Ready…..Set…..TAX!

It’s coming.  You have to know that it is.

I don’t know why I’m about to dedicate a blog post to this, or why we’re going to waste time discussing, when I remain 100% convinced that a municipal land transfer tax is coming to every single square inch of the Province of Ontario.

That old saying, “The three things you’re not supposed to discuss: politics, money, and religion,” certainly rings true here.  But let’s start with two of the three, and who knows where we’ll end up…

SayNoTax

Throughout the course of modern civilization, a lot has changed, and yet one thing that remains constant: people still love to bitch about taxes.

I don’t know if we want to get into a political debate here…….yet.  But the Liberals, being known by most people as the “tax and spend” party, are opening the door to another tax, one which is going to make buying a home in Ontario a lot more expensive!

Although having said that, the Liberals aren’t the ones actually instituting the tax, or collecting it, but rather they’re going to give municipalities the power to impose their own tax, just like the City of Toronto does.

Hmmmm……so can I blame the Liberals for this tax, or not?

Okay, that’s not the point.  We can talk about politics another time.

The discussion point for today, and likely throughout 2016, is how yet another tax on real estate transactions is going to affect home-buyers, and the market in general.

I read an editorial from the Toronto Star about a month ago that was in favour of municipalities imposing a new tax on the purchase of houses.  Have a read HERE.

The article had an agenda, and a villain, in my mind.  Look no further than this quote:

“But beyond those earning a commission from real estate sales, most people aren’t particularly troubled that Toronto’s scorching real estate market could have sizzled even hotter.”

Ah yes, it’s always the fault of the nasty real estate agent community, isn’t it?

For the record – real estate agents aren’t hindered by the tax, and nobody would do better or worse if there were more or less taxes.  An argument could be built that with more sales, there would be more transactions, and thus agents would make more money.  But the Ontario Real Estate Association says there would have been 38,227 more housing transactions over the last five years if we didn’t have the municipal land transfer tax in Toronto.  So that’s 76,454 “ends” for agents, divided by five years – 15,291 per year.  Divided by 43,000 agents, is about 0.33 more deals per agent.

So yeah, I don’t see Realtors clamouring about the tax.

In fact, I think the “blame Realtors” or “they’re the only ones who care” rhetoric is exactly what the proponents of these taxes need.  Make it sound like “the bad guys” don’t like the tax, when in fact, nobody in Ontario wants yet another tax.

New taxes are going to be a battle; it doesn’t matter what the tax is.  And there are going to be “sides” to the debate.

So what is the real estate community doing on their “side”?

Well, this:

Well, I think the point gets through.

Even though it’s a bit cheezy, and quite overdone, with things like “Your community could be next,” and the whole “Don’t tax my dream” tagline.

But to be quite honest, I don’t see any other industry or group standing up to the tax.

Am I wrong to assume that residents of Ontario, almost all of whom don’t want this tax, are going to benefit from organized real estate taking a stand?

Or am I wrong to even assume “most Ontarians don’t want the tax?”

Because somewhere out there, quite possibly you, reading this, right now, is somebody about to say:

You know what?  I own my home, and I don’t plan on moving.  I’ll be here for another twenty years, so I really don’t care about a tax on the purchase of real estate.  I’d rather have that tax, than a higher property tax, or a higher income tax.

I guess I can’t argue with that.

The one point I can agree with from that stupid Toronto Star editorial was the closing line:

“The best tax, after all, is always the one that someone else is stuck paying.”

So those folks who don’t plan on moving, will have no objection to the tax.

And I suppose that’s what the government is counting on.

Like it or not, this tax is coming to every municipality in the province.  Give a government the power to tax, and they will do so.

Residents of Toronto might say, “I don’t care if people in Keswick, Ontario are paying LTT.  I’ve been paying it here for five years!”

And there’s that “me-first” mentality when it comes to how many people look at governance.

In any event, I think the opinions will be split on this one.

I’m eager to hear from you all.

