Everything Tax When Buying or Selling a Property – Part I

Everything Tax When Buying or Selling a Property – Part I

If you’re purchasing a property, you’re probably wondering how much tax you will have to pay over and above the purchase price. You likely want to know what type of tax you will be paying while you own the property and what your tax liability will be when you sell the property. 

There are many different types of taxes which arise at different points in time in relation to purchasing a property and owning real property. Land transfer tax is levied by the Province of Ontario against any buyer, whether residential or commercial, on the purchase of real property. Municipal land transfer tax is an additional tax levied on all purchases in the City of Toronto. HST is levied against a buyer when the property purchased is a new construction build for residential homes, where there is a large portion of vacant non-personal use land in a residential purchase, or where the property purchased is commercial property. Non-Resident Speculation Tax is an additional tax imposed on a buyer who is a non-resident of Canada. Property taxes are the property owners’ obligation to pay to its municipality during ownship.

Capital gains taxation may arise when you sell your property, unless you qualify for the principal residence exemption. If you’ve bought and sold several homes, the CRA may determine its profits to be business income as opposed to giving rise to a capital gain. In this circumstance, you’ll be obligated to pay business income tax in addition to HST levied on this income.

Want clarity? We’ve simplified everything tax in relation to purchasing a property and selling a home.

In part I of Everything Tax When Purchasing or Selling a Property, we will discuss Land Transfer Tax, HST and Non-Resident Speculation Tax. In part II, we will discuss property taxes, capital gains tax and business income tax.

1. Land Transfer Tax and Municipal Land Transfer Tax

Land Transfer Tax and Municipal Land Transfer Taxes are one of the largest additional expenses incurred to a purchaser when purchasing a property in Ontario.

Provincial Land Transfer Tax (called LTT) is imposed on each buyer purchasing a property in Ontario. Municipal Land Transfer Tax (called MLTT) is an additional tax that is imposed on each buyer purchasing property in the City of Toronto only. As a result, if your buying property in Toronto you will be paying two types of land transfer tax, essentially doubling your land transfer tax obligations. There is no tax payable by the seller.

LTT and MLL are payable are normally based on the amount paid for the land. LTT tax percentages range from 0.5% to 2.0% of the purchase price. This is a graduated tax, which means that the lowest percentage is used for amounts up-to a maximum, and then the next tax percentage is used, and so on, as follows:

LTT Rates

Land Transfer Tax	Rate
Up-to and including $55,000	0.5%
Over $55,000 up-to $250,000	1.0%
Over $250,000 up-to $400,000	1.5%
Over $400,000 up-to $2,000,000	2.0%
Over $2,000,000	2.5%

MLTT Rates

Municipal Land Transfer Tax	Rate
Up-to and including $55,000	0.5%
Over $55,000 up-to $250,000	1.0%
Over $250,000 up-to $400,000	1.5%
Over $400,000 up-to $2,000,000	2.0%
Over $2,000,000	2.5%

Ontario’s land transfer tax must be paid at the time the transfer is registered.

If the transfer is not registered which occurs where there is a transfer of a beneficial interest in land, buyers must complete a form called, Return on the Acquisition of a Beneficial Interest in Land, and submit it to the Ministry of Finance along with the payment of tax within 30 days of the purchase.

Exemptions to Land Transfer Tax

If you buy land in Ontario, you must pay Ontario’s land transfer tax, regardless of whether the transfer is registered at one of Ontario’s land registry offices (this includes the transfer of beneficial ownership or interests in land). However, there are limited circumstances where land transfer tax is not required.  These include:

• certain transfers between spouses
• certain transfers from an individual to their family business corporation
• certain transfers of farmed land between family members
• certain transfers of a life lease from a non-profit organization or a charity.

Land Transfer Tax Rebates

First-time home buyers may also be eligible for a Land Transfer Tax (LTT) and Municipal Land Transfer Tax (MLTT) refund for each type of tax, depending on when the home was purchased, and if it is a resale or newly constructed home. The amounts of the transfer tax rebates are as follows:

LTT Rebate – $4,000 for first-time buyers of homes, and only on homes valued at greater than $368,000 (as no LTT whatsoever is payable on homes valued under $368,000).

MLTT Rebate – $4,475 for first-time buyers of homes. The full MLTT rebate is available for homes valued at $400,000 or less.

This refund is usually claimed at the time of registration by your lawyer in your real estate transaction. The refund is automatic, and reduces the amount of LTT or MLTT you must pay.

 2. HST

HST is applicable on the purchase of property in four instances: (a) where the property is residential property and is a new construction build or has been substantially renovated; (b) where the property is a residential property but contains a portion of non personal use vacant land; (c) where the property is a commercial property and (d) on various services associated with the purchase of the property such as real estate broker commission fees and home inspections. Each will be discussed in turn.

  a) New Builds or Substantially Renovated Homes

If you are buying a newly constructed home, HST will be payable. As well, if the home you are buying is a re-sale home, but it has been substantially renovated, then HST will be exigible on is property as well. According to the Canada Revenue Agency, a substantial renovation, in effect, refers to a renovation where at least 90% of the interior of a building (excluding the foundation, external walls, internal supporting walls, roof, floors and staircases) has been removed or replaced. Outside of these two instances, HST will not apply to the purchase price of used residential homes.

The amount of HST is 13% of the purchase price. Many builders include the HST in the purchase price, while others charge the HST in addition to the purchase price. If you are buying a newly built home, you should make sure you know what the total purchase price is including HST.

While considering paying 13% in addition to the purchase price makes you jump out of your skin, there’s some good news here. If you are a purchaser of a home, your property may qualify for a rebate of a portion of the HST paid. You do not have to be a first-time home buyer to qualify.

