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Abolish the Land Transfer Tax, Says Researcher

A new study says the lucrative tax isn't the best way for Toronto to raise revenue.

Photo by {a href="http://www.flickr.com/photos/ikonta/2716300191/"}ikonta{/a}, from the {a href="http://www.flickr.com/groups/torontoist/pool/"}Torontoist Flickr Pool{/a}.

Here’s something that should cheer Mayor Rob Ford amid his many political troubles: a researcher from the C.D. Howe Institute agrees with him that Toronto’s Municipal Land Transfer Tax should be abolished. Though it has to be said that the researcher makes a much more sophisticated case for doing so than the mayor ever has.

The report, released earlier today, is the work of Benjamin Dachis, a senior policy analyst at C.D. Howe. After looking at detailed data on the sales of single-family homes in Toronto and surrounding municipalities, he estimates that the Land Transfer Tax has reduced home resales by about 16 per cent each year since it was instituted in 2008. That means the tax has prevented about 3,500 homes per year from going on the market when they otherwise would have. The study excluded condos and newly built homes.

The Land Transfer Tax works sort of like a sales tax: the City takes a percentage of the amount paid for a property when it sells. For homes over $400,000, the fee is two per cent. Also, the province has its own Land Transfer Tax, which adds as much as another two per cent to the net price of a home sale. Mayor Ford vowed to repeal the City’s version of the tax during his mayoral campaign, and has recently said he still intends to do so, but in phases. The tax is expected to generate about $330 million for the City this year.

Dachis argues that by slowing down Toronto’s real estate market, the Land Transfer Tax is keeping people in homes they don’t want, and preventing them from moving in order to take better jobs. He also believes it’s driving up the prices of homes.

But while the tax-averse mayor may love that part of the argument, he won’t be as big a fan of Dachis’s recommended solution: raise property taxes across the board to spread the financial pain. Dachis thinks this would help the markets return to something close to normal.

Read the full report here: [PDF]

Comments

  • realc

    $330million in taxes vs rich people whining that they can’t afford to sell their 400k+ houses. Hrmmmm.

    • Anonymous

      If you own a $400k home, you aren’t rich.

      • Anonymous

        Define “rich”.

        • Anonymous

          Consider a professional couple, let’s say an engineer and a teacher, neither one earning 6 figures. They could afford a $400k home. Would you call them rich? I’d call them the middle of the middle class.

          • Winkee

            considering the median family income was 65k last year, I would venture to say a 200k+ family income is far from middle class, it would put a household easily into the top 10% of earnings, 150,000 is the floor.

          • Anonymous

            In what way do two people, “neither one earning 6 figures”, have a “200k+ family income”?

          • John Duncan

            Fair point, but if the median household income is approx. $65,000, and you have two people making approximately $65,000 each, it’s pretty hard to argue that double the median income is “the middle of the middle class”.

          • vampchick21

            In the end though, it really depends on where you live and the living costs of that area. On paper I’m middle class. On paper. That’s not my living reality though. Plus, given the average debt load in Canada, you can own a $400K+ house and not make more than the average middle class. Mortgage baby. You can own one of those with not a lot down, but you’re payin through the arse every month.

  • Anonymous

    Agree completely. The LTT punishes the middle class for owning property. But it should be replaced with a regional sales or income tax, not extra property tax.

    • http://paul.kishimoto.name Paul Kishimoto

      The LTT “punishes” people for *buying* property—as LizC points out, if they do this repeatedly, they pay more. People who *own* property long-term are only “punished” with property taxes.

      Economic purists usually argue for taxes on consumption rather than income, property or other items. Apparently home resale is currently HST-exempt (http://canadaonline.about.com/od/money/a/ontariohst.htm ), so the report effectively suggests ending this exemption (end of p.16) as a replacement for at least the provincial portion of the LTT.

      Also, wouldn’t replacing the LTT with a regional sales tax be regressive? It would collect from those whose income is too low to purchase a home (and thus currently do not contribute to LTT revenue).

      • Anonymous

        Whether the disincentive is on owning or buying is semantic. Imagine the government instead implemented a tax on savings: for example, whenever you withdraw money from your savings account, the government takes 5% (on top of any other applicable taxes). Since most peoples’ net worth is tied up in the value of their home, the LTT amounts to the same thing.