51 Comments

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  1. jasmine says:

    I am a long-time fan of this blog, but this is the first time I have posted. On the issue of municipal land transfer taxes (a moot point since the province won’t give this taxation power) I am often amazed at the fact that realtors are front and centre in terms of opposing the tax while at the same time fighting an even more aggressive fight against reforming the way in which we buy and sell houses. Realtor fees are typically the single largest line-item expenses in selling a house. From my perspective, taxes, including land transfer taxes contribute to the community at large, revenues from a second land-transfer tax are likely directed at transportation, infrastructure and services. Realtor fees- aside from Audi dealerships- not so much.

    1. Mike says:

      Funny that, isn’t it? They argue that reducing commission rates or allowing discount services would disrupt the market but in the same breath ague that a tax will also disrupt the market.

    1. David (Not the David who runs this website) says:

      Great news 🙂 !

    2. Libertarian says:

      More evidence that Wynne and her party have no clue what they’re doing!

    3. Ed says:

      I’ll betcha Wynne increases the provincial portion

    4. Cool Koshur says:

      Thanks Joe

      You beat me with this link

  2. David (Not the David who runs this website) says:

    I agree with condodweller, it’s time for all governments to stop wasting our tax money. It seems that as they increase and add more taxes, the deficit just gets bigger. We’re all kidding ourselves if we think that any new taxes are going to help reduce the deficit or improve anything. The Ontario government is like an out of control alcoholic, and you don’t help alcoholics by giving them the keys to the distillery.

    With the Ontario deficit at somewhere around $288 billion and growing, we all know that this isn’t going to end well. Spending is out of control and as taxes rise, they generally suppress economic activity. It isn’t going to be pretty out there when the nasty stuff hits the fan one day and it will.

    1. Joe Q. says:

      It’s the debt that’s $288B, not the deficit. Big difference.

      1. David (Not the David who runs this website) says:

        Thanks Joe, that’s what I meant.

  3. Jeff says:

    Everyone wants more stuff, and is surprised when there is a new tax.

    Every election everyone talks about wanting better infrastructure, transit, more subways, better services for their kids, bigger police forces (even though crime keeps dropping) and when it comes to cut anything people don’t want that either.

    Want to pay less tax, ask the government to stop building more stuff.

    1. condodweller says:

      I’m asking my government to stop wasting my money, instead of taking more of it.

    2. Appraiser says:

      @Jeff. It is more equitable to raise property taxes across the board for all homeowners than to introduce an MTT, but no politician has the guts – so they devise boutique taxes (and tax breaks) for the sake of political expediency.

  4. Gloria says:

    Anyone can clarify? Wouldn’t introducing yet another LTT steer away certain amount of people to reconsider purchasing, thus reducing interest/buyers leading to more supply than demand and a decrease in prices to make up for this?

    1. Appraiser says:

      @ Gloria: Good point. Total revenue from Land transfer taxes are dependent on both the number of transactions, as well as a percentage of the sale price. Economic theory would indicate that such a tax reduces demand, thus reducing the number of transactions, which in turn lowers sale prices, thus also reducing the amount of tax collected from each transaction.

      With fewer transactions and lower prices, the potential net revenue collected by the various municipalities that decide to implement an MTT, may be far less than anticipated.

    2. Libertarian says:

      I have a similar question. With Toronto being so expensive for most people, we keep hearing about the term “drive until you qualify.” If all of the surrounding municipalities opt to have their own LTT, won’t people then have to drive even further out? At what point do those people say “forget it”? Do these people really want a commute of 3 hours each way? Won’t this reduce demand? By reducing demand in the rest of the GTA, would this increase demand in Toronto (because those people would rather live in a smaller residence in Toronto rather than a detached house 3 hours away)? At some point, potential buyers will have to decide whether there’s more to life than owning real estate.

  5. Marina says:

    Isn’t this how we do things? We vote in one party, they do stupid things, so we vote for the other. They do even more stupid things. And so on and so forth.
    I’m guessing this will be on the list of reasons we vote in the Cons the next time around in Ontario, so they can take their turn.

  6. Noel says:

    I disagree with your comment that ‘For the record – real estate agents aren’t hindered by the tax, and nobody would do better or worse if there were more or less taxes.’ not to mention, you prefacing it with ‘For the record’, while it might give it an air of legitimacy is a total misrepresentation.

    First of all, for the record anything that causes the cost of a real estate transaction to rise, be it the house price or transfer costs, of which the greatest is LTT, does not increase the number of transactions but acts as a buffer and reduces them. So increasing the LTT is not going to drive more transactions but fewer. I don’t see how you can argue with this.

