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Significant de facto increase in land transfer tax
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Did the Ontario government increase the land transfer tax in March, or did it
simply clarify the interpretation of the Land Transfer Tax Act so that buyers of
new homes will be paying more tax on closing?
Two weeks ago in this column, I reported that officials in the Ontario
finance ministry "have come out with an edict to increase the land transfer tax
paid on every new home and condominium in Ontario."
Someone in the office of Finance Minister Dwight Duncan complained to
the Star that I had accused the government of quietly raising the land
transfer tax, and said that "this is simply not true."
The email to the Star says: "We have not increased the land
transfer tax. Purchasers of newly built homes have been required to pay for land
transfer tax on the full value of homes, including extras and upgrades, for
decades.
"The information contained in the tax bulletin referenced in Mr. Aaron's
article is neither new, nor an indication of a new tax. It is a clarification of
existing policy.
"This bulletin is part of our response to the provincial auditor's 2004
annual report, which called for further educational materials on avoiding errors
in reporting the total taxable purchase price of a home."
The ministry asked for a correction stating that the information in my
column was wrong.
My colleague Larry Ginsler practises real estate law for developers at
Baker Schneider Ruggiero LLP in Toronto. He also wrote to say that the column
was wrong and suggested that I clarify my comments on the new tax bulletin to
avoid "the anticipated anger and grief" that new home purchasers will
experience, thinking that they are "getting hit with increased, and new taxes."
Another development industry lawyer came in on the other side of the
fence.
"I wholeheartedly agree with your position that the ministry's
`clarification' of the breadth and depth of the phrase `value of consideration'
(purchase price) has taken the real estate bar and home builders by surprise,
and has the effect (if not the purpose) of attracting payment of more tax," he
wrote.
"While extras and upgrades may have been included in the land transfer
tax calculation, I doubt whether any of the major law firms, let alone smaller
firms or sole practitioners, ever included increases in development charges,
meter installation charges and the Tarion enrolment fees into their calculation
of land transfer tax, let alone driveway paving, tree planting and other similar
charges or assumed liabilities.
"The only curious matter," he added, "is why the ministry waited so long
to issue this clarification bulletin!"
I agree with this last letter and I stand by what I wrote when I said
that the new edict will increase the tax paid by purchasers of new homes. I also
agree, and should clarify, that no new taxes were imposed and the rate of the
land transfer tax has not been changed.
What did change was that the ministry has "clarified" that the
value upon which land transfer tax is supposed to be paid was always supposed to
include but didn't a host of extras that builders add on to the base
purchase price of houses and condominiums.
It has always been customary for builders' lawyers to insert, on every
deed to purchasers, the net price without extras. In more than 30 years of
practising law, I have never seen a purchaser pay transfer tax on the extras in
a builder purchase agreement.
Although the ministry announcement was not new law or a new tax, its
"clarification" of the existing law in March amounted to a significant de facto
increase in the amount of land transfer tax being paid by each purchaser of a
new home.
To my knowledge, this is the first time the ministry has ever "clarified"
how the tax is to be calculated, particularly when it presumably knew that the
tax was not being calculated "properly" over many decades.
I find it difficult to believe that the ministry did not know that tax
was being calculated "incorrectly" over several decades in hundreds of thousands
of new home purchases. Yet it took until March to clarify how transfer tax
should be calculated.
The small community of very sophisticated development industry lawyers is
now trying to amend policies to figure out how to comply with the
"clarification." If the lawyers were aware they were doing it "wrong," I am
certain they would have amended their practices years, or even decades, ago.
To say that the new interpretation is not an increase in the amount of
tax being collected is simply disingenuous. Perhaps the ministry is just unhappy
that I called the finance minister a grinch as a result of the tax grab, but I
stand by that, too.
Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818. |
