Except for some first-time buyers, levy is now a fact of life
By Kathy Flaxman - Globe and Mail
Like many people who were house-hunting as 2008 approached, Sherille Layton and her husband, Edward, wanted to stay ahead of Toronto’s new land-transfer tax. They wound up signing an agreement to buy a North Toronto home, closed the deal, and even moved in — all before Christmas.
Ms. Layton was well aware that had they waited until January to buy the house on Erskine Avenue, and pushed the closing date to Feb. 1 or after, they would have had to pay the new tax on top of a selling price of more than $800,000, and the provincial land-transfer tax.
She figures they saved a cool $13,000 thanks to the good timing.
“That’s an awful lot of extra money,” she says.
Now that the tax is a reality — it came into effect on Feb. 1 — home buyers other than some first-time purchasers won’t be able to avoid it as the Laytons did.
But there are some things buyers should keep in mind when they are figuring out their overall financing arrangements.
The new tax, which was passed by council in October, generated a lot of opposition when Mayor David Miller introduced it last summer. He argued that the additional revenue was badly needed by the cash-strapped city to maintain services and fund new projects.
But some groups — including the Toronto real estate industry — condemned the tax.
The critics said the tax would hurt the Toronto real estate market, and jeopardize the chances of many people — especially first-time buyers — of owning a home.
Ms. Layton calls the new measure, “a crazy tax that doesn’t make any sense.
“Buyers have spent ages saving and have set aside their closing costs and worked-out budgets. This tax throws quite a spanner in the works,” she says. For some potential owners, “the extra $4,000 or $5,000″ in tax may be just what puts owning a home out of reach, Ms. Layton adds.
“The market has been very busy so far this winter,” she says. “In February, we will start to see what the effect [of the new tax] will be.”
Under the new bylaw, buyers will pay 0.5% on the first $55,000 of their home’s value, 1% between $55,000 and $400,000, and 2% on any amount over $400,000.
There is one group that can avoid the tax, or at least a part of it: first-time buyers. They are eligible for rebates of up to $3,725 on residences costing up to $400,000. The provision covers homes with one but no more than two self-contained units under one ownership — a detached house, semi-detached single-family residence, townhouse, row house, duplex or condominium. That includes a home with a second suite, for instance, but not a triplex.
For a buyer whose budget leaves no room to manoeuvre, some lending institutions will, for a limited time, cover it — in the form of a loan — if the purchaser negotiates a mortgage with them.
TD Canada Trust, for instance, will cover the tax to a maximum of $15,000 if a customer agrees to a five- or seven-year fixed mortgage. The offer, which is good until March 21, is meant to help consumers “make the purchase they had hoped to and not miss this home-buying opportunity,” says Joan Dal Bianco, vice-president for real estate-secured products for TD Financial Group.
“We decided not to make it specifically tied to the amount of the tax, but to give 1.5% in cash back to help the consumer meet the land-transfer tax increase [on top of the existing Ontario land-transfer tax],” Ms. Dal Bianco explains. “If they happen to have found the funds elsewhere, they can use the [new] funds for some other purpose.”
The Bank of Montreal will cover the tax for up to 1.5% of the mortgage amount for regular customers who take out a new fixed-rate, closed mortgage with a minimum five-year term.
“The funds go to the lawyer and they can close their transaction,” BMO mortgage expert John Turner says. “If they submit an offer to us before Feb. 29, because of our rate guaranty program, the property does not have to close until 90 days after Feb. 29.”
But some tax experts urge consumers to make sure they understand the nature of these offers.
Broker Paula Roberts of Mortgage Intelligence sees merit in them, with a proviso. “This type of product does help, and a number of financial institutions are offering them, but the cost of borrowing the money will be built into the rate charged for the loan. In one case, the rate charged is about 40 basis points higher.
“There are a lot of ways that people in the business are suggesting to get buyers into the market and this type of financing is one,” she adds. “As a broker, I can offer products from a number of financial institutions and I educate the client, too. Hopefully, consumers will sit down with someone who knows something about mortgages and have all their options explained.”
Giles Osborne, Toronto-based manager of Parker Prins Seel Lebano, Chartered Accountants, stresses that “this type of product is not something that is black or white, ‘Yes, it’s good, or no, it’s bad.’ If people need the funds, then the funds are available. But what I think is important is that people understand the interest rate they are actually paying on the extra money on top of their mortgage.”
He also points out that the smaller the loan, the higher the interest rate.
“The customer is actually getting an unsecured loan and the rates reflect the amount of the loan and the fact that that this is not like a mortgage secured by the house itself,” he says.
“Whether someone should take advantage of products like these really depends on what other sources of funds they have available,” Mr. Osborne advises. “I understand the motivation of the client. On an expensive house, it’s a lot of cash to come up with. I would recommend that purchasers, if they are creditworthy, who are negotiating their mortgage, even in this instance, try to negotiate the interest rate. Try to reduce the extra basis points downward.”
How will the new tax impact the Toronto real estate market? Some of those in the business say that sales could be affected for a while, but, like the federal goods and services tax, this tax will eventually be considered a normal thing.
“I’m sure that in a matter of months it will become a sad fact of life and will be absorbed by the equity in the transaction,” says Karen Davis of Sutton Group-Bayview Realty Inc.
Dorothy Wong of ReMax Goldenway Realty Inc. doesn’t mince words: “The Toronto real estate market is so hot and so rich right now that those who wish to live in Toronto will pay the tax. Just like smokers who cry about cigarette prices, they will pay to continue their habit regardless of all the tobacco tax increases and price increases,” she says.
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