Making a case for land transfer tax review in Canada

Kunal Sawhney, chief executive of Kalkine Group

That the pandemic will deal a blow to the housing sector was the speculation in the first half of 2020. But speculations – because they lack firm evidence – tend to go wrong.

And in the UK, where the average house price is up more than £30,000 since the covid onset, the government undertook a preemptive measure in July 2020 by announcing a cut in stamp duty. This tax holiday meant that until March 2021, no stamp duty was levied on the first £500,000 of the sale price. The holiday was in place until September 2021, though the amount was reduced to £250,000 during the extended months.

Property transfer taxes

Stamp duty, or real estate transfer tax (in the US), or land transfer tax (in Canada) are all one-time levies when house ownership is transferred.

Taxes are the only real source of revenue for governments that undertake every task, from infrastructure development to maintaining law and order. No matter the unpopularity, taxes are part and parcel of any economy.

Property transfer taxes are ad-valorem, meaning they depend on the value of the transaction. For example, in the province of British Columbia, 1 per cent tax is levied on value up to C$200,000. This becomes 2 per cent of the fair market value for values greater than C$200,000 and up to C$2,000,000, and 3 per cent beyond this.

The average house price in Canada is nearly C$680,000, which means the transfer tax on a usual sale is C$13,600. According to estimates, the government raises billions in land transfer taxes.

Different countries, different policies

No two countries take identical policy decisions. So, when the UK decided to cut taxes in anticipation of subdued demand in the housing market, Canada did not follow suit.

But the trajectory that the housing market has taken over the past one and half years is nearly identical in almost every economy. The US, the UK, Australia or Canada – house prices are at a record high everywhere.

In Canada, the housing market showed some signs of cooling after March 2021, but the bulls are back, and according to the Canadian Real Estate Association (CREA), the average price was up nearly 14 per cent in September 2021. The Swiss bank UBS recently warned of a bubble, at least in two cities of Toronto and Vancouver, and pinned the blame squarely on low mortgage rates. The bank warns of an ‘abrupt end’ to this frenzy citing the imminent end of the low rates era.

Low rates in the UK were in play when the housing market scripted an unexpected tale of a record number of sales amid locked down cities and borders. While the government in Canada hasn’t touched the land transfer tax thing, it has undertaken measures like taxes on vacant properties of foreigners. These steps are aimed at addressing supply bottlenecks and easing price pressures.

Canada’s transfer taxes seem expensive

In the US, multiple states, including Idaho, Texas and Indiana do not levy a property transfer tax. In the UK, such taxes are back in force after the tax holiday expired in September. But when imposed, the stamp duty in the UK appears less daunting than the land transfer tax in Canada. There is nil stamp duty in the UK for sale up to £125,000, equivalent to nearly C$210,000.

But one element that cannot be ignored is the rebate for first-time buyers. Canada allows rebates to these buyers, but the eligibility bar is set quite high. For example, to claim a rebate, no spouse should have ever owned a home anywhere in the world before acquiring the first home in Canada. If qualified, the first-time buyer doesn’t pay any land transfer tax on the first C$368,000, and for a purchase value of greater than this, C$4,000 is the maximum tax refunded.

In the city of Toronto, an additional municipal land transfer tax (MLTT) kicks in. For the first C$55,000, the MLTT is 0.5 per cent, and the rate increases with the increase in the value of consideration. In effect, since Toronto is not just Canada’s but the world’s one of the most expensive real estate markets, any sale results in almost 2 per cent MLTT being levied.

The dilemma

There is little point justifying or criticizing land transfer taxes that add to a house’s closing price. Not every low- and middle-income family can qualify for the first-time buyer rebate given the eligibility criteria. It is also true that many move from one city or province to another in a similar-sized house.

This calls for at least a review of Canada’s land transfer tax and taking cues from other comparable economies like the US and the UK. Land transfer tax in Canada is a provincial issue, and the federal government cannot unilaterally take a policy decision.

The bottom line is prices are still high, and regardless of all warnings by pundits and institutions, a crash in the housing market is far from visible. A correction in prices was noticed for a few months after March, but things are heating up again. Despite all assurances, there is little Canada can do to address supply gaps, and this remains a medium-to-long-term thing. In the short-term, re-thinking land transfer tax rates and the eligibility criteria for first-time buyers can help.

But with all that said, some analysts in the UK believe that cut in stamp duty was one factor that pushed up house prices. And hence, the review of land transfer tax in Canada has to be pragmatic, not populist.

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