Can agents help clients legally avoid land transfer tax in Ontario?

When your clients are buying real estate in Ontario, they must plan for closing costs — and the most significant closing cost is land transfer tax (LTT). LTT is calculated on a sliding scale based on the property’s purchase price, and it’s effectively doubled for property within the City of Toronto due to the municipal land transfer tax (MLTT). LTT and MLTT combined can add tens of thousands of dollars to closing costs, depending on the purchase price and whether the property falls within Toronto city limits.

Naturally, many buyers ask their Realtor: “Is there a legal way to avoid or reduce this tax?”

The short answer is yes, but only under strict legal exemptions outlined in the Land Transfer Tax Act. Any attempt to avoid or reduce LTT through price adjustments or side arrangements constitutes illegal tax evasion. That said, the law does provide several legitimate paths to eliminate or reduce a client’s LTT burden.

The following are the most common ways lawyers, on behalf of their clients, can structure transactions to eliminate or reduce LTT.

First-time homebuyer rebates

The most common way to reduce LTT is through the provincial and municipal first-time homebuyer programs. Although most consumers and Realtors are familiar with these programs, not everyone is familiar with the qualification requirements. To qualify for this rebate, the purchaser must meet the following criteria:

• The purchaser must be a Canadian citizen or permanent resident
• The purchaser must occupy the home as their principal residence within nine months of closing
• The purchaser and their spouse (if applicable) must have never owned a home or an interest in a home anywhere else in the world

Spousal transfers

If a client is transferring an interest in a property to a spouse, the transaction is typically exempt from LTT. This exemption applies so long as no consideration is being exchanged between the parties. If a mortgage is registered against the property, this will not necessarily derail the exemption, unlike a gift transfer, described below.

Separating spouses: divorce settlements

If a property is being transferred between parties pursuant to a separation agreement or divorce, the resulting owner is exempt from LTT. To qualify, the transfer must be made according to a formal written separation agreement or court order.

Gift transfers: for love and affection

The Land Transfer Tax Act does not specifically exempt gifts of land from LTT. However, if a property is being transferred as a gift for nil consideration to a child, and the property is mortgage-free, no LTT will apply. The key qualification is ensuring no consideration is exchanged between the parties and that the property is transferred without any encumbrances, since assuming a mortgage would be deemed consideration for the purposes of calculating LTT.

Trustee and beneficial transfers

If a property is purchased in trust for the benefit of a third party (the beneficial owner) and LTT is paid on the initial purchase, LTT will not apply to the subsequent transfer when the trustee transfers the property to the beneficial owner, or vice versa. To be eligible for this exemption, clients must produce adequate documentation confirming the nature of the trust relationship, typically through a trust agreement.

This scenario is common when a parent is added to title for the sole purpose of helping their child qualify for a mortgage. In other words, the parent has no genuine beneficial ownership in the property but was simply added as a trustee to help their child qualify. When the parent later seeks to be removed from title because the child can now qualify on their own, LTT can be avoided so long as no consideration is exchanged between parent and child and documentation exists confirming the trust relationship.

Inheritance and estate transfers

When a client inherits real estate in Ontario, the transfer of the property to the beneficiary from the estate of the deceased does not typically attract LTT. For this exemption to apply, the property must be conveyed from the estate to the beneficiary pursuant to a will or the laws of intestacy. Since the value of the consideration is nil, no LTT would apply. The conveyance to the beneficiary would be exempt regardless of whether a mortgage exists against the property, unlike a gifted transfer.

Family farm exemptions

A transfer of farmed land is ordinarily subject to LTT. However, certain transfers of farmed land between family members may qualify for an exemption. There are many conditions to satisfy for the exemption to apply, and it would be prudent for clients to consult an experienced real estate lawyer to ensure compliance.

Corporate reorganizations (deferral/exemption)

A transfer of land from an individual to a family business corporation would ordinarily attract LTT, but in certain circumstances an exemption may apply. Several conditions need to be satisfied, including:

• The individual was engaged in an active business on the land
• The individual transfers that land and the business to a family business corporation
• The shareholders of the family business corporation are members of the individual’s family
• The family business corporation continues to carry on the active business on that land

Satisfying these conditions can be complex, as certain terms carry specific legal definitions. The best option is to consult an experienced real estate lawyer to determine whether clients qualify for an exemption.

This is not an exhaustive list, but as the above illustrates, there are many routes to avoid LTT when transferring property. Many of these options require careful consideration of the conditions and eligibility requirements to ensure a client’s plan to avoid LTT doesn’t lead to a violation of the Act, which could result in penalties, interest and fines. 

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