New Tax Credit, You Say?

Thanks to one of my readers to bringing this to my attention.

The Conservative Party may have taken a while to release their platform in the latest election, but I’m happy with at least one of their campaign “promises.”

The new tax credit for first time home buyers will certainly reduce the barriers to entry for those buyers who are sitting on the fence…

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I’ve written posts in the past about how the real estate market has been our economy’s “cash cow” for the better part of the last decade, and how it is partially responsible for our economic boom.

When our favorite chubby Mayor, David Miller, decided to implement a new Municipal tax on all real estate transactions, it seemed like the worst idea he’d had yet.

The number of industries that rely on real estate is astounding.  From the banks and mortgage brokers, to the lawyers, agents, developers, renovators, tradespeople, and a host of other occupations – a booming real estate industry means a couple dozen other industries boom as a result.

Once you make the costs of transacting in the real estate market even more prohibitive, you begin to kill off your cash cow.

Miller’s new Land Transfer Tax for the City of Toronto effectively doubled the closing costs for buyers of real estate.

First-time buyers are exempt from the Municipal LTT, but imagine being a young condo-owner looking to move up to something a little more spacious and staring TWO Land Transfer Taxes in the face.  It might be enough reason to keep you in your first condo a little longer, and thus the number of transactions in our real estate market begins to stagnate due in part to the prohibitive taxes.

But it is the first-time-buyers I’d like to talk about today, since the Conservative party has made this campaign promise to assist first-timers in their purchase of real estate.

Details are still sketchy, but the direct quote from the Conservative platform is as follows:

“First-time homebuyer tax credit of up to $5000 of eligible closing costs on the purchase of a new home.”

I don’t know if they could possibly be more vague!

The words “up to” are what really troubles me.  It’s like when you see a sign for a sale at a clothing store, and from a distance all you see is “90% OFF” but as you get closer you see the words “up to” in two-inch letters.

Regardless, let’s assume for a moment that a first-time home buyer could get all or most of that $5000 tax credit.

First-time home buyers may be exempt from the new Municipal LTT, but they still have to pay the Provincial tax.  So with this new “tax credit” from the Conservatives, the first-timers are essentially exempt from both.

You could buy a $450,000 property without going over that magic $5000 threshold in Provincial LTT’s.  So if we are to believe that the Conservative party is going to help us retrieve up to $5000 in closing costs on the purchase of a new home, it means that anybody buying a property under $450K for the first time will effectively pay zero Land Transfer Tax.

Sure, you still pay the tax, but if you’re being reimbursed the same amount, then what’s the difference?

“Closing costs” in a real estate transaction normally amount to taxes and legal fees.  So what am I missing here?  What else could this new tax credit possibly be going to cover?

When David Miller first proposed his plan for a new Municipal LTT, he didn’t include the “exemption” for first time home buyers.  It was only when the plan became a reality that he put the exemption into play.

In essence, David Miller almost made it twice as hard for first time home buyers to get into the market.

And along comes the Conservative party with their tax credit that essentially wipes out the only remaining portion of LTT that first-timers have to pay.

One side wants double, the other side wants none!

Oh, the wonderful world of politics!

A skeptic might argue that this Conservative tax credit is counter-productive, since it might allow people who aren’t ready or “shouldn’t” be purchasing real estate to enter the market prematurely.

Well, thankfully our mortgage industry has tightened it’s lending procedures, as the 40-year amortizations and 0-5% downpayments are out the window.  Variable rate mortgages are the next to do.

So while one side of the equation makes it easier and cheaper for first-timers to enter the market, the other side ensures that they are qualified to do so.

It’s a win-win proposition, no?

As I sat and watched all the political ads through the last two months that featured Stephen Harper sitting on a couch in his yellow sweater talking about his family and his pet parakeet, Polly, I eagerly awaited some sort of indication as to what his platform actually was!

I know campaign “promises” don’t always come into effect, but I’m hopeful that this new tax credit will.

I firmly believe that the mortgage practices in place will help to avoid what happened in the United States (ie. millions of unqualified people being lent money to purchase real estate), so what is the harm in helping out the first-timers by giving them a break on a tax I deem to be unnecessary in the first place?

The bottom line is: you can tax just about anything you want in this world of ours.  The government can tax walking down the street if they bloody-well want to, but the ample taxes on transacting in real estate will only make the costs to doing so more and more prohibitive, and kill our lucrative cash cow.

Perhaps the Conservative party saw this, and acted in a timely fashion.

Is it possible that there is more to this party leader than yellow sweaters and large noses?

Time will tell….I hope…

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  1. Krupo says:

    I see where you’re coming from with the “up to” experience of regular sales, but in Tax Land, “Of up to $5000” in this context puts a cap on the total amount of fees you could get the government to refund for you. The logic being if you’re buying $5,000,000 properties (with fees 10x higher), you don’t need the same credit as someone buying a $500,000 property.

    Based on what I’ve seen before, this credit will go on the same page of your tax return where you add in your personal tax credit, education credits, health and TTC metropass credit, etc., to net out against your income.

    The only real ‘catch’ will be that you’ll have to have enough taxable income to use up that credit – if you’re earning between 15k-30k you might have more credits than income.

    I imagine most buyers would have incomes that are at least double that level, though, which should make this credit useful for them.

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