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Conditions for land transfer tax in Ontario

In Ontario, when purchasing a home, besides paying the purchase price, new home sales tax, and legal fees, a significant expense is the land transfer tax. This tax is divided into provincial land transfer tax and municipal land transfer tax. All provinces in Canada charge the provincial land transfer tax, but not all cities charge the municipal land transfer tax. The land transfer tax is a one-time fee paid by the buyer at the time of purchase. For example, for a house priced at $1.2 million, the Ontario land transfer tax is $20,475, and the Toronto land transfer tax is $19,725, totaling $40,200 in land transfer taxes for a home in Toronto. Is there a way to pay less or no land transfer tax?

If you are a first-time homebuyer, you may qualify for a partial refund: the maximum Ontario land transfer tax refund is $2,000; the Toronto refund cap is $3,725. To qualify, you must be at least 18 years old, have never owned any real estate or a portion globally, and your spouse must also have never owned any real estate during the marriage. You must also make the property your primary residence within 9 months of the transfer. If the property is co-owned, and some qualify as first-time buyers while others do not, the refund is calculated based on the ownership share.

In most real estate transactions in Ontario, including those between spouses and family members, land transfer tax must be paid. However, if there is no consideration or economic compensation involved in the property transfer, the transfer amount is $0, and no land transfer tax is owed. This often appears in legal documents as a property sold for $1, resulting in a land transfer tax of $0. If the gifted property has an outstanding mortgage, land transfer tax is required.

If there’s an outstanding mortgage, except for transfers between spouses, the land transfer tax is calculated using the mortgage balance as the base, paid by the recipient. The government considers the recipient as taking over the mortgage debt, so the transfer price is the mortgage balance. For example, if parents gift a house to a child with a $500,000 mortgage, the child must pay $6,475 in Ontario land transfer tax, and if the property is in Toronto, an additional $5,725 in Toronto land transfer tax.

There are three exemptions for spousal property transfers: 1) The recipient only takes on the mortgage balance, with no other consideration paid. 2) The transfer is based on a written separation agreement. 3) The transfer is based on a court order. A spouse is defined as a married couple, or partners cohabiting for over three years, or less if they have a child together.

For joint property, changes from tenancy in common to joint tenancy or vice versa with consideration set to $0 incur no land transfer tax. If partners dissolve a partnership holding property as tenancy in common without changing ownership percentages, no land transfer tax is owed.

For inherited property, regardless of a will, if there is a sole beneficiary, the consideration is $0, meaning no land transfer tax is due, even if there’s an outstanding mortgage. If there are multiple beneficiaries, and some relinquish their share, the property beneficiary may need to pay land transfer tax.

If transferring property from an individual to a corporation, exemptions apply if: the property was primarily used for active business before the transfer; the transfer aims to maintain the business; the company qualifies as a small business with taxable income below $1.5 million, and 75% of income from active business. If the property is contributed as capital without cash or equivalent compensation, the land transfer tax is $0.

(Content is for reference only and does not constitute financial advice. For financial planning advice, please contact the author or consult a professional.)

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