Whose House is it, Anyway?Rental Investment Issues

One of the most popular investments is real estate.  In many cases, real estate investments also become income properties where the owner also becomes a landlord by virtue of renting some or all of the property to tenants.  If you are a landlord, how well do you know the law?  The Residential Tenancies Act, 2006, S.O.  2006, Chapter 17 ("RTA") is the sole authority governing matters affecting both landlords and tenants.  Neither a landlord nor a tenant can “contract out” of this authority.  The RTA can harbour some interesting and surprising results.  Consider the following anecdote based upon a true story.

A couple, each born in the mid 1930s, purchased a house in Toronto in 1985 for $100,000.00 to be an asset, which was expected to appreciate as a retirement "nest egg".  The house was rented to tenants over time to generate income to pay for the mortgage and, at times, generate modest rental income.  On title to the house, however, were not either of the partners of the couple but, rather, a numbered Ontario company -- a corporation.  The purpose of assigning the title of the property to a corporation was to mitigate tax from revenue taken in from the rental income.

By 2018, the couple had aged into their mid-80s with a daughter in her 50s.  The couple, with their daughter, wished to reclaim the house for personal use so they could all live in the house.  At the time, the house had seven (7) tenants living within it.  Changes to the RTA as of September, 2017 precluded the owners/landlord from evicting the tenants on the basis of landlord’s own use (on N12s) because the house was owned not by an individual but by a corporation.  The tenants were not amenable to simple agreement to leave (N11) because the location of the house was favourable, as was the price of the rent.  Demolishing or renovating the house to change its capacity would result in the prospect of lucrative compensation to each of the tenants, if not, also, offering the right of return.

You may ask, why wouldn't the owner/landlord transfer the title from the corporation to an individual (themselves) to facilitate the use of N12s/own use, by which to then lawfully evict the tenants?  The problem for the owners was that owners had realized a profit of $900,000.00 over the duration of owning the house, which rendered them vulnerable to a capital gains tax of at least 20% on 50% of the amount of the gain, or 20% on $450,000.00, or $90,000.00.  Furthermore, a land transfer tax of $32,000.00 would be looming.  And, furthermore, real estate/ lawyer fees of many thousands of dollars would be required to execute the ownership change.  The owner/landlord, therefore, would face almost $140,000.00 in fees to transfer the ownership to then facilitate the use of N12 evictions of the tenants.  The owners of the house, being retired for twenty (20) years, didn't have the revenue by which to transfer the title.

The owners were left with two (2) options: they could attempt N11s with each of the seven (7) tenants which would require compensation of, probably, between $15,000.00 to $35,000.00 which would require a loan which, if they could get, would carry a high interest rate.  Or they could sell the house.  The house, containing seven (7) tenants, would garner much less than market value for a house of its kind.  To sell, therefore, the owners would take a loss of expected revenue, as compared to market value, of approximately $100,000.00.

There are many lessons implicit in this example -- particularly pertaining to the house owner's investment strategy and liquidity -- which are beyond the scope of this post.  An implicit lesson in this example should demonstrate the power of the law, which can and does change over time.  In this case, a benign attempt to save for retirement became entangled with tenancies which, in turn, changed the direction of the investment and, in fact, the ability, if not the right, of the owners to claim their own property for their own use and the value of the investment.

The content of this article is not legal advice and the facts of the matter are altered to protect the identity of the parties while remaining true to the substance of the matter.

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