Are you a first-time homebuyer or looking to purchase a commercial property? With land transfer taxes being in the news as of late, we have received many questions from clients looking to understand Land Transfer Tax (“LTT”) and how it will impact their purchase. Today’s blog post focuses on demystifying LTT and clarifying recent changes.
Last November, the Government of Ontario announced that it would be making changes to the Province’s Land Transfer Tax scheme. These changes came into effect on January 1, 2017, and have had tangible impacts on first-time homebuyers, and purchasers of both commercial and high-end residential properties. As further detailed below, the updates have involved (a) increases in LTT rates on transfers of certain categories of properties, and (b) a larger refund for eligible first-time homebuyers.
What is Land Transfer Tax?
If you purchase land or plan to invest in land in Ontario, you are required to pay a ‘Land Transfer Tax’ to the Province at the time that the transfer of ownership occurs. LTT is payable by the buyer of the property, and with electronic registration, is typically paid through the buyer’s law firm. There are certain kinds of transactions for which an exemption from LTT is available, but for most everyday transactions, LTT will be payable. Common transactions to which LTT applies include the purchase of homes, condominiums, cottages, vacant land, or commercial properties from third parties, and the transfer of an ownership interest from parent to child.
The amount of LTT payable is usually calculated based on the amount paid for the property, less any amount of debt being assumed by the Buyer (ie: assuming a mortgage obligation from the seller). As of January 1, 2017, the tax payable is calculated using a sliding scale based on the value of consideration as follows
- Amounts up to an including $55,000 – 0.5%
- Amounts exceeding $55,000 up to and including $250,000 – 1.0%
- Amounts exceeding $250,000 up to and including $400,000 – 1.5%
- Amounts exceeding $400,000 – 2.0%
- Amounts exceeding $2,000,000, where the land contains one or two single-family residences – 2.5%
For example, on the purchase of a $200,000 property, the buyer will pay 0.5% on the first $55,000.00 of the purchase price ($275), and then 1% on the remaining $145,000 ($1,450). In total, $1,725 in LTT would be payable.
Increases in LTT Rates
Arguably the most significant of the new changes has been the increase of the LTT rate on transfers of commercial properties, these being industrial, agricultural, commercial, and multi-residential properties. As of January 1, 2017, the rate payable on any portion of the consideration in excess of $400,000 is subject to tax at a rate of 2.0%. This is an increase of 0.5% from the 1.5% which was previously payable.
Also new in 2017 is the addition of a new LTT bracket for acquisitions of one or two single-family residences (ie: singles and semi-detached homes, condominiums and townhouses). If the consideration is above $2,000,000, these high-end properties are now subject to a 2.5% tax, where formerly the highest tax bracket was 2.0%.
The added revenues generated by the increased LTT rates are expected to assist with the additional refunds being offered to eligible first-time homebuyers.
First-Time Homebuyer Refund
Prior to January 1, 2017, eligible first-time homebuyers were able to claim a refund of LTT payable of up to $2,000. For conveyances that occur on or after January 1, 2017, the maximum refund amount has been increased to $4,000. As most conveyances are registered electronically, the refund is claimed immediately at the time of registration and acts to reduce or offset any amount of LTT payable on closing.
The effect of the increased refund means that for an eligible first-time homebuyer, no LTT will be payable on the first $368,000 of the purchase price. If the purchase price for the property exceeds that amount, LTT will be paid on the excess amount. The refund available is $4,000 maximum per transaction (not per person), meaning that even if there are multiple first-time homebuyers acquiring the property, the refund cannot exceed $4,000.
The eligibility rules for the LTT refund have not changed as of the new year, but are worth repeating as they differ from other credits and refunds available for first-time homebuyers (ie: First Time Home Buyers’ Tax Credit and Home Buyers Plan RRSP Deduction):
- To be entitled to claim the refund the buyer must first be purchasing an “eligible home”. The types of properties which qualify are sufficiently broad but include new and resale single and semi-detached homes, condominiums, townhouses, and mobile homes.
- The buyer must also be considered a “first-time buyer”. This means that the buyer cannot have:
- Ever owned a home anywhere in the world, or
- Ever owned an interest in a home, anywhere in the world (so think twice about being added to the family cottage for estate planning purposes).
Previous home ownership disqualifies a buyer from claiming a refund, and you can never re-qualify as a first-time homebuyer for LTT purposes.
Moreover, if the buyer has a spouse and the spouse either owns or has owned a home while they were spouses, the buyer will not qualify.
When persons who are not spouses acquire a property together, and where one or more of the buyers are not first-time homebuyers, the portion of the refund available to any first-time homebuyer in the transaction will correspond to their ownership interest in the property.
Whereas the increased LTT payable on luxury properties will most heavily be felt in the hot real-estate markets of Toronto and the GTA, the increased relief being offered with the LTT refund comes at a needed time for many first-time homebuyers across the province who have already felt the impact of more stringent federal mortgage rules which came into effect last fall.
Determining eligibility for the first-time homebuyers’ refund and the calculation of LTT payable is highly fact specific and should be discussed on a case-by-case basis with a lawyer to account for your unique circumstances and particulars of the transaction. RSR’s real estate lawyers would be pleased to assist.