A real estate cautionary tale – Tribulations of tax check boxes
The client was buying a multi-million-dollar property, located geographically outside of the lawyer’s usual jurisdiction. Fully doable with province-wide Teraview access and today’s technology.
The law office prepared the transfer and land transfer affidavit. The box indicating the transaction was subject to other taxes was checked. However, the lawyer practices in a jurisdiction where there is no municipal land transfer tax on properties. As a result, they were unaware that checking the box meant municipal non-resident speculation tax (MNRST) would also be charged. Unfortunately, the box caused over $300k in taxes to be taken from the lawyer’s general account and paid to the municipality. The transaction was not subject to MNRST.
The error was noticed almost immediately. The client was unaffected, but the law firm was out a large amount of money. Your LAWPRO policy does not (and other business insurance may not) cover this error. The Registry Office will not generally return a document submitted for registration on request, and if returned for other valid reasons we are told that this would not reverse the tax payment. The taxes are taken as part of the Teraview process and remitted from Teranet to the province/municipality overnight. Teranet has advised that it is not in any position to return the funds.
Toronto, and likely other municipalities, offer refunds for this type of error, but the process can be time consuming. For information required for a refund see the City of Toronto’sMunicipal Land Transfer Tax (MLTT) page. The City of Toronto declined our request for statistics of how often this type of error happens but told the lawyer that this was a regular occurrence.
If unexpected money came out of your general account, could your firm continue operating as usual? If not, will your bank agree to fund your daily operations until the refund is returned to your account? A dedicated Teraview account (ERBA) may end up in a deficit position. Would your bank then draw the funds from your general or personal accounts to cover the deficit? Assuming your daily cash flow is not impacted you would still incur interest expense, in addition to the angst created by the experience.
I started practicing when we did not do transactions outside of our geographic area, under the caution that you only know the skeletons in the closet for your area. Today, technology has expanded our service area, but we must be alert to the dangers that may exist when we practice outside of our usual jurisdiction. This includes the type of transactions, their particularities and their location.
Do you have processes in place for a thorough understanding and review of documentation to avoid a similar situation happening to you? A review by someone other than the person that created the document might be a wise practice.
Check your checkboxes carefully:
Consider using the PracticePRO Residential Real Estate Tax Consideration chart.
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