On September 5th, 2023, the City of Toronto approved a long-term financial plan and as expected, some of the new revenue tools are housing related. The City desperately needs to make up its funding shortfall and while a lack of provincial and federal funding may be part of the reason for Toronto’s financial problems, it is understandable they would look to options under their direct control.
There are a number of housing related revenue tools being considered, but as of yet, the only new tool that has now been approved a graduated Municipal Land Transfer Tax (MLTT) rate, coming into effect on January 1, 2024.
Let’s review the key details about this tax as well as the projected impact.
Toronto, King of Municipalities
Toronto is, as of September, 2023, the only municipality in the province with the ability to charge an additional Municipal Land Transfer Tax (MLTT). As of February, 2008, the City charged a MLTT equal to the Provincial Land Transfer Tax on all sales of real estate within the boundaries of Toronto.
While Toronto may have stood alone in their ability to charge an MLTT for the past 15 years, other municipalities are now chomping at the bit to also charge their own MLTT. We say “now”, as if this is a new concept, but in reality since Toronto gained the power, other municipalities have regularly raised the idea of setting up their own MLTT. York Region politicians mused about a few years ago and Peel Region has recently been talking about it as an option. There is considerable opposition from residents whenever the idea is raised, as with an MLTT comes the fear of making their existing property less appealing to potential homebuyers, thereby reducing the value of real estate in the municipality.
Targeted taxes, such as the MLTT, are gaining popularity as municipalities face funding pressures and it seems likely that if one of the municipalities surrounding Toronto receives authority from the province to charge their own MLTT, we will see all adopt an MLTT in short order. It seems like this is likely to occur in the next few years, as it is a way for the Ontario government to “help” with financial challenges without actually providing funds directly from Provincial taxes.
Take that tax and then double it.
Anyone who buys a home in Toronto is responsible for paying not just the Provincial Land Transfer Tax, but also the (Toronto) Municipal Land Transfer Tax, which doubles the amount payable. As of the end of August, 2023, the average price for a property in Toronto was $1,005,945, which means that buying a home in the city cost you an additional $33,188. Half of that ($16,594) goes to the Province and half goes to the City of Toronto.
This is a hefty additional tax paid for by a buyer and it is very apparent when you see homes selling on either side of the Toronto geographic boundaries. In such cases, a home a block or two away is either, on the Toronto side, tens of thousands of dollars more expensive due to the MLTT, or, on the neighbouring Peel, York or Durham side, tens of thousands of dollars cheaper due to no MLTT. The direct impact is hard to calculate, but we definitely see clients who would love to save the money if possible.
If you want to see a calculator for Land Transfer Taxes, you check one out here on the Toronto Regional Real Estate Board site.
Since it was established in 2008, the Toronto MLTT has been set at the same rate regardless of the purchase price of the home. Buy a condo in Liberty Village or a mansion in the Bridle Path, the rate is the same. Starting January 1, 2024, that is changing.
Here’s the current model
Here is the current (since 2017) rate structure.
Value of Consideration MLTT Rate
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Up to and including $55,000.00 0.5%
$55,000.01 to $250,000.00 1.0%
$250,000.01 to $400,000.00 1.5%
$400,000.01 to $2,000,000.00 2.0%
Over $2,000,000.00 2.5%
As you can see, it’s graduated, where the lower the value of the sale price, the lower the tax rate you pay. Once you hit $2M, that portion over $2M is charged at the highest rate of 2.5%.
The graduated model means you pay more for each portion, so the effective rate is blended. For example, if you buy a $2.5M property, you don’t pay $62,500 ($2,500,000 x 2.5%), but instead, you would (currently) pay $48,975 in MLTT.
As per the City of Toronto MLTT Calculator, the math works out like this.
Instead of paying a 2.5% MLTT rate, you would pay a MLTT of 1.96% MLTT rate in this example.
A new year, a new rate structure.
The City of Toronto voted to bring a new rate structure into effect on all transactions closing as of January 1, 2024.
This new rate structure is (for now at least) the same as the current rate structure, with higher rates established for residential properties valued at $3M and above.
Specifically, the new structure has a 3.5% tax applied to homes up to $4M, a 4.5% tax on homes up to $5M, a 5.5% tax on homes up to $10M, a 6.5% tax on homes up to $20M, and, finally, homes over $20M would be hit with a 7.5% tax. This would mean a new rate structure as follows.
Value of Consideration MLTT Rate
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Up to and including $55,000.00 0.5%
$55,000.01 to $250,000.00 1.0%
$250,000.01 to $400,000.00 1.5%
$400,000.01 to $2,000,000.00 2.0%
$2,000,000.01 to $3,000,000.00 2.5%
$3,000,000.01 to $4,000,000.00 3.5%
$4,000,000.01 to $5,000,000.00 4.5%
$5,000,000.01 to $10,000,000.00 5.5%
$10,000,000.01 to $20,000,000.00 6.5%
Over $20,000,000.00 7.5%
So, what’s the additional cost if you’re buying in these new tiers?
