What is a Land Transfer Tax?
A land transfer tax is a tax imposed on the buyer of a property during the purchase process. It is typically calculated based on the property's purchase price and must be settled before ownership can be transferred. In Ontario, the rate of this tax varies depending on whether the property is residential or commercial and its value. These rates apply universally to both property purchases and transfers in Ontario, with some municipalities such as the city of Toronto also levying additional municipal land transfer taxes.
Ontario's land transfer tax (LTT) uses a progressive scale based on the property's value. For instance, if you buy a home for $500,000, the tax would be computed as follows:
- The first $55,000 incurs a 0.5% rate, resulting in an LTT of $275.
- The next $195,000 ($250,000 – $55,000) incurs a 1% rate, adding an additional LTT of $1,950.
- The subsequent $150,000 ($400,000 – $250,000) incurs a 1.5% rate, adding an additional LTT of $2,250.
- The remaining amount over $400,000 (in this case, $100,000) is charged at a rate of 2%, resulting in an additional LTT of $2,000.
Thus, the total land transfer tax payable for this property purchase amounts to $6,475.
Gifts Are Not Exempt From Land Transfer Tax Per Se
The Land Transfer Tax Act does not provide an exemption for gifts of land from land transfer tax. However, if there is no consideration exchanged in any form (directly or indirectly including mortgage assumption) between the parties during a conveyance, no tax is payable. This is because the tax rate is applied to a "nil" value of consideration, resulting in zero tax payable.
An exception to this rule occurs when the Act determines that consideration has passed, such as in transfers from a corporation to its shareholders or leases exceeding 50 years, where the fair market value of the land is deemed to be the consideration.
Under the land Transfer Tax Act, consideration also includes the assumption of any liabilities. If there are outstanding encumbrances, typically mortgages or liens, on the property, tax is payable on the amount outstanding at the time of registration, irrespective of the relationship between the parties (with specific exemptions regarding spousal rollover or same-sex partners under Regulation 696, R.R.O. 1990). The amount of any liabilities assumed must be detailed in paragraph 4(b)(i) of the Affidavit of Residence and Value of the Consideration (LTT affidavit).
In cases where no consideration is exchanged, paragraph 4 of the LTT affidavit will indicate the consideration as "nil".
Exemptions and Rebates
First-time homebuyers in Ontario can benefit from exemptions and rebates aimed at easing the financial impact of the land transfer tax. Those purchasing a property valued at $368,000 or less qualify for a full tax rebate. Moreover, first-time homebuyers can apply for an additional rebate of up to $4,000, which can cover closing costs such as legal fees and land transfer taxes. To qualify as a first-time homebuyer, you must not have owned any home worldwide previously, though there are specific considerations if your spouse has owned property before.
Agricultural landowners in Ontario can also benefit from rebates and exemptions designed to mitigate land transfer tax expenses. The Family Farm Transfer Exemption provides a complete exemption when transferring farm property to a family member for farming purposes. This exemption can be utilized once per generation.
Pro Tax Tips – Land Transfer Tax Will Still Apply if There's Outstanding Mortgages in a Gift Situation
When transferring property between family members, it's important to consider land transfer tax implications. Transfers given as gifts between spouses or parents and children may qualify for exemptions, provided there are no outstanding mortgages. However, transfers made at fair market value or at discounted prices generally require the payment of land transfer tax based on the property's value. Therefore, it is highly recommended for a taxpayer to consult with an experienced Toronto tax lawyer to confirm whether the land transfer tax applies along with the potential rebates and exemptions.
FAQ
Is a gift exempt from land transfer tax?
The Land Transfer Tax Act does not provide an exemption for gifts of land from land transfer tax. However, land transfer tax is calculated based consideration and a gift with no mortgages is considered as nil consideration. Therefore, a gift without mortgage will not trigger land transfer tax.
Who may be exempt from land transfer tax?
First-time homebuyers and agricultural landowners in Ontario can benefit from exemptions and rebates aimed at easing the financial impact of the land transfer tax.
To qualify as a first-time homebuyer, you must not have owned any home worldwide previously, though there are specific considerations if your spouse has owned property before.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.