There’s nothing simple about buying a house, and there’s always more to it than meets the eye. There are lots of hidden costs, fees you weren’t aware of, and taxes that you might not have anticipated. One such tax is the Land Transfer Tax (Provincial Property Tax in B.C.) When you’re looking at a home for sale in Toronto or Vancouver, you’ll have to deal with this tax. For many homebuyers, this tax is a minor irritant, but in the luxury market it can cost an extra hundred thousand dollars. Learn how to circumvent this tax, or at the very least mitigate its negative effects, and make your home buying process easier.
What is the Land Transfer Tax?
When you, the buyer, purchase a house in Canada, that means the title of that house (and the land it sits on) transfers to you. The local government and province will tax that transfer, usually coming out to 3% of the value of your purchase. The seller is not taxed, just the buyer. The tax is staggered with 1% on the first $200,000 of the purchase, then an additional 2% for values ranging up to $2,000,000. This includes the majority of all Canada Real Estate.
The luxury market faces higher Land Transfer Taxes, as you might imagine, and foreign homebuyers in Canada pay a 20% transfer tax. Newly built homes with values of less than $750,000 are exempted from the tax, but as many Canadian home buyers well know, finding a home below $750,000 is a rarity in just about every major Canadian municipality. First-time home buyers can get a rebate on the LTT (at the buyer’s disclosure), and can usually save themselves around eight or nine thousand dollars for their trouble.
How to Circumvent the Land Transfer Tax
Benjamin Franklin said that there is nothing certain in life but death and taxes. About two-hundred years later, the same wisdom holds true today. It’s hard to get out from under the Land Transfer Tax, but not impossible. One thing you can try is to use a bare trust.
A bare trust is like splitting ownership of an asset in two. One half, the legal ownership, keeps the title of the land and manages it, while the other half, the beneficial owner, reaps the rewards from the land. The real usefulness of the bare trust comes when you’re looking to buy a house. Under a bare trust, it’s the beneficial ownership that gets transferred, not the legal ownership which actually holds the title. The title doesn’t move, the beneficiaries do.
This works only in a few places, namely in British Columbia, and already the loophole there is closing. Under the Property Transfer Act, bare trusts have to report who their beneficiaries are on a regular basis, making avoiding the Provincial Property Tax (same as the LTT) that much harder in British Columbia. In Ontario, this loophole isn’t feasible.
The one thing that you can use to your advantage across Canada is the Land Transfer Tax rebate for first-time home buyers. So long as you’re a Canadian citizen or permanent resident, and you’re at least 18 years of age, you can qualify for the rebate. You just need to disclose that this is your first time buying a property in order to qualify for the rebate. The rebate won’t get you out of paying the tax, it’ll just lower the taxes you pay.
Fool-Proof Way to Avoid the Land Transfer Tax
The one sure-fire way to get out of paying the Land Transfer Tax is to buy property in provinces that don’t have the Land Transfer Tax. Alberta and Saskatchewan don’t have the Land Transfer Tax. They do charge a similar fee, but it is much smaller than what you’d deal with in Ontario or B.C.
Things are different out in the Plains provinces, and usually for the better. You can find great homes for sale in Calgary and similar cities that won’t tag on an extra twenty thousand dollars through taxes. The best way to avoid paying a certain tax is by moving somewhere that doesn’t have that tax, plain and simple.
Believe it or not, buying a house in Canada is not just a choice between Toronto or Vancouver. It’s a big country out there, and there’s plenty of flexibility in the housing market if you’re willing to make some compromises in the name of saving tens of thousands of dollars. You just have to go out and look for it.