch – which deals with BC’s ordinary property transfer tax and the ATT.

In Ontario, the situation is more complicated since the NRST also applies to unregistered transfers of beneficial interests to “foreign entities”. Therefore, should a purchaser initially not be subject to the NRST, but then gives a beneficial interest to a “foreign entity” without formal changes to the property title, the NRST may apply to the transfer. In the past, such beneficial interest transfers would ordinarily occur contractually between the parties to the transaction, subject to offer, acceptance and consideration per the common law of contracts,[15] and the civil law framework in section 1385 of Book Five, Title One of the Civil Code of Québec.[16]

V. Tax Traps: Co-Signors, Guarantors & Lenders

In the context of real property purchases, a “co-signor” will usually have their name on the title of the home, which means they will legally have the same rights to the property and must sign all the mortgage papers. If the borrower were to default on the loan, the “co-signer” would be legally liable to repay the mortgage and risk seizure of their own assets to recoup payment. A “foreign entity” “co-signor” would naturally taint the purchase, and the additional tax would apply on their registered proportionate share of the declared FMV of the property at the time of the transfer.

The situation is more nuanced with “guarantors”. A “guarantor’s” name is only on the mortgage and is not registered on title for the home, and so a “guarantor” does not have the same property rights as a “co-signer”. The role of a “guarantor” is to guarantee that the mortgage payments will be made on a regular basis to ensure loan approval. Consequently, “guarantors” are liable for default only when the lender has been unable to get the primary borrower to make the payments and are then responsible for making the loan payments if the primary borrower does not. Effectively, in the event of the primary borrower’s bankruptcy, lack of payments, or death, the “guarantor” would then become responsible for each monthly payment until the mortgage has been completely repaid.

Even including a guarantor on a mortgage for the property may cause provincial tax authorities to infer during an audit that the purchase of the property was facilitated by a “foreign entity”, tainting the purchase and causing 100% of the value of the consideration to be subject to the Ontario NRST or the BC ATT. This risk is further heightened if the “guarantor” is a “foreign entity” under the LTTA, the PTTA, or any other foreign buyer taxes in other provinces, and/or if any loans from a “foreign entity” or a Canadian resident who obtained funds from a “foreign entity” for the down payment remain unpaid. Consequently, because of joint and several liability, the Canadian resident “taxable trustee” may be assessed for the tax in their province.

VI. Tax Traps: Presumption of Resulting Trusts during Audits

A common position taken by additional foreign buyer tax provincial auditors, faced with a possible Canadian citizen, permanent resident, or Canadian corporation “taxable trustee” situation, is the possible existence of a resulting trust.

Resulting trusts are presumed trust relationships and arise whenever legal or equitable title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner, or to the person. It should be noted that unlike “implied trusts”, a resulting trust does not allude in any way to intention, but rather describes what happens to the property in question. Specifically, it results or goes back to the person who is entitled to call for the property.[17] This underscores the importance of distinguishing the situation of a title holder/alleged “taxable trustee” from that of a resulting trust.

Provincial auditors may determine that immediately after title registration of the property a “foreign entity” held a “beneficial interest” that was not declared on the transfer tax return, and therefore a resulting trust may be inferred, and an Ontario NRST or BC ATT assessment ought to be issued. The issuance of an assessment is of course subject to the property being located in the designated area pursuant to the Ontario LTTA, BC PTTA, and any other conditions which may be found in other foreign buyer tax statutes in other provinces. In such provincial audit contexts, to rebut the auditor’s position, it may be important to:

