Bob Aaron firstname.lastname@example.org
May 6, 2006
Ontario hikes land transfer tax on new houses
Buyers will pay on total, not base, price
That definition might well apply to Ontario Finance Minister Dwight Duncan, whose mandarins have come out with an edict to increase the land transfer tax paid on every new home and condominium in Ontario.
No major announcement of the increase was made and industry insiders told me they were not aware of any stakeholder consultation. At the end of March, a new land transfer tax bulletin quietly appeared, buried deep within the Ministry of Finance website (http://www.rev.gov.on.ca/english/bulletins/ltt/1_2006.html and see full copy, below).
Under the current practice, purchasers of new homes and condominiums pay land transfer tax on the base price of the home, excluding GST, all the builder extras and the purchaser upgrades.
According to the new tax bulletin from the Ontario Ministry of Finance, however, homebuyers will now have to pay tax on the total purchase price, including all extras and upgrades, plus installations, assumed charges and miscellaneous costs.
The value of extras and upgrades to be included in the purchase price for land transfer tax purposes now includes the cost of:
Purchasers will also have to pay land transfer tax on charges for:
Builders of new houses and condominiums typically charge back to each purchaser all or a portion of the installation and connection charges for gas, hydro and water meters.
As a result of the changes in the new bulletin, the value of these installations will now be added to the purchase price so that land transfer tax will be payable on the total.
As if this weren’t enough, purchasers will have to start paying land transfer tax on a host of other charges that builders typically pass on to purchasers as extras, including:
Purchasers will not be able to escape some of the liability by entering into separate agreements to buy the land and then construct the house. The cost of both agreements would be subject to land transfer tax.
If a home purchase includes new appliances, buyers have to pay the government eight per cent retail sales tax on the value of the appliances instead of land transfer tax. But in most cases, the buyers wind up paying PST directly to the builder instead of the government. Eventually, either the builders or the government will have to stop collecting this tax so the purchasers won’t have to pay it twice.
Last week I contacted Toronto lawyers Harry Herskowitz and Mark Freedman to get their take on the new tax bulletin. Herskowitz is a partner at DelZotti Zorzi and Freedman is a partner at Harris Sheaffer. The two lawyers handle a large percentage of builder closings for new condominiums in the Greater Toronto Area.
Herskowitz told me the builder community is concerned that increasing the overall amount of land transfer tax will have a negative impact on new home buyers. It may also bump up the house value on which the Tarion warranty premiums are calculated, as well as the price upon which the GST New Housing Rebate is calculated.
In addition, when the Municipal Property Assessment Corporation sets the initial market value assessment of each new house and condominium, those values will be increased by the total cost of the extras, which could be in the range of $5,000 or more. As a result, municipal property taxes will be that much higher in future years, since the initial base price will include all the extras, upgrades, levies and other adjustments.
Mark Freedman told me that several aspects of the new tax bulletin are still unclear. Some builders, he said, offer purchasers a cash-back credit or a refund of all common expenses for the first year of ownership.
Some credits, Freedman explained, are reductions in the price and some are incentives paid after closing.
Whether or not these items can now be deducted from the purchase price for the purpose of calculating and paying land transfer tax remains to be seen.
Freedman, Herskowitz and Jules Mikelberg, another developer lawyer, will be meeting shortly to discuss how to comply with the new guidelines and standardize conveyancing procedures across the industry.
In Ontario, land transfer tax is paid on a sliding scale. The new tax policy will apply at the marginal rates of 1 per cent on homes valued at less than $250,000, 1.5 per cent on homes valued at more than $250,000, and 2 per cent where the price exceeds $400,000.
Assuming the government ruling will add about $5,000 in extras to the taxable value of each new home, the initial effect of this provincial policy will be to increase the transfer tax by perhaps $75 to $100 on each new house or condo.
Where a buyer has ordered substantial upgrades, the tax increase will be significantly higher.
Although the actual dollar cost of the tax hit will not be much on each purchase, the optics are that it will appear prices have increased substantially across the board. That may hurt the entire new home sector.
The only good news is that the land transfer tax grab should be more than offset by the new 1 per cent decrease in the goods and services tax.
Bob Aaron is a Toronto real estate lawyer. He can be reached by email at email@example.com, phone 416-364-9366 or fax 416-364-3818.
Visit the Toronto Star column archives at http://www.aaron.ca/columns for articles on this and other topics or his main webpage at www.aaron.ca.