July 25, 2019 | Land Transfer Taxes
By many people’s estimation, Toronto real estate prices are high, and there’s a lot of reasons why that may be true. Some simply have to do with the desire to live in Toronto, and the employment and cultural draws that bring people here. There is a reason why Toronto is an expensive place to buy real estate while somewhere like Windsor is less expensive. It has to do with how our financial systems are run – the many, many years of low interest rates and strong performance of Toronto real estate that performs better than stock markets. It has to do with city planning and how long it takes for lands to go through the development process and how much the low density land in Toronto (the Yellow Belt) has too many restrictions on development.
All of these forces do have some influence on Toronto prices, but I want to focus on one in particular that is unique to Toronto: The Land Transfer Tax. Toronto has some of the highest land transfer taxes in Canada. Not only do you pay a land transfer tax for Ontario, but you pay for one in Toronto as well. Most municipalities pay a provincial land transfer tax, not a municipal one. It’s been over 10 years now since the Toronto Land Transfer Tax was added to any real estate transaction. In Spring of 2008, the land transfer tax essentially doubled the cost of every transaction in Toronto. In addition, as prices go up, so do the land transfer taxes. To see a history of the evolution of the land transfer tax in Toronto click here.
The most interesting thing noted in this article is NOT the change in price of a Toronto house – up 1325% since 1974, but the land transfer taxes have gone up $9528% between 1974 and now. That’s an increase that’s over 7 times faster than the price of real estate. So, if you think prices in Toronto have gone up, that would nothing compared to the price of the land transfer taxes.
It’s this large sum of money that is paid out in land transfer taxes that contributes to keeping inventory low, and prices higher. So, if you buy a condo for $500,000, you pay a total of $12,950. For a $1,000,000 property, you pay $32,950. And for $2,000,000, it’s $72,950. It’s a lot of money. But how do fewer buyers keep inventory low? If, for example, you wish to sell your house, and buy a larger one, the cost of selling your house and buying another one does not often justify the cost of moving up, especially with the land transfer taxes. This, in turn, has fewer people selling their homes, and staying put. Twenty years ago, you would see people buy and sell properties every 5 to 10 years to upgrade. It’s much less common now. This means less inventory. With less inventory and new buyers coming in, there are higher prices. New buyer are often not hit as hard with the land transfer taxes – one of the few benefits of being a first time buyer. They do receive a deduction on their purchase, and rarely are first time buyers buying property for $2,000,000. Still, they do suffer the higher prices.
To be clear, this is not a complaint that the government charges too much in taxes. There are areas where government should be spending more money – affordable housing is one of them. Infrastructure is another. I’m not against Toronto looking for a new revenue stream. Toronto has an economy that is similar in size to Alberta or Quebec, and we are not able to generate our own taxes like these provincial economies can.
The Toronto land transfer taxes have certainly created some big revenues for a cash-strapped city, but these revenues are not a reliable revenue stream. Toronto builds budgets on how much money they will make off of these land transfer taxes, and they have missed the mark in some years where there have been fewer transactions, and less money for them. When the real estate market is selling a lot of properties, then they make more money. When they don’t, they make less. Less transactions happen. Less money is collected.
When people are already dealing with expensive real estate, then this Toronto land transfer tax is just another expense at a time when a lot of money is being spent. It’s a tax expense to buyers that I think is poorly implemented and not entirely fair. Why not? Because the burden on this tax is put on the shoulders of people buying property, not everyone.
I think there are better, more reliable ways to generate money. Charge more for property tax. I know that would not be popular, but Toronto has some of the lowest tax rates in Ontario. In addition, this would create a more stable and consistent system for the government to raise capital spread out between all home owners, not just the ones who are buying. I think that would not be easy to pull off in a four year election cycle, but it makes sense. Though my suburban counterparts may disagree, we could have road tolls. If you are going to work in this city and use it’s infrastructure, you should pay for it.
I’m all for Toronto finding ways to fund the things that big, forward-thinking cities need, but the Toronto land transfer tax is not it. It’s an excessive burden to buyers, a tax dumped on people buying in the last 11 years, but completely skipped over those who bought before then and have not purchased anything since.