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This article was first published in the April 2025, Vo,12 No. 3 STEP Connection Toronto Branch Newsletter

All levels of government in Canada have been busy over the past few years enacting various types of real estate taxes in an attempt to address the housing crisis. This article will lay out certain unintended and unexpected consequences of two specific real estate taxes in effect today, here in Toronto, as they relate to a common estate planning strategy. Specifically, we will analyze the Toronto Vacant Home Tax By-Law 97-2022 (the “Bylaw“) and the Underused Housing Tax Act, SC 2022, c 5, s 10 (the “UHTA“). Concepts such as citizenship, residence, and use of real property within a given time period, are of heightened importance when assessing the impact of these taxes in relation to an estate plan.

Using a Nominee Corporation to Hold Real Property

Estate Administration Tax (commonly referred to as “probate tax“) is a tax of 1.5% on the fair market value of an estate’s assets in excess of $50,000 CAD, and is payable when an Application for a Certificate of Appointment is filed. Probate taxes can, depending on the testator’s assets, be minimized by allocating assets for which probate is not needed (e.g. shares of a privately held company) to a separate will, so that assets requiring probate (e.g. personally held real property¹) are covered by one will (often referred to as the “Primary Will“) and non-probate assets are covered by a second will (often referred to as the “Secondary Will“).

Where a “first dealings exemption” is not available, using a nominee corporation structure to hold legal title of real property, combined with a Primary and Secondary Will, allows the testator’s estate to avoid probate tax on the value of the property, since the nominee corporation would not require probate in order to accept the authority of the executor(s) named in the Secondary Will.

However, even the best laid plans can go awry, especially when there are changes in the law that can undermine careful planning efforts. The Bylaw and UHTA are an example of such changes.

Toronto Vacant Home Tax

The VHT is an annual tax applied to certain residential properties in Toronto that remain unoccupied for a significant portion of the year. The tax is calculated at a rate of 3% of the property’s current value assessment and is imposed on residential property that is classified as a “Vacant Unit” under the Bylaw. A Vacant Unit is defined as a residential property that for more than six months within a taxation year does not meet either of the following conditions:

• It is the Principal Residence of the Owner or another Occupant; or
• It is occupied by one or more Tenants in aggregate for at least six months of the year.

Under the Bylaw, an “Owner” is the registered legal owner of a property. A “Tenant” is a person who occupies a residential unit under a written lease or sublease for at least 30 consecutive days. An “Occupant” refers to anyone residing in a residential unit, including both Owners and Tenants.

A “Principal Residence” is the home where a person ordinarily resides, and under these rules, an individual may have only one Principal Residence.

Certain exemptions apply to the VHT. One significant exemption is granted in cases involving the death of the Owner. If the registered owner of a property passes away, the property is exempt from the VHT for two years following the year of death. Given the phrasing of the Bylaw, this exemption applies to natural persons and is not available if a nominee corporation holds legal title to the property.

If none of the exemptions apply, the VHT will be payable for the year unless the property is sold to an arm’s length party before the end of the year.

The Underused Housing Tax

The UHT is a federal tax in Canada that applies to certain residential properties that are considered underutilized and that are owned by certain categories of individuals or entities, including non-residents and foreign citizens. The UHT imposes a tax of 1% on the value of the property and a requirement to file a return each year, unless an exemption applies. It is therefore crucial to determine whether a person or entity is an “Owner” under the UHTA.

Under the UHTA², an “Owner” is any person listed as the owner of a residential property under the applicable land registration system. The term “person” is not defined in the UHT, but the Canada Revenue Agency (the “CRA”) interprets this term to refer to an individual or a corporation, in accordance with its publication “Questions and Answers About the Underused Housing Tax“. Like the VHT, the UHT focuses on the registered legal owner on title, rather than the beneficial owner. Additionally, under the UHTA, an “Owner” also includes a life tenant under a life estate in respect of a residential property. Notably, a residential property may have multiple owners for UHT purposes such that each owner must independently assess their obligations.

Property owners that qualify as “Excluded Owners” are not subject to the tax and filing requirements. The UHTA provides an extensive definition of “Excluded Owners”, which includes the following categories of property owners:

• Trustees of a Specified Canadian Trust;
• Individuals who are Canadian citizens or permanent residents; and
• Specified Canadian Corporations.

A Specified Canadian Trust is a trust in which every beneficiary holding a beneficial interest in the residential property is a Canadian citizen or permanent resident or another Specified Canadian Trust as of December 31 of the calendar year.

A Specified Canadian Corporation is defined under the UHTA in terms of what it is not. Essentially, it is a corporation that is incorporated or continued under the laws of Canada or a province, and is not:

• a corporation in which a non-resident, foreign citizen or foreign corporation has ownership or control, directly or indirectly, of shares of the corporation representing 10% or more of the value of the equity in the corporation or carrying 10% or more of the voting rights under all or under some circumstances.
• While the UHTA does not explicitly define “beneficiary,” the CRA has provided some guidance on how this term should be interpreted:
• A beneficiary is generally someone for whose benefit the trust was created;
• A beneficial interest refers to a person’s right to income or principal from the trust, as opposed to a trustee, who holds legal title to the property; and
• A contingent beneficiary (someone whose interest is dependent on a future event) does not have a beneficial interest in a residential property for UHT purposes and is therefore not considered a beneficiary under the UHTA regulations.