        The report confirms that the LTT’s bite is mostly felt by the middle class: “The most pronounced effect on the market was in areas with relatively low sales values” (page 1).

        Sales taxes are somewhat regressive, but in Canada this is mitigated by rebates, as well as exemptions on things like food. Even so, a Toronto sales tax would be a great idea because it would capture funds based on the considerable economic activity within the city, and not just based on who lives here. As I’m sure you know, civic sales taxes are common in the USA and even David Miller campaigned for one in Toronto.

        • http://paul.kishimoto.name Paul Kishimoto

          Didn’t the federal Conservatives trumpet the introduction of “tax-free savings accounts”? I’m not a tax expert, but that implies by opposition that savings *are* taxed; maybe as investment income. If the LTT amounts to the same thing, maybe it’s not especially objectionable.

          The point I was trying to make was that, in general, a revenue-neutral switch from a progressive instrument to a flat instrument is a regressive act.

          In particular, if the LTT were untouched and new civic sales tax revenue were devoted to something that benefitted all (transport?), that would be fine by me. But if a civic sales tax were used explicitly to offset a tax break that benefits only homeowners (and benefits wealthier ones more), I wouldn’t support it.

          • Anonymous

            Of course savings are taxed, as is the rest of your income; including mortgage payments. We’re talking about a surtax that reduces the value of a long-term investment, namely your home.

            Again, if you read the report, the effect of the LTT is felt most by those at the lower end of values, probably because their home is their only large investment. In other words, this is a tax that targets the middle class, not the rich.

          • Anonymous

            I’m not a tax expert either, but I believe the TFSA exists because interest on savings, including RRSPs, is normally taxed.

        • Anonymous

          “Whether the disincentive is on owning or buying is semantic.”

          How so? The LTT is a one-time ding incurred when purchasing. You don’t pay the LTT year after year, you pay property tax, which dings you for owning property. You can’t argue against the former tax as if it were the latter.

          Your proposed regional sales tax punishes people who don’t own property, making them pick up the slack the LTT currently covers.

          • OgtheDim

            People who rent pay on average more per square foot in city taxes then home owners as rental units are taxed at the commercial rate. Having the LTT creates a bit of fairness.

            Which is why a consumption tax, the sales tax, is actually more progressive. People who own homes tend to buy more. They also tend to vote more. A simple % based sales tax is less likely to rigging to make voters pay less at the expense of non voters.

          • Anonymous

            I’m not opposed to a Toronto sales tax, but replacing the LTT with it shifts the burden off property buyers and onto everyone else.

          • Anonymous

            It’s semantic because in order to own, you have to buy. Unless you inherit your property.

          • Anonymous

            Someone who inherits their property doesn’t pay the LTT, yet they still own the property. LTT ≠ tax on owning property.

  • Anonymous

    Wouldn’t raising property taxes also raise property values, and, more importantly, rents? Is pricing thousands of people out of the downtown rent market, and thousands more out of the city entirely, really better than somewhat-kinda-I-guess discouraging a few thousand homeowners from selling their increasingly more valuable homes?

  • The Other Dave

    Hmmmm…. home sales have dropped since the economy went south in 2008 except outside the city where home prices are significantly lower. Must be the land transfer tax, not the uncertainty caused by a poor economy making people look for lower housing costs.

    Yep, I can certainly see why it could only be the land transfer tax and nothing else. Good thing the C.D. Howe Institute is on the job.

    • Anonymous

      They got their results by comparing similar neighborhoods both inside and outside jurisdictions with a LTT, so they controlled for the wider economy.

      • OgtheDim

        The myth of the control again?

        There is no such thing as a similar neighbourhood within the 416 and outside of it. Transit, schools, distances all different once you move outside.

  • LizC

    The LTT hits real estate investors harder than long term home owners. I think that was part of the original intention but it’s not the kind of thing the CD Howe Institute supports.

  • Anonymous

    The C.D. Howe institute has no axe to grind…

  • vampchick21

    I’m just gonna come right out and say it. As someone who’s gearing up to buy, it’s not the LTT that’s holding it back for me, it’s the actual cost of the damned house/townhouse/condo in the city.

  • Anonymous

    A right wing “institute” asking to abolish a tax. Colour me shocked!!!!