By Brian Madigan LL.B.
Land Transfer Tax is payable on the price of new homes. The question is how do you value and properly assess the true price of a new home for purposes of the Land Transfer Tax Act?
Land Transfer Tax in Ontario is calculated on the "true value of the consideration", which is defined in subsection 1(1) of the Land Transfer Tax Act.
The definition of value is fairly broad. It is not just the purchase price stated in the agreement of purchase and sale. You must also look at the definitions of "convey", "conveyance" and "land".
You should also remember that it may not be in your best interest to avoid land transfer tax. You might find that you have to pay retail sales tax at 8% (or about 16 times the rate of the land transfer tax).
So, your preferred strategy should focus on paying this tax!
Extras and Upgrades
Builders often want to advertise the lowest possible price. Sometimes, there is a targeted marketing price. For example $399,000 sounds a lot less expensive than $400,000. So, how do you get the price down? You charge for items that any reasonable person would have thought were included in the price. The secondary market for resale homes does not have this same luxury.
The value of extras and upgrades are to be included in determining the value of the consideration. Some examples of extras and upgrades to the building include:
· upgraded flooring, cupboards, doors, windows, counters, etc.,
· architectural changes,
· extra doors and entrances,
· whirlpool baths,
· finished basements,
· roughed in washrooms,
· fireplaces, etc.
The value of upgrades to the land are included:
· lot premiums,
· tree planting,
· sodding and grading,
· driveway paving.
Sometimes, the price is still not low enough. Consequently, builders will charge extra for installing gas, hydro and water meters. If that is the case, the tax must be paid on these items.
Assumed Liabilities and Costs
The definition of "value of the consideration" includes the value of any liability assumed and the value of any benefit conferred "as part of the arrangement relating to the conveyance."
These are charges that are simply directed to lowering the overall price to permit targeted marketing at attractive numbers. Try to avoid paying the school levy because you don't have children? These are truly all items that are part of the basic purchase price. The Ministry of Revenue looks to the bottom line. What are you paying in total? Forget about the breakdown! That doesn't matter. If you have to pay it, to get the deal done, then it's taxable.
Consider some of the following:
· lot levies,
· development charges,
· school levies,
· increases in development levies imposed by a municipality,
· the builder's lawyer's Law Society of Upper Canada transaction levy surcharge,
· a late request for upgrades fee,
· the Ontario New Home Warranty Plan fee,
· architect's fees.
All these charges are very much the same as "delivery charges" for new cars. You buy it off the lot in Toronto but there is another charge and that is the cost of transportation from Detroit. I know it's silly, but that's just the way it is. The auto industry has been playing games with the manufacturer's suggested retail price (MSRP) for years. The construction industry is simply playing "catch-up".
For a number of years, it was possible to avoid paying land transfer tax on the construction. What you needed was two contracts, one for the land and one for the building. However, that "loophole" has now been plugged. If the building to be constructed is truly part of the deal, then the value of the building is taxable.
Land is defined as including a structure to be constructed on land as part of an arrangement relating to a conveyance. This is in addition to land and any existing structures and fixtures.
The Ministry of Revenue issues Bulletins and Guides to assist in the interpretation of the Act. In a recent Bulletin the Ministry indicated:
"Entering into separate agreements for the purchase of the land and the construction of a new home on it will not reduce the value of the consideration for the transaction if they are all integral to the arrangement relating to the conveyance. A good rule of thumb to determine if this is integral to the arrangement is: "if the purchaser doesn't enter into the agreement to construct the new home, will he or she still get the land?" Where the conveyance of the vacant land is dependent on the construction of the home, then the arrangement is to buy the land and the structure to be constructed; both agreements must be taken into account to determine the true value of the consideration."
If you are considering the purchase of a lot and later you are having a builder construct a house, you should consult legal advice. If the vendor is also the builder or is a related party to the builder, then you may have to pay land transfer tax. It would be wise to secure a legal opinion in structuring this transaction.
Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty