When buying and selling real estate, whether for residential, recreational or business purposes, it is important to consider the various tax implications of the transaction. All land purchases involve Land Transfer Tax (“LTT”). All land sales involve consideration of capital gains tax, assuming the property has increased in value (which hopefully it will have). Some transactions will trigger Harmonized Sales Tax (“HST”) and recently, the Ontario government has introduced a Non-Resident Speculation Tax (“NRST”) which applies only to certain types of purchasers and certain property types. Fortunately, there is no Retail Sales Tax when it comes to most real estate transactions.
The purpose of this article is to outline and highlight some of the tax consequences that should be considered when purchasing and selling real estate.
Ontario Land Transfer Tax
As indicated above, LTT is applicable to all transfers of real property registered in the Province of Ontario. LTT is based on a percentage of the consideration involved in the transaction. Consideration is usually just the purchase price, but may include the value of cash payments, or the value of encumbrances being assumed by the buyer and/or the value of other property being transferred in exchange for the land. The percentage increases as the consideration increases. The minimum rate is 0.5% of the consideration and the highest rate is 2.5% of the consideration.
Clearly LTT can be significant when purchasing properties of higher value. There are specific exemptions from LTT for first time homebuyers, certain transactions relating to transfers between spouses and transactions involving transfers to and from trustees and beneficial owners. Such exemptions will be discussed in future articles. However, please feel free to contact one of our real estate lawyers if you require more information on such exemptions.
LTT must be paid at the time the Transfer/Deed is registered.
Toronto Land Transfer Tax
If the property is located in the Municipality of Toronto, there is an additional Municipal Land Transfer Tax. The rates are similar to the Ontario Land Transfer Tax and may be calculated using the following link:
This tax is also payable at the time the Transfer/Deed is registered.
Provincial Retail Sales Tax
With certain exceptions, the harmonized sales tax (HST) took effect July 1, 2010 and replaced the provincial RST. Therefore, generally speaking, RST does not apply to real estate transactions. However, one of the instances in which RST is applicable relates to private purchases of certain specified vehicles. If your real estate transaction includes the purchase of a boat, 13% RST is payable on the purchase price or the vehicle’s wholesale value (Red Book), whichever is greater. Specified vehicles without a Red Book value (e.g., off road vehicles, boats, aircraft, etc.) are taxed at 13% of the purchase price.
You do not pay RST to the seller at the time of the purchase. Rather, it is collected at Service Ontario Centres across Ontario.
Harmonized Sales Tax
HST, at the rate of 13%, applies to the sale of all land UNLESS the transaction falls into one of the exceptions listed in Schedule V, Part I of the federal Excise Tax Act. The exceptions are generally based on the Vendor’s use of the property at the time of the closing. The most common exceptions involve the sale of resale residential properties and non-commercial vacant land properties owned by individuals. Vacant land being sold by a corporation or by a trust and newly constructed homes do not qualify for either of these two common exemptions. Surprisingly, the Purchaser’s intended use of the property is not relevant to whether HST will apply to the transaction or not.
The general rule is that while the obligation to pay HST is imposed on the purchaser, the vendor is required to collect the tax as agent of Her Majesty in Right of Canada and remit it to the Receiver General. However, an exception this rule applies in cases where the vendor is not a Canadian resident for income tax purposes or if the purchaser is an HST registrant. In those situations, the purchaser is required to remit the applicable tax to the Canada Revenue Agency.
Capital Gains Income Tax
If you are the vendor (or transferor) in the real estate transaction, you must report the transaction on your income tax return. One half of the increase in value since the date of acquisition (less the cost of certain improvements), must be included in your income for that year and then taxed at your marginal rate. As the minimum marginal rate in Ontario is 20%, the tax payable on dispositions of real estate can therefore be significant. It is therefore advisable to consult with a tax advisor before you enter into any agreements to dispose of your property in order to avoid any unexpected tax liabilities.
There are exemptions provided for transfers of certain types of properties, such as principal residences and some farm or fishing properties. There are also exemptions for donations of certain qualifying properties and for certain transactions when the transferor and the transferee are spouses. You should contact your tax advisor to inquire as to whether you may qualify for any of these exemptions.
This tax is payable at the time of filing your income tax return for the year of the sale or disposition and is paid directly to Canada Revenue Agency. It is not collected by the parties in the transaction and it is not due at the time of sale.
Non-Resident Speculation Tax
The NRST is a 15 per cent tax on the purchase or acquisition of an interest in residential property located in the Greater Golden Horseshoe Region (GGH) by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees. This applies only to those properties located in Simcoe County, Kawartha Lakes, York Region, Dufferin County, Brant County, Durham Region, Haldimand Region, Halton Region, City of Hamilton, Toronto, Wellington County, City of Waterloo, Niagara Region, Northumberland County, Peel Region or Peterborough County. Canadian citizens (regardless of residency) and permanent residents of Canada are exempt from this tax.
The NRST applies to the transfer of land which contains at least one and not more than six single family residences. The NRST does not apply to other types of land such as land containing multi residential rental apartment buildings with more than six units, agricultural land, commercial land or industrial land. If the property has mixed uses, the NRST applies only on the value of the consideration allocated to the residential portion of the property.
If it applies, this tax is payable by the Purchaser at the time of registration of the Transfer.
As with most taxing legislation that we deal with both federally and provincially (i.e. the Income Tax Act is a federal statute and the Retail Sales Tax Actis a provincial statute), the legislation tends to be very technical in nature and professional advice should be sought in all circumstances to ensure that the tax implications of any proposed transaction are adequately planned for.
If you have questions about taxes and how they might impact your real estate transaction, please contact us.