Changing Legal Tenure in Ontario – A Land Transfer Tax-Free Transfer
Most transfers of land are subject to land transfer tax, an added tax when conveying a property. This additional cost can be quite significant as the tax amount is based on a graduated formula of 1-2% of the purchase price. However, certain transfers, such as those that change the way that the property is held between the owners (the legal tenure), are exempt from land transfer tax, making them a low-cost estate planning tool. This blog concerns registered owners with beneficial interests in property and does not cover the complexities of trust scenarios.
Individuals can hold property in one of two ways – tenants in common or joint tenants. The main difference is what happens with the title to the property when an owner passes away. If you are holding property as joint tenants, all owners have an undivided interest in the whole property. When one owner dies, their interest automatically reverts to the other joint tenant(s) and does not form part of the deceased’s estate. This is evidenced on title by registration of a survivorship application removing the deceased joint tenant’s name from title.
As tenants in common, each individual’s ownership interest can be specified; they do not need to be equal. For example, you can own 90% of the property, your mother 7%, and your father 3%. If an owner dies, their share of the property will form part of their estate – it will not pass automatically to the remaining owners.
Why would I want to change the legal tenure of my property?
All sorts of things can change from the time you purchased a property to the present. Many reasons exist as to why you may now wish to change the legal tenure of your property, a few of which are outlined below.
For example, say you purchased a property with your mother as joint tenants a few years back. If your mother dies before you, the entire property will pass directly to you. If you die first, the opposite is true. As joint tenants, your respective wills do not govern what happens with the property. Perhaps you now have children, and you would like your portion of the property to go to them instead of your mother. The easiest way to carry out these wishes is to change the legal tenure from joint tenants to tenants in common. In this example, I’ve disregarded issues of resulting and bare trusts for ease of illustration.
Alternatively, you may hold the property as tenants in common with your elderly mother who wants the property to go to you when she passes. You may wish to change the legal tenure to joint tenants so that the property automatically passes to you. However, there are risks associated with this set up, such as the chance that your mother may outlive you or a sibling may challenge whether the transfer was to be a real gift to you to the exclusion of the other siblings.
Another example might be if you are going through a divorce where you hold property as joint tenants with your separated spouse. Until you have finalized and signed a separation agreement, you may want to make sure that your share of the property goes to someone other than your former spouse if you were to pass away before the ownership of the house has been sorted out. In this specific example, you can change legal tenure to tenants in common without the need for your former spouse to consent. However, you cannot specify a share other than 50% if you are making this change without your former spouse’s involvement.
One further example is if you purchase a home with a partner as tenants in common and later get married. If you each decide that you want the other person to have the property if you pass away, the easiest way to do this is to change the title to the property into joint tenants by registering a transfer from both of you to both of you as joint tenants.
Fortunately, these types of transfers are quite low-cost solutions since they do not attract land transfer tax. Land transfer tax is not payable since both before and after the transfer is registered, the owners will remain the same and no money changes hands – the only change is the way each owner holds the property. There may be other issues which make these transfers more complicated, such as bare trusts, resulting trusts, etc. The trick is to fully explain the facts of your situation to your lawyer to determine what is and is not possible, and at what cost. In contrast, a transfer that adds or removes an owner will typically require payment of land transfer tax unless it falls under an exemption (which will be discussed in a future blog).