The property will qualify if you:

• buy a new home, or a substantially renovated home, from the builder;
• buy a newly constructed house from a builder, where you lease the land from the builder under the same agreement to buy the house;
• buy a mobile home (or a floating home, not a house-boat) from a builder;
• buy a share interest in a newly-built, co-operative housing corporation;
• build, or substantially renovate your home, or construct an addition; and
• rebuild your home due to fire.

For more information on the GST/HST new housing rebate, read the CRA’s Guide RC4028 here.

  b) Vacant Land

Where you are purchasing a house that is situated on a large portion of vacant land, HST will be exigible only on the non-personal use vacant land portion. That is, where a sale of vacant land includes a residence or house, the sale is viewed as two separate sales as follows:

1. the portion that includes the house plus the land that is necessary for the use and enjoyment of the house, and
2. the remaining portion of land.

If the vacant land portion can be demonstrated to have been used by the seller personally, then no HST will be exigible on its portion. To clarify, HST is exigible on the vacant land portion of residential property only where the vacant land was not used personally by the owner of the property.

The test for personal use of vacant land for exemption from HST looks to the use of the land prior to the purchase, not the proposed use after the purchase. Therefore, we look to the purchasers use of the land prior to its sale to determine if HST is exigible.

  c) Commercial Properties

Commercial properties are subject to HST, payable by the purchaser. However, where the purchaser is an HST registrant, the vendor may not be required to collect the tax. Where this is the case, both parties can make an election pursuant under the Excise Tax Act to have the transaction exempt from HST.

A business selling real property should ensure that the purchaser is registered before concluding that no tax will be collected on the sale. In this case, we recommend that the vendor should obtain a Certificate of GST/HST Registration from the purchaser, and verify its accuracy on CRA’s online GST/HST Registry. Incorrect treatment or lack of proper documentation in this scenario can be very costly to the vendor.

HST and resale cottage/vacation property purchases   

HST will not be payable on the price if the property sold by the seller and bought by the buyer is personal use property. However, if the seller had been renting out the property more than 50% of the time during the seller’s ownership then it will be deemed to a commercial property, the price will likely be subject to HST.

  d) HST on associated services

Unfortunately, home buyers and sellers have to pay extra tax on a range of services associated with the real estate transaction: services such as legal fees, moving costs, real estate commissions and home inspection fees. Keep in mind that in addition to the other taxation obligations when purchasing real estate, you will be paying HST on real estate broker commission fees, home inspection fees, surveys and lawyers fees.

3. Non-Resident Speculation Tax

In 2017, the Ontario Government introduced the Non-resident Speculation Tax (NRST). The NRST is a 15% tax on the price of homes in the Golden Greater Horseshoe (GGH) bought by people who aren’t citizens or permanent residents of Canada or by non-Canadian corporations. This new tax is in addition to Ontario’s land transfer tax payable, and was effective as of April 21, 2017.

The geographical areas covered in the GGH include:

• City of Barrie
• County of Brant
• City of Brantford
• County of Dufferin
• Regional Municipality of Durham
• City of Guelph
• Haldimand County
• Regional Municipality of Halton
• City of Hamilton
• City of Kawartha Lakes
• Regional Municipality of Niagara
• County of Northumberland
• City of Orillia
• Regional Municipality of Peel
• City of Peterborough
• County of Peterborough
• County of Simcoe
• City of Toronto
• Regional Municipality of Waterloo
• County of Wellington, and
• Regional Municipality of York.

The NRST applies to three types of purchasers: foreign nationals, foreign entities and taxable trustees.

A) Foreign nationals: 

Individuals who are not Canadian citizens or permanent residents of Canada

B) Foreign corporations:

Corporations incorporated outside Canada or corporations incorporated in Canada that are controlled by a foreign national, or controlled by a corporation incorporated outside Canada.

C) Taxable trustees: A trust with at least one trustee that is a foreign entity, or if a beneficiary is a foreign entity.

The NRST only applies to the purchase of land with at least one and not more than six single family residences. In plain English, NRST is only applicable on residential property and not commercial property. The types of property to which NRST will attach are:

• detached and semi-detached houses
• townhouses
• condominium units
• duplexes, triplexes, fourplexes, fiveplexes and sixplexes.

How is the tax calculated and who pays it?

The 15% NRST applies to the value of the consideration (the purchaser price) for a transfer of residential property where the above criteria is met. The NRST will be applicable on the entire value of the home, even where only one of four purchaser partners are a non-resident.

For example, if a transfer of residential property is made to four transferees, one of whom is a foreign entity that acquires a 25 per cent share in the land, the NRST would apply to 100 per cent of the value of the consideration for the transfer.

Each purchaser is jointly and severally liable for any NRST payable. If a foreign entity or taxable trustee does not pay the NRST, the other purchasers will be required to pay the tax. This applies even if the other purchasers are Canadian citizens or permanent residents of Canada.

The NRST applies to unregistered dispositions of a beneficial interest in residential property. This includes purchases and acquisitions of residential property where section 3 of the Land Transfer Tax Act is applicable.

NRST is payable at the time of the purchase. Presently, all lawyers in Ontario must make a statement to the Ministry of Finance confirming whether the purchaser will or will not be subject to NRST.

Conclusion

In this Article, we discussed Land Transfer Tax (LTT), Municipal Land Transfer Tax (MLTT), Harmonized Sales Tax (HST) and Non-Resident Speculation Tax (NRST) all of which are levied on a buyer of real property in various circumstances in Ontario.

In part II of Everything Tax When Purchasing or Selling a Property, we will discuss property tax, capital gains tax and business income tax which are taxes levied against the owners or sellers of property in Ontario.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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-Shira Kalfa, BA, JD, Partner and Founder

Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society. 

© Kalfa Law 2018