Land Transfer Tax and the Purchase of Real Estate with a Business in Ontario

When purchasing real estate in Ontario that includes an operating business, understanding the tax implications is crucial. Land transfer tax (LTT) is a tax levied on the acquisition of real property in Ontario. Whether you need to pay LTT on the value of the business itself, in addition to the real property, depends on the specific circumstances of the transaction.

1. Understanding Land Transfer Tax (LTT)

A. General LTT Application:

  • Scope: LTT applies to the transfer of any real property in Ontario, including residential, commercial, and industrial properties.
  • Calculation: The tax is calculated based on the fair market value of the real property being transferred.

B. Exclusions:

  • Non-Real Property Assets: LTT is not applied to personal property or business assets that are not real property, such as equipment, inventory, and goodwill.

2. Distinguishing Real Property from Business Assets

A. Real Property:

  • Definition: Real property includes land and any buildings or structures attached to it.
  • LTT Basis: LTT is based on the value of the land and the structures.

B. Business Assets:

  • Definition: Business assets can include tangible personal property (e.g., equipment, inventory) and intangible assets (e.g., goodwill, trademarks).
  • LTT Exemption: These assets are typically exempt from LTT.

3. Calculating LTT When Buying Real Estate with a Business

A. Separating Values:

  • Allocation: In the purchase agreement, allocate separate values to the real property and the business assets. This helps in determining the correct amount of LTT payable.
  • Fair Market Value: Ensure the allocation reflects the fair market value of each component.

B. LTT on Real Property:

  • Valuation: LTT is payable on the portion of the purchase price allocated to the real property.
  • Rates: LTT rates are tiered and increase with the value of the property. As of the most recent update, the rates are as follows:
    • 0.5% on the first $55,000 of the property value
    • 1.0% on the portion from $55,000 to $250,000
    • 1.5% on the portion from $250,000 to $400,000
    • 2.0% on the portion from $400,000 to $2,000,000
    • 2.5% on the portion above $2,000,000

C. No LTT on Business Assets:

  • Exclusion: The portion of the purchase price allocated to business assets (equipment, inventory, goodwill, etc.) is not subject to LTT.

4. Practical Steps in the Transaction

A. Professional Appraisal:

  • Obtain Valuation: Consider getting a professional appraisal to accurately determine the value of the real property and the business assets separately.
  • Justification: This appraisal can justify the allocation of the purchase price in case of any queries from tax authorities.

B. Detailed Purchase Agreement:

  • Clarity: Ensure the purchase agreement clearly itemizes the values assigned to the real property and business assets.
  • Legal Review: Have the agreement reviewed by a lawyer to ensure compliance with tax regulations and to protect your interests.

C. Consultation with Professionals:

  • Real Estate Lawyer: Work with a real estate lawyer who understands both property and business transactions.
  • Accountant: Consult an accountant to ensure that the transaction is structured in the most tax-efficient manner and to handle any associated tax filings.

Contact Falcon Law PC

For expert legal advice on purchasing real estate with an operating business in Ontario, contact Falcon Law PC. Our experienced lawyers can help you navigate the complexities of land transfer tax and ensure your transaction is compliant with all legal requirements. Reach us at 1-877-892-7778 or info@falconlawyers.ca.

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