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Hello New Home, Hello Taxes. Here’s What You Need to Know.

Hello New Home, Hello Taxes.  Here’s What You Need to Know.

Hello New Home, Hello Taxes. Here’s What You Need to Know.

Buying a home is exciting.  Taxes are not. While this is the topic that everyone loves to ignore, buying or selling a home in Ontario does come with quite a few tax implications.  The more you know about them, the less stressed you’ll be down the road. 

In this blog, we’ll dive into:

  • Land transfer taxes
  • Property taxes
  • HST (Harmonized Sales Tax)
  • Capital gains taxes
  • Income tax implications

Land Transfer Taxes

In Ontario, the buyer is on the hook for a land transfer tax payment that is due on closing.  Given the average property price in your market, this can be a significant amount that you’ll need to plan for.  Here’s how it’s calculated.

Ontario Land Transfer Tax:

  • 0.5% of the value of the property up to and including $55,000
  • 1% of the value which exceeds $55,000 up to and including $250,000
  • 1.5% of the value which exceeds $250,000 up to and including $400,000
  • 2% of the value between $400,000 and $2,000,000
  • 2.5% for amounts exceeding $2,000,000, where the land contains one or two single family residences

If you’re buying in the city of Toronto, you’ll also be paying a second land transfer tax .

Toronto Land Transfer Tax

  • 0.5% up to and including the first $55,000
  • 1% of the value which exceeds $55,000 up to and including $250,000
  • 1.5% of the value between $250,000 and $400,000
  • 2% of the value between $400,000 and $2,000,000
  • 2.5% of the value over $2,000,000

Before you start creating excel spreadsheets and dusting off your calculator, our land transfer tax calculator will help you figure out what you will owe. 

If you’re a first time buyer, you’re in luck (pending some conditions, of course,  you may be eligible to receive a refund for all or part of the land-transfer tax – click here for details of the Land Transfer Tax Refund Program.  Our calculator factors in any first-time buyer rebates, so once again, no need for number crunching on your part.

Property Taxes

Your property taxes will vary based on your municipality.  

If your property is in the city of Toronto, you can check how much property taxes are by using the City of Toronto property tax calculator..  Other municipalities may offer similar calculators on their website. 

The amount of your property tax is calculated on the phased-in property assessment value of your property, determined by MPAC (Municipal Property Assessment Corporation). You can read all about how MPAC determines the value of your property here.

MPAC property assessments are usually lower than current market value so if paid $1,000,000 for your house, MPAC’s assessment probably has you paying taxes on a much lower assessed value.

Depending on what you sign up for, property taxes are due in either two instalments (March and July); 6 instalments (March, April, May, July, August and September); or in 11 instalments (due every month except January). 

Increases in property values will impact your property taxes

Do you plan to finish the basement or do a significant renovation, like an addition to your home?  You will likely be re-assessed for tax purposes and your taxes will increase.

New Construction Homes

MPAC usually assesses newly built homes within 6 months.  In the meantime, you may be responsible for paying the taxes on the land value of your property.  The most important thing to remember is that once the MPAC assessment is completed, the city will bill you for property taxes owed from the date of possession.   For most people, it’s a shock when they get their first property tax bill that is a lot larger than what they had expected. A good tip is to always set money aside to cover your first property tax bill.

HST

To say the HST is confusing is an understatement.  Here’s how we boil it down.

Resale Homes

  • HST is NOT payable on resale properties in Ontario
  • If a residential property is used partially as commercial, HST would be payable on the percentage that was used as commercial
  • HST may be payable on a highly renovated home (but rebates may apply)

Vacant Land

  • HST is not payable on vacant land (personal use only)

Newly Constructed Houses and Condos

  • HST applies to new construction homes
  • Federal and provincial rebates are available in some cases
  • Most builders will factor the HST and the HST rebate into the purchase price of the home, though some will not, so if you’re buying pre-construction, make sure to ask and have your lawyer review the agreement.
  • To qualify for the rebate from the builder, the home must be the primary residence of the purchaser or one of their immediate blood-relatives and you’ll be required to submit proof if an audit ever occurs.
  • If you are buying a property as an investor, you don’t qualify for the rebate automatically. Plan to pay the builder the full amount of the HST on closing and you can apply for a rebate after you’ve signed a one-year lease agreement with a tenant.  This basically means that you may be fronting the HST for a few months until the rebate is processed and approved.

Commercial Properties

  • HST is payable on commercial properties

REALTOR Commissions and Legal Fees

  • All REALTOR commissions are subject to HST
  • HST is payable on real estate legal fees

When closing your purchase or sale with Deeded, we apply the appropriate taxes to your closing and can help guide you through complex processes such as filling for an HST tax rebate or refund.

Capital Gains Tax

When you earn money on an investment, you’re subject to a capital gains tax on the amount you’ve profited.  

The good news is that if your home is your principal residence (the home you live in), you won’t have to pay capital gains taxes.  You can only have one principal residence and may be asked to provide proof that you live in the house if audited.

If you’re selling an investment property, even if a part of it has been rented in the past, you may be on the hook for capital gains tax that will be paid on 50% of the gain.  For example, if you bought a condo at $500K, rented it out for a couple of years and later sold it for $750K, you will pay taxes on $125K (50% of the $250K you made, less selling expenses).   

Your taxes will be calculated after the capital gains have been added to your income for the year so if make $100K and followed our example, another $125K in income will be added to your overall income, putting you at a higher tax bracket.

It is important to involve your accountant or financial planner before buying or selling an investment property to account for the tax implications according to the latest rules from the CRA>

Income Tax

If you are flipping your home or if that’s your full-time job, you’ll be taxed on the full income you make between what you bought and sold the property for, less your expenses.

If you’re going to be a landlord and rent your property out, the rents you collect will be added to your income, less expenses that are associated with the rental property (like property taxes, interest on your mortgage, advertising, renovations, etc.)

If you’re in the business of flipping houses, the CRA will want a piece of the action in the form of income tax. If flipping is your main gig or forms a substantial part of your income, the CRA will consider it active income and you’ll be taxed at the usual income tax rates.

Our final take is this.   Taxes can be complicated and every situation is different.  The best you can do is become aware of tax implications and plan ahead for them.   There’s no worse situation than having to come up with an extra $50K at closing because there’s something you missed or were not told along the way.   

It is always worth a brief conversation with your lawyer and accountant before you buy or sell a property to understand your obligations and tax liabilities.  You’d be amazed by how much a 10 minute conversation can save you.

Important note: This article is not Legal Advice.  No one should act, or refrain from acting, based solely upon the materials provided on this website, any hypertext links or other general information without first seeking appropriate legal or other professional advice.

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