    For the record, your own column a month ago reported that 41% of the 48,825 real estate agents in Toronto did 1 or fewer transactions in the last 12 months. These are likely agents who are not really active as full-time agents but rather selling their best friend’s or relative’s property. So, suggesting that any additional transactions if there were no LTT should be apportioned between these inactive agents is an extremely specious argument. In fact, as you report in a previous column, only about 2,000 agents in Toronto do 4 or more deals a year. So, lets use this figure why don’t we as it it reflects reality a bit more as likely the 38,227 increase in transactions if we did not have LTT (according to the Ontario Real Estate Association) would be spread over these 2,000 agents rather than all agents registered with TREB. In fact, one could argue that they should be apportioned between the really active agents which are less than 1,000 in Toronto (ie doing at least 1 deal a month). However, even using the 2,000 figure, for the record, that’s 38,227/2,000 or about 19 deals more per active agent in Toronto. That is quite an increase and for many agents would double or triple the volume they were doing. So, of course real estate agents will stand to benefit immensely if LTT is not introduced and, in Toronto, eliminated.

    I do notice you sometimes tend to twist your analysis so that it supports your premise with the exact same facts. You cannot blow hot and cold at the same time.

    I opposed Toronto’s LTT but it’s here forever (notwithstanding Mayor Ford’s campaign promise to get rid of it). Perhaps if municipal governments would get rid of their bloated defined benefit pension plans and outsource more services to private companies that have to be efficient and make a profit the LTT could be eliminated. However, politicians like to feather their own nest (and those of their employees, which helps to justify their own feathered nests) so I doubt that will ever happen.

    1. Noel says:

      Edit: Those 19 deals are over the 5 year period.

  7. hoob says:

    I fail to see how a new land transfer tax makes housing more expensive; when most people shop for houses, the variety of closing costs is all part of the total price equation, and if someone is spending $850,000 on a house that’s what their spending regardless of how the selling price and closing costs actually break down.

    So if a transfer tax of 1% comes in, most offer prices would drop around 1% and the total transaction amount would stay the same. And since this recalibration affects all transactions, it doesn’t really single anyone out and doesn’t add any extra burden, since.

    It’s no different than mortgage rates going up (or down), most people buy on a total price per month basis (classic debt service ration, etc) so fluctuations in transaction burdens don’t really affect affordability much (aside reaction lag.)

    So why is the transfer tax such a big thing?

    1. Noel says:

      You are assuming perfect elasticity of supply and demand. That is as far from reality as is possible in the real estate market which is fraught with imperfect pricing, real estate agents who ALL have a conflict of interest as their remuneration largely based on the binary nature of a transaction happening and much less based on fine tuning of the sale price, not to mention also highly driven by emotion and bidding wars.

      Also, LTT is not mortgageable, which magnifies it’s impact.

      That’s why it is a big thing.

      1. Appraiser says:

        @Noel. You make some good points, but might I suggest that bidding wars in most of Ontario outside of the GTA, are far more likely to be the the exception than the rule.

        1. Noel says:

          Yes, you are right, when I was writing it I thought of modifying it by saying ‘possible’ bidding wars.

      2. Mike says:

        @Noel

        You can mortgage your LTT and all the Buyers closing costs by including them in the PSA as the Seller’s costs

        1. Noel says:

          How does that work? I’ve never heard of a bank accepting that.

          1. Mike says:

            Technically the Seller is the one taking the loss so the banks are not all that concerned about it but it has to be within reason, if you’re overpaying for your house, your over paying for your house and the bank won’t accept your mortgage but if they price is fair and the wording is in the contract then it’s usually not a problem.

            A lot of people include their closing costs.

            Heck, look at all the new condo’s and homes that incetivise the purchase, you can get a new car, vacation, upgrades or even straight cash thrown in. There are ads in the subway for developments where the developer will even pay your down payment

          2. Kyle says:

            @ Mike

            Despite what Sandra Rinomato may have told you on Property Virgins. No resale home seller in Toronto is going to pick up any buyers closing costs…NO ONE! And condo developers would much rather provide incentives than transact at a lower price as it sets a bad comp for when they want to sell the other units from their inventory.

