In Ontario, the Land Transfer Tax Act provides that every time a person acquires an interest in land, by either registered or unregistered transfers, land transfer tax is payable.
In most cases, land transfer tax is payable on the entire value of the transfer. For instance, this value may include the assumption of a mortgage or other liabilities, a payment in cash or a mortgage given back to the vendor.
In some cases, there are refunds of the land transfer tax which would otherwise be payable. One example of this scenario is a refund for first time homebuyer, which is provided for under the Ontario Home Ownership Savings Plan Act (the “Act”). What is commonly known as the “first time homebuyer refund” is not a full refund of the entire land transfer tax and does not apply to all first time homebuyers. In fact, the Act provides that a rebate will be available only in the following situations:
1) Where an eligible “purchaser”, as defined by the Act, is purchasing a newly constructed home;
2) Where that purchaser has never owned a home anywhere in the world; and
3) Where the purchaser’s spouse has never owned an eligible home anywhere in the world (while he or she was a spouse of the purchaser).
There are certain exceptions built into this refund. For instance, where two spouses purchase a newly constructed home together but only one of the spouses (for example the husband) is a first time homebuyer, the first time purchasing spouse would receive the rebate but the other would not. In other words, the purchasers would receive 50% of the rebate as permitted under the Act.
Most importantly and beyond these qualifications, exactly what is the rebate? The Act does not provide a full refund of land transfer tax for first time purchasers of a newly constructed home. Rather, for an agreement of purchase and sale entered into after March 31, 1999, the amount of refund claimed will offset the land transfer tax otherwise payable to a maximum of $2,000. Practically speaking, this allows first time purchasers of newly constructed homes to avoid paying land transfer tax on homes that are purchased for approximately $225,000 or less (excluding GST). However, in an alternative scenario, if a first time homebuyer purchases a newly constructed home for $300,000 (excluding GST), the land transfer tax payable on $300,000 would typically be $2975. Therefore, after applying the first time homebuyer rebate, the purchaser in this case would still be required to pay $975 of land transfer tax.
Since the province of Ontario has introduced an electronic method for the registration of land transfer documents, a first time purchaser seeking this rebate need not pay the entire land transfer tax amount (ie: $2975) and then apply for a refund. They can simply pay the net amount of land transfer tax (ie: $975) upon registration of the transfer, provided that his or her solicitor takes the appropriate steps.
The Ontario government has recently considered expanding the land transfer tax refund program to include first-time homebuyers of re-sale homes. If this change is implemented, first-time homebuyers of re-sale homes, with agreements of purchase and sale entered into after December 13, 2007, will also benefit from the same $2000 land transfer tax refund as is currently the case for purchasers of newly constructed homes. However, this proposed amendment has not yet received Royal Assent and therefore has not yet become law in Ontario.
This article was originally published in the May 6, 2008 edition of the Ottawa Business Journal.