1. clearly document the relationship between any “foreign entity” lenders and/or guarantors and the title holder/alleged “taxable trustee” under audit;
2. document the nature and quantum of any collateral involved for any financing arrangements between “foreign entity” friends, family, and corporations, and between the final lender and the title holder/alleged “taxable trustee” under audit;
3. ensure all loan agreements are in writing, preferably originally done through a lawyer, translated if not in English or French, as applicable, between the relevant parties, and explain that the laws of the relevant provincial jurisdiction do not, nor do they intend to, place restrictions on the source of financing, even if derived from a “foreign entity”;
4. be prepared to explain the choice of the property relative to the circumstances of the title holder/alleged “taxable trustee”, and/or the non or marginal involvement of the “foreign entity” in the property search;
5. be prepared to support the intended purpose for the purchase of the property by the title holder/alleged “taxable trustee”, whether through actual use, and/or family circumstances;
6. demonstrate how the use of the property by the title holder/alleged “taxable trustee” demonstrates a “beneficial interest” in the property is not held in trust for a “foreign entity”, and any other parties involved;
7. support that any changes or additions to the property were done independently by the title holder/alleged “taxable trustee”, without the need for approval from a “foreign entity”; and
8. explain that a “foreign entity”, as a “guarantor” on the mortgage for the property, would not be able to enforce payment of their loan with a related party or be placed on title of the property of the title holder/alleged “taxable trustee”, if that related party subsequently loaned the money to the title holder/alleged “taxable trustee”, in the context of a two-step loan transaction, pursuant to the provincial statutes such as the LTTA and the PTTA. 

The calculation for the Ontario NRST and the BC ATT is based on the declared FMV of the transaction for the property, multiplied by the proportionate share of the primary title holder/alleged “taxable trustee”, which is then multiplied by applicable rate at the time of the transfer. Because the applicable formula is as follows:

[Declared FMV] x 1.0 [100% proportionate share of the “taxable trustee”] x 0.2 [20% in BC or 25% in Ontario]

In Ontario, for a single-family residential property purchased for $1 million, the “taxable trustee” would be liable for an NRST of $250,000.00, plus interest.

In BC, since single-family homes located in the designated area pursuant to the PTTA are usually well above $1 million; if a property was purchased for $2.5 million, the “taxable trustee” would be liable for an ATT of $500,000.00, plus interest.

VI. Conclusions: Trust Relationships as a Foreign Property Buyer Tax Audit Space

The combination of policy interest rate hikes by the Bank of Canada, Federal foreign buyer bans, underused housing taxes, and provincial taxes on foreign buyers, such as the Ontario NRST and the BC ATT have a clear policy objective in relation to reigning in inflationary pressures in the Canadian housing market and making housing more affordable to Canadians (both for lease and sale).

Ordinarily, determining whether these additional taxes on property purchases, such as the Ontario NRST and the BC ATT, apply is straightforward following an analysis of the nature of the transaction and the parties to that transaction. If a “foreign entity” purchases property in a province with the additional tax legislation, and no exceptions apply while all of the conditions are met, the tax will apply.

On the other hand, determining whether the additional taxes apply in the context of a possible trust relationship is more complex both at audit and at the time of purchase. Quite simply, the situation is more nuanced if a guarantor is a “foreign entity”, and if funds were provided by “foreign entities” to Canadian citizens, permanent residents, or corporations, where provincial tax authorities may deem a “taxable trustee” to be holding in trust a “beneficial interest” in the property on behalf of the “foreign entity”, which may result back. In such situations, it is important to review the facts and circumstances to determine whether the presumption of a resulting trust can be rebutted.

Although the Federal foreign buyer ban will be automatically repealed on the second anniversary of its in-force date,[18] the Federal underused housing tax, the Ontario NRST, the BC ATT, and any other foreign buyer tax statutes in other provinces are unlikely to be repealed anytime soon.

It is reasonable to assume that the policy interest rate hikes and statutory measures may make the Canadian property market less attractive to foreign buyers, which may slow prices and make housing more affordable for Canadians.

In the context of taxes such as the Ontario NRST and the BC ATT, where it is unclear if a trust relationship exists, or if a Canadian citizen, permanent resident, or corporation are under a provincial audit, it may be prudent to consult a tax lawyer.

 

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