Using the new structure, it’s possible to calculate the increased amount a buyer would pay at any purchase over the $3M level. Let’s pick a few options at the start of each tier, to see what it actually costs.
- If you bought a $3M property right now, it would cost you $61,475. As of January 1, 2024, it will still cost you that amount, as the new rate structure kicks in at over $3M.
- If you bought a $4M property right now, it would cost you $86,475 and that goes up by $10K as of January 1, 2024, to $96,475,
- If you bought a $5M property right now, it would cost you $111,475, and that goes up $30K as of January 1, 2024, to $141,475.
- If you bought a $10M property right now, it would cost you $236,475, and that goes up $180K as of January 1, 2024, to $416,475.
- If you bought a $20M property right now, it would cost you $486,475, and that goes up $580K as of January 1, 2024, to $1,066,475.
- Anything over $20M currently costs an extra $25K per $1M, but that goes up to $75K per $1M as of January 1, 2024.
Using these examples, you can see that at the lower, new tiers, the increased MLTT tax (and therefore increased Toronto revenue) is relatively limited. It is only as we approach true luxury properties of $10M and above that the costs and therefore revenue increase significantly.
How much revenue will this actually generate?
We crunched some numbers on what additional revenue this new MLTT rate structure will bring into the city in 2024. Using the number of sales in each of the tiers in the most recent full year (2022) there are a total of 881 sales that took place in Toronto in the $3M to $20M price range. The highest sale was for $19.8M, so there were actually no sales at the highest tier of the new rate structure.
When we looked at these 881 sales across the various price bands and used the average increased LTT revenue based on the new rates, the City would bring in an additional $26.7M next year with the new rate structure.
That sounds like a pretty significant amount, but keep in mind that as of August 17, 2023, the City of Toronto’s updated Long Term Financial Plan and staff report show an estimated $1.5 billion starting pressure for the 2024 operating budget and $29.5 billion in capital needs, which both form part of a $46.5 billion shortfall over the next 10 years.
If we say the new rate structure will bring in about $27M, that means it will be less than 2% of the amount needed to address the operating budget shortfall. A welcome addition to the City’s revenue, but not the cure all for the financial crisis being experienced by Toronto.
Where’s that money mostly coming from?
As part of our analysis, it was interesting to note where that $26.7M in additional revenue is coming from, and the results are surprising!
In our review, 533 of the 881 sales were in the $3M to $4M range, and despite making up 60% of the transactions, they represent only $2.66M, or just 10% of the projected additional revenue. The $4M to $5M range has 180 sales, or 20% of the total sales, but brings in just $3.6M or about 13% of the projected additional revenue.
It is in the $5M to $10M price range that we see the bulk of the projected additional revenue, with 158 sales bringing in $16.6M, which works out to 62% of the projected increased funds to the city.
As an aside, the $10M to $20M range has so few sales (10 in the last full year) that despite the hefty percentage rate for that price point, it brings in just $3.8M.
Based on this review, despite accounting for 80% of the transactions impacted by this new rate structure, the $3M to $5M price band is only bringing in about $6.3M of projected additional revenue. That’s 23% of the total additional revenue, so 4/5ths of people impacted are bringing in a quarter of the money. Th
Will there be any unintended consequences?
Any changes to taxation can bring unintended consequences and in this case, we think it is likely that the new rate structure will see certain purchasers re-evaluating whether Toronto is where their next home should be purchased.
In a general sense, the higher your purchase price, the more a buyer needs to have for a downpayment. As the transaction costs for higher priced properties increase next year in Toronto, the required funds for closing will increase as well. A softening of the $3M to $5M market in Toronto seems likely as a result, with York likely to see increased demand as buyers seek out properties just north of the city boundaries.
The new rate structure for the MLTT that comes into effect January 1, 2024 will bring in some revenue but it appears it will have an unevenly distributed impact, with a large number of $3M to $5M buyers being impacted despite those transactions bringing in a relatively small amount of the revenue.
In the announcement on September 5th, Toronto Council also directed staff to develop a multi-year approach for property tax rates and report back on the possibility of increasing the Vacant Home Tax rate from 1% to 3%. In addition, reports were requested on introducing a municipal foreign buyer land transfer tax, an emissions performance charge for buildings, and an additional land transfer tax on buyers of residential property where the purchaser owns more than one property in Toronto. In short, lots of real estate related revenue tools are being considered!
If you’re considering buying or selling real estate that will be impacted by the new MLTT rate structure and want to discuss timing, we’d be happy to discuss it further with you.
