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New City of Toronto Land Transfer Tax | Impact on Toronto Home Buyers

December 5, 2007 - Updated: September 8, 2015

New City of Toronto Land Transfer Tax | Impact and Implications


City of Toronto Land Transfer TaxAs you have probably of heard, after much protest, not enough debate and a lot of misgivings, the City of Toronto has recently passed its much maligned Land Transfer Tax proposal. The Mayor has conceded that this was a necessary reactionary measure, to stem the City’s burgeoning fiscal deficit, projected to be in excess of $500 million next year.

 

Now that this is law, what exactly is this tax and what impact might it have on the Toronto real estate market?

 

What is the New Land Transfer Tax?

 

The new City tax, like the pre-existing Ontario land transfer tax, is paid by home buyers as a closing cost when purchasing a house or condo. It is a regressive tax, which has proportionately more impact on purchases of higher priced homes. In addition, it impacts repeat buyers to a larger extent than first time buyers. The main components are as follows:

  • paid by purchasers of homes, (new and resale), vacant land and commercial property that are situated in the (416) area code. Any homes situated in the (905) area code are exempt.
  • Is an ‘additional tax’. It’s additional to the existing Ontario land transfer tax which continues without change. Toronto City is now the only city with two land transfer taxes in the country.
  • impacts all Agreements of Purchase and Sale made after January 1, 2008 that close after February 1, 2008 (so an agreement entered into prior to January 1 will not be affected, regardless of when the closing date is. An agreement entered into after January 1 must close before February 1 to be exempt from the tax)
  • first time home-buyers are entitled to a rebate of up to $3,725. In effect, it means that they are for up to $400,000 of purchase price. If buying a home worth more than $400,000, first time buyers pay tax on the full purchase price and receive a rebate of $3,725. In effect, this means that they are really paying tax on the difference between the purchase price and the $400,000 threshold at the applicable rate (see table below).
  • the tax cannot be added to the mortgage, but rather, must be paid at closing. It is an ‘additional’ closing cost
  • Tax thresholds are as follows:

 

Purchase Price

Tax

 

Home Price

Ontario Land Transfer Tax

Toronto Land Transfer Tax

Total Land Transfer Tax

$0 - $55,000 *

0.5%

 

$250,000

$2,225

$2,225

$4,450

$55,000 - $400,000 *

1.0%

 

$350,000

$3,725

$3,725

$6,950

> $400,000

2.5%

 

$450,000

$5,475

$4,725

$10,200

* First Time Buyers Exempt

 

$500,000

$6,475

$5,725

$12,200

 

What is the Potential Impact of the New Tax on Real Estate in Toronto & GTA?

 

2007 to date has been a very strong year for the City of Toronto (416 area code). The number of Downtown condo sales is up about 25% from this time last year, and the same is true of detached homes in cheaper suburbs such as north Scarborough. Prices overall are forecast to increase by about 8-10% by the time the year is up, with the relatively cheaper condo market appreciating by even more than this. Multiple offers continue with regularity in hot City of Toronto neighbourhoods and demand for the most part exceeds supply. Employment continues to be at a record high, and interest rates, while higher than a few years ago, remain at historic lows with increasing signals that reductions are in store for early next year.

 

In this positive environment, in the short term (at least until the end of December) we will inevitably see the following:

  • an unseasonally heated market, as repeat buyers and investors (the parties most impacted by the tax) attempt to make purchases before the end of the year to ‘beat the tax’…..to some extent this will be offset by first time buyers holding out until early next year, when they may anticipate the market could cool off a little, and they can capitalize on predicted interest rate cuts.

In the medium term (from January 1 until the middle of next year) we are likely to see the following:

  • the market move along at a respectable clip, as continued low interest rates and near full time employment support consumer confidence
  • a reduction in down payment and equity as both first time and repeat home buyers make purchases with less money (effectively funding the tax with the amount that they previously could have used for a down payment)
  • even higher demand for ‘staged’ and ‘move-in’ condition homes relative to fixer-uppers, as buyers realize that any ‘renovation money’ must now be applied to the tax.
  • investors and repeat buyers waiting longer before making that second home purchase or investment purchase (to save up enough)
  • perhaps more selectivity from investors, since the rate of return calculation will not be as favourable in the new year, once the tax is incorporated
  • incentives from major lending institutions to help home buyers. As an example, BMO & TD have just announced that they will help pay the new land transfer tax up to a cap for home buyers for a limited time (some conditions apply)
  • perhaps more activity in (905) area code (near the border with the City of Toronto), as buyers take advantage of the lower land transfer impact of buying outside the City borders.

In the long term (after the middle of next year), no one is really sure. It is possible we may see:

  • more development in the (905) area on the City borders, as developers capitalize on demand by buyers just on the outskirts of Toronto (i.e. Thornhill, south Markham, east Mississauga, west Pickering etc.)
  • smaller and more affordable housing development within the City core (i.e. high density construction) to keep the purchase price at a level that attracts first timers (who are exempt for a lot of this tax) and repeat buyers (where the impact of a regressive tax is not as pronounced at lower price points
  • more redevelopment of areas within the 416 area code that have up to now been neglected by developers (parts of west and east Toronto), as their relative affordability encourages development.

The Bottom Line on the New Tax

 

In 2007 to date, the City of Toronto real estate market was very solid and in some cases (i.e. the new build condo market) was beginning to exhibit some signs of speculative frenzy. . We continue to see more demand than supply for decent real estate in the 416 area code. This new City land transfer tax, to the extent that it causes speculators to be more prudent when making an investment decision, is a good thing. To the extent that it makes first time home buyers more cautious about buying beyond their means or jumping in without sufficient equity, is also a good thing. While the implementation of double-taxation by the City in order to cover its mismanagement is abhorrent to some, it is possible, somewhat perversely, that this City tax may in fact sustain our real estate boom, by preventing a bubble in the making from forming and/or getting out of control. Could it be the law of unintended consequences at work?


Tagged with: land transfer tax tax toronto real estate market toronto home buyers closing costs
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