I had a friend who didn’t believe in taxes. When I say I had a friend who didn’t believe in taxes, I don’t want you to get alarmed. He’s still a friend and he’s still alive. He just believes in taxes now.
Truth be told, he always believed in taxes. I used to make fun of him when he used that phrase. The conversation went like this.
Friend says “I don’t believe in taxes.”
Jeff says “So, you mean, you’ve heard of taxes, but never actually seen anyone pay them?”
Friend says “What?”
Jeff says “You don’t believe in them, right? Like you don’t believe in life on other planets? Or dressing yourself like a grown up?”
Friend says “No, and shut up. I mean I don’t think they’re right.”
Jeff says “Ah, so you mean you don’t agree with them. You believe in them, like, you know they exist, you just don’t like them?”
Former Friend says “Yeah, I just don’t believe in them.”
Jeff says “I don’t think you’re grasping my point.”
I don’t know that anyone actually likes taxes but I know most of us believe they exist.
Taxes on real estate are a bit of a misunderstood area, so I thought I would clear up the confusion. Here are the four things you need to know about taxes and real estate.
- Principal residence exemption
If you live in a home and claim it as your principal residence, you are not responsible for paying any capital gains tax on the proceeds of the sale of the property. If you use more than 51% of the home for yourself, even if you are renting out a portion of the house, you still don’t owe any capital gains on the sale of the property. The CRA doesn’t like to acknowledge this and has some confusing information online about it, but speak with a tax accountant and they’ll confirm this fact.
- New builds versus resale properties and HST
When you buy a resale property (i.e. a house or condo that isn’t brand new from a builder), you don’t have to pay HST on it. If you buy a new property, then HST (13%) does apply. There is a fair bit of math below so feel free to skip this section if you feel like it’s too much on a Friday afternoon.
There are rebates available on the GST portion of that HST tax (which contains both Goods and Services Tax as well as Provincial Sales Tax). You will get back 36% of the GST paid, up to the purchase price maximum of $350K. The credit starts shrinking as you go over that purchase price and over $450K, you don’t get any GST rebates. At all. A home bought at $449K gets a significant discount on GST and a home bought at $450K gets no rebates at all. The PST portion is similarly structured, except in its case, it’s 75% of the PST paid (which is 8%), up to a maximum of $24K in rebates (75% of the $400K maximum applicable purchase price) for the property.
A final note that if you are buying a new build, you need to be clear on whether the builder has incorporated these rebates into the sale price and don’t assume you are getting amount back from the sale price. Often they focus on the final cashflow price, which looks cheaper because they’ve included the rebates.
- Tax on commissions
In the vast majority of cases, sellers pay the commission to both the listing agent as well as the purchasing agent for a real estate transaction. Real estate brokerages must charge HST on their commissions, so for example the commission of 5% of the sale price will be 5% plus HST of 13%. That makes the cash out equal to 5.65%. Brokerages and their Realtors have to remit this to the government so it isn’t a revenue source for them, though of course it allows them to claim the HST on allowable expenses as input tax credits.
- Land transfer taxes
The biggest additional expense on the purchase side is the land transfer tax (or taxes) the buyer pays on the property. This is a one-time tax when title is transferred on a property, and it can be pretty hefty. There is a formula but you can find calculators online, such as this one at my brother Peter’s website for his law practice.
In Toronto, there is a municipal land transfer tax in addition to the provincial one already in place. This effectively doubles the land transfer tax that is paid when purchasing a property in Toronto. For example, a property bought at $800,000 will incur land transfer taxes of $12, 475 in provincial land transfer taxes and an additional $11,725 in Toronto land transfer taxes. That adds up to $24,200 and it needs to be factored into any purchase.
As my lawyer friends and relatives are keen to point out when I talk about things like this, I’m neither a tax accountant nor a tax lawyer. It is always a good idea to involve professionals like this in your real estate dealings to make sure your situation isn’t different than what I describe above.
If you or someone you like are looking to invest, buy or sell real estate, please get in touch with me. Even if you just want to tell me you don’t believe in taxes. As always, I’d love to be responsible for what comes next.
TAPESTRY OF LIGHT AND DARK
In a building with uniform light level, there are few “places” which function as effective settings for human events. This happens because, to a large extent, the places which make effective settings are defined by light.
I love this lesson as it isn’t as intuitive as some others. People naturally are phototropic, that is, they move towards light and orient themselves towards the light. Even if we don’t want to sit in the light because of heat, we want to face the light, rather than face the dark. The dark remains crucial though, as it forms how we react to a space. In a place with all light areas, we don’t know where to orient ourselves. This also means that if the light areas of a room or space are not made appealing, we end up still looking at them, thereby forming an impression of the space. Lighting when you are selling is crucial because it literally highlights where buyers focus their attention.