2024 has been a difficult year for many property owners in Canada, in light of the high mortgage rates, increased capital gains tax, and the slow real estate market. Many residential property owners, especially those who purchased their properties during the COVID-19 pandemic when the interest rate was low, struggle to keep up with the mortgage payments. The high mortgage interest rate also deters potential buyers from entering the market, despite the new First Home Savings Account program and the 30-year amortized mortgages for first-time home buyers. As a result, there are a historically high number of inventories of real estate property in Canada listed for sale.
For the commercial real estate market, office vacancy rate has been at all time high, most notably in Toronto, Vancouver, and Montreal. The low demand for industrial properties also increased vacancy rates in the industrial market across Canada. Consequently, owners of commercial properties have also been looking to sell or to convert the properties for other purposes.
To help property owners better understand their tax obligations when they dispose of their properties or when deemed disposition of their properties occurs, this series provides a basic guide for Canadian property owners who are subject to various types of taxes. This is Part II of the series, which introduces applicable taxes and rules with regards to the disposition of residential and commercial properties, including Land Transfer Tax, new Capital Gains tax rules, Principal Residence Exemption, Substantial Renovation rules, and rules applicable to situations where deemed disposition of property may occur.
Land Transfer Tax: Tax Imposed On Property Buyers
A Land Transfer Tax is a tax imposed on a property buyer during the purchase and sale process. Not every province levies a Land Transfer Tax but there will always be fees associated with registering property titles. For example, Saskatchewan does not charge Land Transfer Taxes. Instead, Saskatchewan charges a flat land title transfer fee of $25.97 for property valued between $525 and $8,800. For property that is valued at $8,800.01 and higher, Saskatchewan charges 0.3% of the value of the property value. In contrast, Ontario charges a lot more during transfer of property, depending on the type of property, property value, and whether the buyer is a first-time home buyer. Based on the property value, Ontario's Land Transfer Tax (LTT) is applied on a progressive basis. In addition, if the buyer is a non-resident of Canada, the Non-Resident Speculation Tax may also apply.
Provinces that levy a Land Transfer Tax often provide exemptions and refunds to lessen the tax liability for first-time home buyers. In Ontario, a first-time home buyer can receive up to $4,000 in Land Transfer Tax rebate. The maximum Land Transfer Tax refund available to first-time home buyers in British Columbia, subject to other requirements, is set at $8,000 as of January 1, 2024. Some municipalities also levy a Land Transfer Tax. For example, the City of Toronto imposes the Municipal Land Transfer Tax (MLTT) on any purchases of properties in the City of Toronto, in addition to the Ontario Land Transfer Tax. If you are looking to become a property owner in Canada, particularly in provinces where provincial and/or municipal Land Transfer Tax applies, you should learn more about any existing exemptions and rebate programs before you purchase any properties.
New Capital Gains Tax Rules: Increased Tax Liability For Property Sellers
When a property owner disposes of his or her property, if the sale price exceeds the total amount of allowed expenses and original purchase price, the property owner will have gains from disposition of the property. If the gains are characterized as capital gains, property owners should be aware of the new capital gains rules. The inclusion rate of capital gains in a taxpayer's income-tax return used to be set at 50%, regardless of the amount of capital gains claimed by a taxpayer. Effective June 25, 2024, the capital gains inclusion rate will be increased from one-half to two-thirds for the capital gains of over $250,000 per year for Canadians, and on all capital gains for corporations and most types of trusts. In other words, Canadian property owners, who receive more than $250,000 in capital gains from disposition of their properties, will need to include 50% of the first $250,000 and two thirds of the remaining capital gains in their income of the year.
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.