Made-In-Ontario Land Transfer Tax Reforms
Ontario seems to have rejected a cloning of the 15 per cent foreign owner land transfer tax that came into effect in British Columbia on August 2, 2016 (the “B.C. Foreign Buyer Tax”), which imposed a whopping additional tax – to the tune of $300,000 on a typical $2-million Vancouver area home! Although the B.C. Foreign Buyer Tax did not explicitly target buyers from the People’s Republic of China, it was no secret that Chinese buyers had driven the Vancouver real estate market to dizzying heights in recent years, and the B.C. Foreign Buyer Tax was, for all intents and purposes, squarely aimed at those Chinese buyers.
The B.C. Foreign Buyer Tax is a politician’s dream – if it ultimately works in driving down housing prices in the Greater Vancouver Area, then Premier Christy Clark and her Finance Minister can take credit for restoring (or at least hastening the decline of) housing affordability in British Columbia’s Lower Mainland. If, on the other hand, the B.C. Foreign Buyer Tax has little, if any, long-term effect on housing demand in Greater Vancouver, well, at least the government tried and, incidentally, B.C.’s coffers will benefit from an sizeable land transfer tax windfall, all funded out of the pockets of foreigners no less.
It is this political win-win characteristic of the B.C. Foreign Buyer Tax that had Ontarians worried about a corresponding made-in-Ontario foreign owner land transfer tax. Ontario follows British Columbia as a destination for much of the foreign capital that fuels Vancouver real estate markets, and there is a sizeable Chinese influence in many Ontario real estate markets, especially around the Greater Toronto Area.
Ontario Finance Minister Charles Sousa, in a news conference held immediately after the B.C. Foreign Buyer Tax was announced, noted that he was examining the B.C. Foreign Buyer Tax “very closely” and concluded by saying that “we’re certainly looking at whatever options can be made available.” These remarkably friendly words in support of the B.C. Foreign Buyer Tax fueled lots of speculation that Ontario might soon follow-suit.
Alas, fears of a made-in-Ontario version of the B.C. Foreign Buyer Tax have proven greatly exaggerated. In October, 2016 Premier Wynne put such speculation to rest by categorically rejecting the B.C. Foreign Buyer Tax outright, announcing:
We’re not going to go down the road that British Columbia has gone down…I’m not interested in doing something that would have an unintended consequence in Ontario – something that was designed for a totally different market.
Shortly thereafter, in November, 2016, Ontario announced that it was indeed going down a different land transfer tax reform path, effective January 1, 2017. Ontario would also amend its land transfer tax regime, but not by penalizing foreign buyers with a mega-tax. Instead, Ontario would add an additional 0.5 per cent surcharge to two categories of real estate, regardless of the buyer: (i) uber high-end residential real estate (i.e. homes over $2 million); and (ii) commercial properties over $400,000.
The maximum marginal land transfer tax rate payable on a residential house used to be two per cent, but after January 1, 2017, houses above $2 million now pay a marginal rate of 2.5 per cent in land transfer tax. Less conspicuous was what Ontario did to commercial properties. The maximum marginal land transfer tax rate payable on a commercial property used to be 1.5 per cent, but after January 1, 2017, all commercial properties above $400,000 will pay a new marginal rate of 2.0 per cent in land transfer tax.
This is not to say that Ontario did not penalize foreign buyers a bit. At the same time that Ontario increased the land transfer tax rates, it also softened the blow on first-time homebuyers by increasing the land transfer tax refund available to such first-time homebuyers from $2,000 to $4,000, but only for Canadian citizens and permanent residents. In other words, foreign buyers, even if first-time buyers, would not get any refund at all.
Not surprisingly, the mainstream press has latched on to the first-time buyer refund, with little if any focus on the increased marginal tax rate that applies to commercial properties. Although a relatively small increase (one half of one per cent), in the existing land transfer tax line item the new surtax will apply to almost every commercial transaction in the province given its relatively low threshold of only $400,000.
Although the term “commercial” has been used throughout as a convenient descriptor, the legislation defines this category as any property that does not have one or two existing single family residences. As a result, and of particular relevance to Building readers, almost all raw lands or development sites purchased from here on in will attract the new, higher marginal tax rate (the legislation does have some grandfathering for agreements of purchase and sale entered into before the legislation was announced but closing after January 1, 2017).
Of course, the irony of the situation is not entirely lost. If land acquisition costs are going to go up, even marginally, so too eventually will the cost of housing, even for those who qualify for the first-time homebuyers’ refund – ironic in light of the policy goal of increasing housing affordability. Well, nothing is certain, except death and taxes, and, so long as there are taxes, there will be periodic tax reforms.
Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the author alone.