          3. Mike says:

            @Kyle it happens all the time. Ever see something that sells for above asking where you say, “why would someone pay that for that house”, fees have been included.

            It happens way more often in the higher end real estate, especially in those transactions that go un-reported (LTT paid in advance)

            I’ll grant you that it is a condition and probably not going to fly with some seller at Danforth and Greenwood but as I said, it happens all the time.

          4. Kyle says:

            @ Mike

            In 13 years of buying and selling properties, i have never once heard of what you’re talking about, so i’m quite confident when i say it most certainly does not happen “all the time”. In fact i’d wager it actually happens none of the time. What you describe doesn’t make much sense at all, especially on “higher end homes”. In your description, the buyer and seller gross up the sale price by the LTT and then has the seller remitting it, but this makes the buyer need mortgage insurance….but alas mortgage insurance isn’t available on “higher end” homes (i.e. 1M+). Which kind of puts a damper on this kaka meme scheme. Plus if a buyer doesn’t have 20% down and enough to cover LTT, then grossing up the purchase price isn’t really going to help him in anyway.

          5. Mike says:

            @ Kyle

            I’m sorry that in your extensive 13-years of experience buying and selling real estate, you’ve yet to come across it but that doesn’t mean that it doesn’t exist.

            The fact that it happens mainly in higher-end homes and that those who use it to to help increase their down payment are not exclusive. High end buyers do it to hide the transaction details, the most expensive home sold in Ontario is on record changing hands for $2.

            That’s not to say that someone buying a two million dollar home isn’t going to use it to help them with their higher down payment, they don’t qualify for insurance but the extra money they pay for the house (the embedded LTT) would be equivalent to a few bps on their mortgage rate.

            The original question was that LTT is not mortgageable, it is. The fact that you haven’t done it or haven’t seen anyone do it doesn’t negate it’s existence.

          6. Kyle says:

            @ Mike

            Ummm, you realize those transactions that get registered for $1 or $2 were most likely done without a mortgage right?

          7. Mike says:

            @ Kyle

            Yes, but in those cases often the Seller covers the LTT.

            Remember, in your 13-years of buying and selling real estate, you’ve never seen the Seller pick up the closing costs. I was pointing out an example of where it happens.

            And you’re kidding yourself if you don’t think those properties are leveraged. Why would anyone pay cash at these rates?

          8. Kyle says:

            “Remember, in your 13-years of buying and selling real estate, you’ve never seen the Seller pick up the closing costs. I was pointing out an example of where it happens.”

            No, you were actually pointing out examples where you believe it *may* have happened, but actually have no idea if it did or not.

          9. Mike says:

            No, I’m pretty certain it did happen. I know I did it when I bought my last two houses.

            I was giving you examples of where it does happen. The word “does” indicates a generalisation whereas the word “did” would refer to something specific.

          10. Kyle says:

            Well forgive my skepticism, but this concept that you talk about and seem to be the only one familiar with, despite it “happening all the time” sounds pretty specious to me.

            And if you’re the same Mike that frequently comments with other specious concepts, such as how adding a “Wolfe” (SIC) range will instantly turn any house into a million dollar home, then i am doubly skeptical.

          11. Mike says:

            You’re allowed to be skeptical, that’s your right, though I’m not sure why. And I’m not too sure why you’d spend so long arguing the counter-point if you had doubts about my validity?

            I think the comment you were referring to was when I said that everyone who buys a $600,000 and puts it in Wolf range and then wants a million for it. The comment was in jest and was making light of all these flips that have high-end, 6-burner ranges that cost eight grand in a 2 to 3 bedroom houses.

            I do apologise for the subtly of the remark; though one would think with all the buying and selling you’ve done over the last 13-years you would have noticed the trend though and see it’s humor.

            Same Mike though.

          12. Kyle says:

            Actually no Mike, i distinctly recall asking you in that conversation if you were kidding, and you responded that you were serious. Nice try though.

