September 19, 2022

Whose House Is It Anyway?

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Real estate and income properties are popular investments. Often, real estate becomes an income property where the property owner becomes a landlord by virtue of renting some or all of the property to residential tenants. If you are a landlord, how well do you know the law? The Residential Tenancies Act, 2006 (RTA), is the sole authority governing matters and disputes affecting both landlord and residential tenants. Neither a landlord nor a tenant can “contract out” of this authority. The RTA can harbour some interesting, if not surprising, results. Consider the following anecdote based upon a true story.

A couple, each born in the mid 1930s, purchased a house in Toronto are about $100,000.00 in 1985 to be an asset which they expected would 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 neither of the couple partners but, rather, an Ontario numbered company — that is, a corporation. The couples assigned the property title to a corporation to mitigate taxes paid from rental income.

BY 2018, the couple were in their mid-80s with a daughter in her 50s. The couple, with their daughter, wished to reclaim the house for own/personal use so they could all live in the house. At that time, the house had seven (7) tenants living in it. Changes to the law (RTA) as of September, 2017, precluded these owners from evicting the tenants for their own use because the house was owned by a corporation. The tenants, when asked to vacate, were not amenable to leave via a simple agreement (N11) because everything about the house, such as location and rent, were favorable to them. Demolishing or renovating the house to change its useful capacity would result in lucrative compensation to the tenants, which was not affordable, or would result in the tenants having the right of return, which they would exercise, defeating the purpose of the renovation.

One may ponder why the owners wouldn’t transfer the title from the corporation to an individual (themselves) to circumvent the law, enabling the use of an N12, and thereby lawfully evicting the tenants. The problem for the property owners was that the owners realized a profit (per market value) of $900,000.00 over the duration of ownership of the property, which rendered them susceptible to a capital gains tax of over 20% applicable to 50% of the gain. $450,000.00 taxed at a rate of 20% would be $90,000.00. Furthermore, a land transfer tax of $32,000.00 would be looming. And, furthermore, the owners would face legal fees of many thousands of dollars with respect to these transactions. The owners would realize, therefore, approximately $140,000.00 in various fees in order to transfer the ownership to then facilitate a lawful eviction of the tenants. The owners, having retired some 20 years previously, did not have the revenue stream by which to pay the fees.

The owners were left with two (2) options: firstly, they could attempt to get each tenant to agree to terminate their respective tenancies via an N11 process in exchange for consideration for each tenant. However, seven (7) tenants being compensated for a total of $30,000.00 to $100,000.00 would require a loan carrying a high rate of interest. Secondly, the owners could sell the house with the tenants remaining in the house. A house containing seven (7) tenants would significantly compromise the market value of the house – a loss compared t market value of about $100,000.00. In this case, the owners sold their house for much less than market value and were left without their retirement “nest egg”.

There are many implicit lessons in the above example, particularly pertaining to the property owner’s investment strategy and liquidity. At the core of the above example is the power and reach of the law, which can, does, and did change over time. In this case, a benign attempt to save for retirement became entangled with the legal nuances of tenancies which, in turn, changed the direction and worth of the investment itself.

This example does not constitute legal advice.



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