I recently had an interesting conversation with a Realtor friend in Arizona. The subject of land transfer tax came up.

She looked at me blankly.

“What is land transfer tax?”

Fair question. Arizona does not have one.

In Canada, every province and territory charges buyers something when ownership of a property is transferred. Five jurisdictions do not impose a conventional land transfer tax, charging comparatively modest land-title or registration fees instead.

On the purchase of a $1-million home, those registration fees generally range from approximately $1,000 to $4,000.

In provinces with a conventional land transfer tax, the bill can range from approximately $10,000 to $18,000 on that same purchase.

And then there is Toronto.

Welcome to Toronto. That Will Be $32,950.

A buyer purchasing a $1-million home in Toronto pays both Ontario land transfer tax and Toronto’s municipal land transfer tax.

The combined bill is approximately $32,950.

What makes this particularly interesting is where the money goes. You might assume that a tax collected from homebuyers would be dedicated to housing, infrastructure or programs designed to improve affordability.

Generally, it is not.

The money usually becomes part of provincial or municipal general revenue, where it can be used to fund a broad range of government services.

In other words, the tax is collected because someone bought a home, but the money is not necessarily spent on housing.

 Very convenient and very Canadian.

Consider a First-Time Buyer

Let’s look at a first-time buyer purchasing a Toronto home for $1 million with a 10% down payment.

Their numbers would look roughly like this:

• Purchase price: $1,000,000
• Down payment: $100,000
• Mortgage before insurance: $900,000
• Combined Toronto and Ontario land transfer tax: $32,950
• Mortgage insurance premium: $27,900

Eligible first-time buyers may receive rebates of up to $4,000 from Ontario and $4,475 from the City of Toronto. That could reduce their combined land transfer tax from $32,950 to approximately $24,475.

The mortgage insurance premium is normally added to the mortgage rather than paid entirely on closing. However, it is still a real cost. The buyer then pays interest on that premium as part of the mortgage.

Ontario also charges provincial sales tax on the insurance premium, which is generally payable at closing.

Before legal fees, title insurance, adjustments, moving expenses or buying their first celebratory lamp, this buyer has already accumulated tens of thousands of dollars in government-related taxes and insurance costs.

That is quite an entrance fee for someone attempting to enter an allegedly unaffordable market.

Can Land Transfer Tax Be Avoided?

The honest answer is: sometimes.

Certain transactions may qualify for a rebate, exemption or reduced tax, but the rules are more complicated than simply transferring a property between family members.

Situations that may receive special treatment include:

First-Time Buyers

Eligible Ontario first-time buyers may receive a provincial refund of up to $4,000. Toronto also offers an additional municipal rebate of up to $4,475.

Eligibility rules apply. Among other requirements, the purchaser cannot previously have owned a home or an interest in a home anywhere in the world.

Transfers Between Spouses

Certain transfers between spouses may be exempt, but not every spousal transfer qualifies automatically.

The treatment can depend on whether money changes hands, whether a mortgage is assumed and whether the transfer falls within a specific exemption under Ontario law.

Separation and Divorce

A transfer between spouses or former spouses may qualify for an exemption when it is completed under a written separation agreement or court order.

Gifts to Family Members

Calling a transfer a “gift” does not automatically make it tax-free.

If no money changes hands and the recipient does not assume a mortgage or other debt, there may be little or no taxable consideration. If a mortgage is assumed, land transfer tax may become payable on that amount.

Estates and Inheritances

A transfer through an estate may receive different treatment depending on how ownership is transferred, whether anyone provides consideration and whether a mortgage is involved.

These are not do-it-yourself legal questions. Before changing ownership, speak with a real-estate lawyer and an accountant. A poorly structured transfer can turn a generous family gesture into a very expensive casserole.

The Cost We Rarely Discuss

While researching this topic, I found plenty of discussion about the barriers facing homebuyers.

Development charges are frequently blamed for the price of new construction. Those charges matter, but they are usually built into the eventual selling price.

Land transfer tax is different.

It lands directly on the buyer at closing, precisely when that buyer is already paying a down payment, legal fees, adjustments, moving expenses and dozens of other costs.

It also taxes mobility.

A homeowner who needs to move for work, downsize, relocate after a divorce or find a more suitable home must pay the tax again simply because ownership changes.

Governments say they want a more accessible housing market while charging buyers thousands of dollars for permission to participate in it.

That is like encouraging people to use the emergency exit and then installing a toll booth in front of it.

If municipal, provincial and federal leaders are serious about improving housing affordability, land transfer taxes deserve far more scrutiny than they receive.

Not another study. Not another slogan. Put the tax itself on the operating table and see whether the patient actually needs the organ.

For questions about purchasing a property or transferring ownership, legal advice should come from a qualified real-estate lawyer. I can, however, help buyers and sellers understand the process, identify the right questions and avoid preventable surprises.

Lindsay Smith
905-743-5555
lindsay@buyselllove.ca