          13. Kyle says:

            Try not to hurt yourself back-peddling…again:
            http://www.torontorealtyblog.com/archives/12391

            Mike: “The difference between a $500,000 house and a $1,000,000 house is the cooking range…”

            Kyle: “Please tell me you’re joking…”

            Mike: “Check it out Kyle, you will see a house purchase for a $500m and sold for $1mm and every time they have a Wolfe range…”

            Kyle: “OMG you aren’t joking. You are actually trying to tell people that a $5 – 15K stove will increase a house’s market value by $500K…”

          14. Mike says:

            Yes Kyle, I was absolutely serious (wait, no I wasn’t sarcasm isn’t your strong suit) you’re so right on this one.

            Where to start with this one, comprehension or correlation vs causation?

          15. Kyle says:

            How predictable, of course once exposed for being full of it you’re now going to pretend you were just being sarcastic. I suppose you were just being sarcastic the dozen other times your BS got called out by regular readers too, which is pretty much a routine occurrence.

            Like i said, nice try though.

        2. Noel says:

          I found your claim is totally bogus.

        3. Appraiser says:

          Nonsense!

          1. Noel says:

            @Mike – LTT is paid by the buyer and collected by the lawyer as part of the closing cost and sent directly to the government. Adding it to the APS will merely result in more than double payment of the LTT as it is based on the APS.

          2. Mike says:

            @Noel

            LTT can be paid by anyone and can happen at any time with a signed agreement. It happens at closing because real estate agents like to happen at closing. Transactions that pay the LTT prior to the sale close don’t appear on MLS as a recorded transaction.

            Heck, you just need to wait out the line in Oshawa with a cheque in your hand

            @Noel

            Yes, your right, you have to pay more on your more on your mortgage but it works out to less than $50/month for the average buyer. Just like taking on a higher rate.

            Remember, this is can be used to help someone who doesn’t have a full 20% saved up so they’re using closing costs to cover that nut. You add in the extra cost of mortgage insurance and you’re ahead by adding in the 4% to the sales price.

            For the Seller it’s a wash, they’re getting their sales price and the buyer is getting into the market.

  8. Kyle says:

    Oustide of the larger Ontario cities, i’m not certain that a lot of townships and municipalities will be rushing out to implement this. Many of the townships that i’m familiar with seem to be used to running lean and with a stable, predictable budget. I don’t get the sense they are all chomping at the bit to increase revenues and expand government services.

    1. Buckley B. Buckington says:

      I guess you haven’t been paying much attention to how ballooning police and emergency budgets are crushing the finances of small towns?

      http://ottawacitizen.com/storyline/304976

    2. Kyle says:

      As usual Buckley, you guess wrong. I own properties in small townships. The OPP funding reallocation was a lot of noise at the beginning of the year, but once added to the 2015 property tax bills there was very little drama or blow back. As with any other costs a township faces that are subject to rise (cost of salt, cost of asphalt, cost of gravel, etc), they simply factor it into the property taxes and move on with life. I can tell you right now, i don’t hear the slightest chatter about even considering “new tools” for taxing.

      Just because you read a headline saying a municipal cost will increase doesn’t mean you should automatically jump to the conclusion that all townships will now be clamouring to layer on new forms of tax.

  9. Appraiser says:

    Taxation. Oh my, memories of Economics 101.

    The great debate – efficiency vs. equity. One of the main principles of economics is that people respond to incentives, including incentives provided by the tax system. Because taxes distort incentives, they entail deadweight losses, which is the reduction in economic well-being in excess of the amount of revenue raised.

    According to the Toronto Star article, the Toronto Municipal Land Transfer Tax is projected to generate $430M this year. Assuming the same amount was collected for the previous 4 years, that amounts to $2.15B. However, the economic costs generated by the tax over the past half-decade amount to $2.3B AND 15,000 jobs, resulting in a considerable degree of deadweight losses to the city of Toronto.

    So naturally the provincial government can’t wait to roll out the deadweight losses right across the province.

    1. Joe Q. says:

      “However, the economic costs generated by the tax over the past half-decade amount to $2.3B AND 15,000 jobs, resulting in a considerable degree of deadweight losses to the city of Toronto.”

      What’s the source for this, Appraiser?

      1. Appraiser says:

        @ Joe Q. Follow the link to the Toronto Star article.

        1. Joe Q. says:

          That just leads down a series of links to an OREA press release that also doesn’t provide a source.

          I suspect it is from the same report we discussed last year (or earlier) here on David’s site. Would have to look it up.

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