We will now look at a case study illustrating these concepts in practice and highlighting potential unintended consequences.

Case Study

Consider the following situation: A is a Canadian citizen, who is married to B, a U.S. citizen/resident. A and B spend their winters at B’s residence in Florida and spend their summers at A’s Toronto residence that she solely owns and which is her principal residence. A has two children from her first marriage, both of whom are Canadian residents and citizens.

Prior to the introduction of the VHT and UHTA, A transfers legal title to her Toronto home to a nominee corporation, incorporated in Ontario, which holds her Toronto residence as a bare trustee for her³. Unfortunately, A passes away shortly after the VHT and UHTA come into effect. A’s Will names B as one of the executors and trustees of her estate. Additionally, A’s Wills provide B with the right to occupy the Toronto home rent-free for up to five years, after which the home will be sold, and the proceeds are to be divided between A’s surviving children. A’s Will also names B as one of the executors of her estate. The Toronto home is left unoccupied following A’s death.

As the nominee corporation is the registered owner of the Toronto residence (rather than A), the VHT exemption with respect to the death of the registered owner does not apply.

A’s executors also cannot rely on the property being B’s “principal residence”, since B has a principal residence in the U.S. and a person can only have one principal residence for the purposes of the VHT.

For UHT purposes, the nominee corporation would be the trustee of a Specified Canadian Trust if all of the beneficiaries of the trust are Canadian citizens or permanent residents. B is a U.S. citizen and resident. The CRA’s interpretation of a “beneficiary” is broad enough to capture B, given that his right to reside in the property for a fixed period is a benefit. As such, the combination of B’s status as a beneficiary of the trust and his U.S. citizenship and residency would disqualify the trust from being classified as a Specified Canadian Trust.

The nominee corporation would be a Specified Canadian Corporation if B is not a shareholder (due to his foreign citizenship and non-residence in Canada) and does not have indirect or direct control over the shares, including in the capacity of an executor/trustee. However, as B is one of the executors of A’s Will, the nominee corporation would not qualify as a Specified Canadian Corporation.

While the definition of “Owner” also includes a life tenant under a life estate, in this case, B’s right of occupancy for up to five years, meaning his interest is not a “life interest”.

The nominee corporation would, accordingly, be required to file and pay the UHT unless another exemption applies (whether UHT would ultimately be payable would depend on the type of occupancy of the property and is beyond the scope of this article). As a result, A’s executors would either have to pay the VHT and the UHT each year the trust holds the Toronto residence unless they:

1. Sell the property before the end of the year to an arm’s length transferee⁴;
2. Enter into a written lease with B that is in effect for at least six months in the year and each subsequent year until the property is sold; or
3. Enter into a written lease with a third-party tenant that will be in effect for at least six months in the year and each subsequent year until the property is sold.

Estate Planning & Administration Considerations

While the use of a nominee corporation to hold legal title of real property can be an effective probate tax savings tool, the case study shows how the Bylaw and UHTA can result in an annual tax burden on the deceased’s estate that far exceeds those probate tax savings.

As always, it is prudent for estate planners to discuss the testator’s intended plan for their real property, particularly when such property is situated in Toronto and is to be held in trust for the benefit of a non-resident and foreign citizen. The following questions could provide a helpful starting point:

• Are all of the current and intended occupants and owners of the residential property Canadian citizens and residents? Do any of the occupants or owners have future plans to change their citizenship or reside outside of Canada?
• Does the named beneficiary wish to reside in the property on the testator’s death? If not, is the property likely to be unoccupied for a period of time or will it be rented out pursuant to a formal lease agreement?
• Will the property be occupied by an individual who already has a primary residence elsewhere?

The terms of the residence trust may offer some support for the executor and trustee. It is good practice to draft a residence trust that includes terms as to the termination of the trust upon an event; typically, this is the earlier of the beneficiary’s death (or a specified period) and such date that the executors and trustees shall determine. The executor and trustee could exercise his/her discretion to terminate the trust earlier and contend with the property in a manner that satisfies one of the time-specific exemptions for the VHT. For example, the real property could be sold to an arm’s length purchaser within the year of or the year following the year of the testator’s death, depending on when the death occurred.

Take Aways

When using a nominee corporation arrangement, it is advisable to consider in advance whether the registered owner on title to the real property will fall within the definition of an Owner or an Excluded Owner under the UHTA. If it is not possible to fit within the latter category, the next consideration should be the available tax exemptions. While it is not possible to plan for every eventuality, it is always prudent to discuss these potential issues at the planning stage.

Testators and planners alike should consider whether probate saving techniques are effective in light of these additional real estate taxes and the legal and administrative costs involved with dual will and/or nominee corporation arrangement.

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1  A “first dealings exemption” is available in limited circumstances under the Land Titles regime in Ontario allowing real property to be administered without probate.

2  For the purposes of this article, we have only included the relevant portions of the terms set out below. Please refer to the UHTA for the complete definitions.

3  A already has Primary and Secondary Wills.

4  Either the year of A’s death if she died before July 1 of that year or the year following the year of A’s death if she died on or after July 1.

_{This publication is intended for general information purposes only and should not be relied upon as legal advice.}