When it comes to real estate there are six different types of taxes to consider:

1) income taxes,
2) land transfer taxes,
3) municipal taxes,
4) local improvement rates,
5) GST Goods and Services Tax, and
6) PST Provincial Sales Tax.

Income Taxes

It is important to be aware of the fact that a principal residence is exempt from capital gains tax. This is one of the most significant opportunities for capital appreciation available. As a result, you should consider buying the biggest and best house that you can possibly acquire.

Mortgage interest is not deductible, but the gain is tax free. A married couple may only have one principal residence between them. However, you can allocate the exemption to the cottage property if that is the most valuable piece of property that you own.

In fact, there is an opportunity to have more than one principal residence at a time. If you are interested, please contact me for details.

Other real estate is subject to capital gains tax. This can be significant. The capital gain is the amount that the property has increased in value from the time you bought it to the time you sold it. You are entitled to certain adjustments on account of the cost of improvements, as well as certain deductions concerning the disposition. First, it is necessary to calculate the capital gain, then, one half of that amount is the taxable capital gain. It is this amount which must be brought into income in the year of disposition. So, in some cases a delayed closing date can provide a twelve month deferral of taxes.

If the property were used for investment purposes, then you can deduct the mortgage interest and related expenses. If you are considered to be in the business of buying and selling property, then the entire gain is treated as business income rather than a capital gain.

If you live on more than one acre of property, you might consider spreading out your principal residence activities over several acres. You might be quite generous in your use and placement of a swimming pool, tennis court, gazebo, pond and vegetable garden. This way more than one acre will be exempt from taxation under the principal residence rules.

And don’t forget that if an elderly relative moves into a nursing home that they may continue to designate their property as a principal residence. There are some qualifications, so please contact me if you would like further details.

Land Transfer Taxes

The Land Transfer Tax is a tax which is imposed upon the purchaser of real property at the time of registration of the transfer of the interest in the property.

The rates are: 0.5% on the first $ 55,000.00
1.0% on the amount between $ 55,000.00 and $ 250,000.00
1.5% on the balance over $ 250,000.00

There is an additional 0.5% surcharge for single-family homes (and duplexes) which have a value of more than $ 400,000.00. So, for example the land transfer tax payable with respect to a $ 450,000.00 single-family home would be:

$ 275 for the first $ 55,000.00
$ 1,950 for the next $ 195,000.00
$ 2,250 for the next $ 150,000.00
$ 1,000 for the next $ 50,000.00

The total Land transfer tax payable would be $ 5,475.00

Previously, there had been a 20% rate imposed upon non-residents. That provision has now been repealed.

Municipal Taxes

These are the local taxes which are imposed by the municipality. The property is assessed in value by the Municipal Property Assessment Corporation (MPAC). A municipality establishes an annual budget, that is the amount of money it requires to provide for its services. The value of all properties in the municipality is then divided by the budget in order to come up with a mill rate or an effective amount of taxes required for every dollar of assessed value.

Tax bills are generally sent out twice a year. The first bill is the Interim bill and it is really just an estimate. The second bill is the Final tax bill and it is usually sent out mid- year after the municipality has approved its budget. In some cases, there may be a Supplementary tax bill sent out after the Final tax bill, where the municipality has seriously underestimated the taxes and simply cannot wait until the following taxation year for payment.

In addition, the municipality may issue a Supplementary tax bill for one particular property. If a building were constructed mid year, it would have to be added to the tax bill. For commercial purposes the value of the building is added as of the date of completion and for residential purposes typically it is added as of the date of occupancy. The municipality may issue such a supplementary tax bill for the current taxation year and for the two immediately preceding taxation years.

Local Improvement Rates

Local Improvement rates are like “local neighbourhood taxes”. They do not apply to all properties within a municipality, just to some. For example, if sewers, sidewalks or noise fences were installed in an already established neighbourhood at the request of the local property owners, then the municipality might “charge-back” the costs to that neighbourhood and amortize the payments over a period of years..

The key concept is that the construction or installation is an “improvement”. This cannot be used to repair or maintain existing municipal facilities.

The property owners benefitting from the improvement would ordinarily prefer to pay for the cost of the improvement over its useful life. This way future owners are obligated to pay their fair share.

These local improvement rates are collectable by the municipality in the same manner as taxes and appear on the tax bill.

Goods and Services Tax (GST)

This tax will be imposed at the rate of 7% on the total value of the goods (which includes real estate) and services (the realtor’s commission) in all transactions unless there is an exemption. In particular, it will apply to commercial sales and leasing, and the sale of new or substantially renovated residential housing.

There are exemptions available for residential sales (provided the property is not new or substantially renovated), residential leases, personal use land, and personal use farmland to a related individual.

There is a certain group, often referred to as MUSH that does not pay GST. This includes municipalities, universities, schools, hospitals, colleges, charities and non-profit organizations.

The liability for payment of the GST can be negotiated between the parties in the agreement. The liability for collection and remittance to Canada Customs & Revenue Agency will remain with the Vendor.
It will be important to ensure that the purchase price either includes or excludes the GST. The liability for payment must be addressed in the agreement, and of course, you should ensure that it is consistent with your understanding of the contract.

There is a New Housing Rebate intended to benefit the owners of new homes valued at less than $ 450,000.00. There is a complex formula to calculate the rebate. In most new housing developments the builder will have the purchaser assign the right to the rebate and apply this amount towards part payment of the purchase price.

In order to qualify for the rebate, the property must be acquired for use as the primary place of residence of the individual or a related individual. Needless to say, this matter should be confirmed through appropriate sources prior to execution of an agreement.

In addition, the GST will be payable on a number of other goods and services provided in the course of a real estate transaction.

Provincial Sales Tax (PST)

Retail sales tax in Ontario will be payable at the rate of 8% on the value of any chattels that are included as part of the real estate transaction. The value will be deducted from the cost of the land, buildings and fixtures. Here, Land Transfer taxes will be imposed. Since the rate for retail sales tax is about 16 times greater than the land transfer tax, a purchaser should ensure that all items that may appropriately be classified as fixtures are included under the land value allocation, and only those items that are truly chattels are subject to retail sales tax.

Caution

This section is included for purposes of information only. Legislation and Court decisions which are released daily could effect the application of the law and its usefulness in your circumstances. So, please don’t rely on it unless you have confirmed it from appropriate sources.