Bob Aaron email@example.com
May 6, 2006
Ontario hikes land transfer tax on new houses
Buyers will pay on total, not base, price
My dictionary defines "grinch" as one who spoils the pleasure of others. The derivation, of course, is the principal character in the Dr. Seuss classic, How the Grinch Stole Christmas. 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:
upgraded flooring, cupboards, doors, windows and counters
extra doors and entrances
Purchasers will also have to pay land transfer tax on charges for:
sodding and planting
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:
municipal lot levies
development charges and increases in development charges
the $53.50 charge by the Law Society to the sellers
any administrative fee charged for a late request for upgrades
the Ontario New Home Warranty Plan fee
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
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
Where a buyer has ordered substantial upgrades, the tax increase will be
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.