Garry Marr: Why Toronto’s land transfer tax makes less sense than ever

Canada’s largest city has the dubious honour of leading the way when it comes to taxing homeowners for the simple privilege of buying a home.

In addition to the provincial land transfer tax, common in most Canadian jurisdictions, Toronto introduced its own tax in 2008.

The tax, paid by the purchaser, means the average detached home selling for $1,562,996 would face a $55,470 tax bill, with half going to the City of Toronto and half to the province.

It’s unclear why the city wants to be known as a leader on a tax that mostly seems to discourage people from buying and selling homes, especially amid a moribund housing market in which September sales were down nine per cent year over year, the Toronto Regional Real Estate Board said.

It’s no shocker that the group’s leader is calling for changes to the municipal portion, or that it has emerged as a key issue in the municipal election.

“Governments must make homeownership more attainable by reducing barriers such as Toronto’s municipal land transfer tax and opposing its expansion,” TRREB chief executive John DiMichele said in a statement, adding that other governments in the region and Ontario are now lobbying for the same taxing power.

Toronto mayoral candidate Brad Bradford jump-started debate on the tax, saying he will eliminate the city’s tax on the value of a principal residence below the average Toronto home price of $1.1 million in 2025.

“This is the biggest affordability pledge that anyone is going to get this entire election,” Bradford said when announcing the cut, which he estimates would cost the city $300 million.

Toronto not only didn’t cut the tax during the last council term: It raised it for homes sold for more than $3 million.

“If you have enough money to buy luxury properties, then you pay a bit more,” Mayor Olivia Chow, currently running for re-election, said during a council meeting that approved the increase.

The change did not affect homes under $3 million, but the municipal land transfer tax jumped from 3.5 per cent to 4.4 per cent for property purchases in the $3 million to $4 million range. For homes selling for more than $20 million, the tax jumped from 7.5 per cent to 8.6 per cent.

Jason Mercer, TRREB’s chief information officer, said it’s probably too early to tell whether the tax jump for $3-million-plus homes has affected sales in that category in the city.

He said on the lower end, ultimately, if you have to pay a tax, it means you’re going to have less money to put towards a down payment. “If I’m going to be on the hook, it is less I can put towards other costs.”

A key factor is you cannot just add the cost of the tax to your mortgage and amortize over time. “The money has to come from somewhere, and more often the money will come from money you saved up as a first-time buyer or some of the equity you are using for your next purchase,” said Mercer.

Another issue is that it keeps homeowners in place. Why move to upgrade your living circumstances when renovation can do the trick and the tax savings can apply to that work?

“You don’t see as much cycling in the market,” said Mercer, adding that it can mean the stock of homes changes and starter detached homes become more expensive because of all the renovation money directed at them.

Mike Moffatt, founding director of the Missing Middle Initiative, said the land transfer tax was originally used to cover the cost of registrations and work to switch ownership. But in the 1980s, it started being used as a revenue generator.

“The Toronto one is entirely a revenue-generating tool; there is no cost associated with it,” said Moffatt. “It’s purely a mechanism to keep property taxes lower than they otherwise would be.”

It’s pretty simple: raising property taxes quickly riles people up. A land transfer tax? You are probably less likely to be upset about that because you’ll think, “I’m not moving, so who cares.”

Eventually, you will move or downsize. And the tax at the end of the day affects the price someone will pay for your home.

Bradford’s pledge would effectively cut the tax bill on a $1.1 million home in half, to $18,475, leaving only the provincial portion and no city bill.

Aside from the impact on affordability, the other issue the land transfer tax raises is that it can push transactions outside the city of Toronto, especially to jurisdictions just outside the municipal boundary.

The C.D. Howe Institute studied Toronto’s land transfer tax five years ago, before the city raised rates, and suggested it came at a high economic cost.

“It is unrelated to services provided by governments, unlike the property tax which is arguably related to municipal services. Land transfer taxes tend to reduce the number of residential real estate sales, imposing a real burden on households that would otherwise prefer to move to a different home,” the think-tank said in a paper. “The land transfer tax is also a volatile source of tax revenues that increase rapidly during a housing market boom, but then decline sharply when housing markets crash.”

Jack Mintz, a senior fellow with C.D. Howe and one of the authors of the paper, said it is surprising how the transfer of real estate is now taxed globally. It is becoming the norm.

“It’s hard to understand because a property tax itself is much easier if you wanted to simply make up the revenue and charge somewhat higher property tax,” said Mintz. “Maybe it is easier to collect, but they don’t consider the economic impacts. It’s just a smaller group of people who pay until you have to pay.”

A bigger problem is when tax applies to business real estate it is much harder to collect. “You can easily set up a system where you have a corporation that owns a trust and the trust owns the building,” said Mintz,

Some of the most famous cases where the tax was disputed include the $1.27 billion sale of Scotia Plaza and the $400-million real estate initial public offering in 2013 by Loblaw Cos. Ltd., which created Choice Properties Real Estate Investment Trust.

“There is no actual sale of the building, so there is no transfer tax applied,” said Mintz, adding that in some cases the corporation is just trading or the trust beneficiaries are changing.

Yes, getting rid of it won’t rescue the housing market and Moffatt said the condo market is so broken that it wouldn’t matter much. But in the long run, he says it will stimulate more housing activity.

“It just discourages people from either upsizing or downsizing their homes and keeps them in homes not well-suited to them,” said Moffatt. “It misallocates the housing stock.”