Haldimand County transfer of land - is it illegal?

by Gary McHale - The Regional

November 2, 2011

This story has two aspects to it. First, did the county legally sever land? Second, did the people involved pay the proper Land Transfer Tax and/or Income Tax as a result of the transfer? In 2009, a property owner who owned 100 acres of land with a house applied to the county to have the home severed. The county approved the severance with the condition that the property be sold to a farmer who had additional farms with homes on them.

In this deal the property owner and farmer both used the same law firm - McCarthy & Fowler out of Hagersville. All transfers were signed the same day - June 16, 2009.

In an email from Mr. McCarthy he acknowledged that "the property owner in this transaction was not permitted to sever his house... Since it is well known to the County that the Sheppard family uses their personal name as well as their Corporate name to carry on the family farming operation, it was therefore not felt necessary to have this farm transferred into the Sheppards' personal names and then subsequently transferred to the Corporation... I might also point out as a matter of interest, that from a legal perspective I see no reason why Sheppard would not have been able to apply for this severance in his own name... However, in this case it was decided to apply in the name of the seller."

In short, legally the property owner didn't qualify and therefore could not apply for severance but because the buyer is well known to the County the legal nuances were overlooked to make it easier. I guess what is suggested is that the letter of the law wasn't obeyed but the spirit was. The question is whether the County wilfully overlooks the legal nuances for everyone else or just with families well known to the County?

The second question is why not just obey the law and transfer the property legally? The answer appears to be twofold.  First, no one would be willing to transfer ownership of their land (including their home) into someone else's name in the hopes the person will transfer the home back after severance is granted which takes months to do. Second, there are tax implications regarding both land transfer tax and income tax - farm land has special income tax breaks that homes do not.

The 100 acres and home were purchased for $135,000. According to McCarthy the assessment value of the land portion was $165,400 and the home was $159,600 for a total of $325,000 at the time of the sale. After the 100 acres and home were transferred into the farm corporation, 1 acre and the home was transferred back for $1.

Instead of paying land transfer tax on $325,000 which would be $3,375 the tax was paid on $135,000 which was $1,070 - a savings of $2,305 on the first part of the transaction. The second transaction was valued at $1 thus no tax was paid, whereby if that transaction was valued at $159,600 the tax would be $1,346 - total savings on taxes from both transactions was $3,651.

I spoke with the Ontario Ministry of Finance about this transfer to get their feedback. They acknowledged that the whole transaction must be considered when calculating land transfer tax. I gave them the exact example that occurred in this case and they replied that if the original sale included any condition to transfer back any land then that consideration in the sale would have to be at fair market value.

In the Ontario Land Transfer Act this is worded, "the amount expressed in money of any consideration given or to be given for the conveyance [selling of the property]." In this case the seller is receiving $135,000 plus one acre and a home as stated in the sale's agreement.

McCarthy claimed the "only consideration which passed between the buyer and seller in this transaction was the $135,000 purchase price for the farmland.  There was no intention that the purchaser acquire any interest in the farmhouse. The farmhouse was only in the purchaser's name for 31 minutes..."

Of course this isn't completely true. The buyer filled out the paperwork as someone with legal interest in the farmhouse in order to get the severance. You can't have it both ways unless you are in Haldimand where the rules are not followed. Also, the farmhouse was only in the buyer's hands for 31 minutes because the laws were not followed in the first place - had the laws been obeyed the property would have been in the buyer's hands for months.

While McCarthy stated, "The agreement stipulates that... the buyer apply for and obtain a consent to sever the house..." this never happened because it was the seller who didn't qualify who applied for the severance.

In fact, the buyer (Sheppland Farms Inc.) didn't qualify either. McCarthy stated that 5105 Rainham Road was the address where the buyer owned another farm with a home that would have qualified it for this severance. However, Sheppland Farms had already received approval to sever 5105 Rainham Road and exercised that severance on March 24, 2009. This means it didn't qualify in June of 2009 to sever the property which is the subject of this story.

Furthermore, such transactions would have Federal Income Tax implications by causing Capital Gains Tax on the various parties. The property owner pays Capital Gains on the difference between the $135,000 and what he bought the land for and not on an assessed value of $325,000. Since he buys back the home for $1 there is no Capital Gains for the corporation and the owner is now free to sell his home a second time for any amount he wants without any Capital Gains because primary residents are exempt from this tax.

Sheppland Farms Inc. has done this several times in Haldimand and as of Aug. 9, 2011 has a request before council to sever another property. You can be assured they will get it whether or not they qualify.

The law is designed to ensure everyone is equal not that well known people have special privileges.