When people talk about the cost of a new home in Ontario, they usually focus on the price tag from the builder. Everyone understands that it costs money to build a home and most people realize that you also to have land to build upon, which pushes the costs up even more.

Many people don’t know that behind the scenes, there are a whole bunch of extra costs that make their way into that sale price number. One of the biggest is development charges and it’s time we talk about them – and why they’re causing housing affordability to get even worse in Toronto and the GTA.

So, what exactly are development charges?

Development charges (DCs) are fees that cities and towns in Ontario collect from developers when new homes or buildings are built. The idea is simple: new housing brings new people, and those people need roads, transit, water, fire and police services, and other infrastructure. Development charges are meant to cover those growth-related costs.

Good, make those greedy developers pay.

If you don’t see a problem with making developers pay for these growth-related costs, you’re not alone.  While it has been a rough road recently, developers can make significant profits after all is said and done.

The challenge with DCs is that builders don’t absorb those fees—they pass them on. Developers often borrow money to pay the charges upfront, then recover the cost (plus interest) when they sell the homes. By the time you buy a newly built home, development charges have been baked right into the price.

In some Ontario cities, all the various municipal housing taxes (including DCs) can add $250,000 or more to the cost of a modest family home. That’s a huge factor in why new homes are so expensive compared to resale properties.

Here’s a breakdown of the typical costs that go into a new build property.

While construction costs and the price of the land itself make up about 75% of the cost, development charges and other taxes and fees can add up to 25% of the eventual purchase price.  With the average price of a detached home in most parts of the GTA at over $1M, that’s hundreds of thousands of dollars.  Crucially, it’s the sale price that is subject to HST, land transfer taxes and all sorts of other fees, which means that you’re effectively being taxed upon a tax.

At least we get something out of it.

Even if you’re OK with the idea that the fairest way to cover the services and infrastructure required for a new development is to charge the people who are directly benefiting from it, the reality around what is charged for – and spent upon – varies tremendously.  There is provincial legislation that outlines the legal framework for when, what, and how development charges can be used (the Development Charges Act or DCA) but within that framework, there is a lot of variation.

Ontario municipalities are not legally required to use development charges, and only 216 of the 444 municipalities in the province (48.6%) do so.  With about half of municipalities not charging DCs, you start to understand why it seems like some places have tons of new developments happening and others have none at all.  The pro forma for a builder will always look a lot healthier – and appealing – if they can cut 15% to 25% of the costs incurred, and it typically means a lower end user price as developers pass on some of those savings.

Even if we look at just those towns and cities that choose to charge DCs, what is covered and what is charged varies tremendously.

It’s complicated – and sometimes unfair

A few things make development charges tricky so let’s go over them.

• They’re based on averages. A large detached home and a smaller detached home often pay the same fee, even though the bigger one might use more services.
• They vary by area. Some charges cover city-wide infrastructure, while others are specific to certain neighbourhoods.
• They’re political. Cities make assumptions about future growth and infrastructure needs when setting the fees. Small tweaks to those assumptions can raise or lower the costs dramatically.

Let’s say you’re comparing a new townhouse in Markham to a new townhouse in Toronto.

In Markham, you’ll see both municipal-wide charges (for big-picture services like major roads or water treatment) and area-specific charges (for things that only serve that neighbourhood).

In Toronto, which is a single-tier municipality, all those charges are rolled together.

The end result? Two similar-looking townhouses could have very different development charge costs built into the price—sometimes tens of thousands of dollars apart.  That’s before the cost of land is factored into the list price!

Here’s the bottom line.

Development charges are a big reason why growth in Ontario doesn’t always feel like it’s paying for itself. Instead, new buyers often end up shouldering costs that benefit both new and existing residents.

If you want to do deeper dive into understanding development charges, the fine folks at the Missing Middle Initiative (out of Ottawa University) have written a fantastic primer the subject and you can read the PDF here.

If you’re considering buying property to build your dream home, or investing into the build of a multiplex income property, then we’d love to help you make it happen.  It’s complicated, sometimes challenging, but ultimately it can be very rewarding.  Get in touch with us to talk about next steps!

There’s a quote from Ben Franklin that is often used when it comes to the taxes we pay, where he says “in this world nothing can be said to be certain, except death and taxes”.

While we may wish it was otherwise, real estate is no exception to this saying, and we often have questions from clients about the tax implications for buying or selling real estate. Given that taxes on real estate are a bit of a misunderstood area, we thought we would clear up the confusion. Without further delay, here are the four things you need to know about taxes and real estate.

What’s a 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. If you use more than 50% of the home for personal use—even if you’re renting out part of it—you typically won’t owe any capital gains tax on the sale of the property.

There are some exceptions to that rule though! For example, if you’ve made significant structural changes to accommodate a rental unit or claimed depreciation (CCA) on it, the Canada Revenue Agency (CRA) may treat part of the home as a separate rental property. But generally, if it’s primarily your home and you’re not claiming it as a business asset, the full exemption still applies.

CRA’s own materials can be unclear, but most tax accountants will confirm this general rule. When in doubt, always check with a qualified tax advisor.

What about HST?

When it comes to HST, the big question is whether it is a new build or a resale properties.

When you buy a resale property (i.e., a home that isn’t brand new from a builder), you don’t have to pay HST on the purchase price.

However, if you buy a new build, HST does apply—13% in Ontario (which includes a 5% federal GST portion and an 8% provincial portion).

While that can be a bitter pill to swallow, there are rebates available:

• On the GST portion, you can get back 36% of the GST paid, up to a purchase price of $350,000. Between $350K and $450K, the rebate gradually decreases, and above $450,000, there’s no rebate at all.
• On the PST portion (Ontario’s 8%), the rebate is 75%, up to a maximum of $24,000, which applies to homes up to $350K–$400K.
• A home bought for $449K still qualifies for a significant rebate; one at $450K gets nothing on the GST side. It’s a hard cutoff.

Important to note that if you’re buying a new build, always confirm whether the rebates are already included in the builder’s sale price. Many builders advertise the “net price,” assuming you’ll qualify for and assign the rebate to them. If you don’t qualify, you may be on the hook for that rebate amount after closing.

Are there really taxes on real estate commissions?

Sadly, the answer to that is yes, we do have to charge HST on the commissions for a real estate transaction. That isn’t particularly relevant for buyers, as in most real estate transactions, the seller pays the commission for both the listing agent and the buyer’s agent.

On the sale side, however, real estate brokerages are required to charge HST (13%) on their commissions. So, if the commission is 5%, the actual cost is 5% + 13% HST, which works out to 5.65% of the sale price.

This HST amount isn’t extra profit for the agent or brokerage—it’s collected and remitted to the government. Brokerages can claim HST on business expenses (input tax credits), just like other businesses.

Buyers don’t get away tax free though!

The biggest added cost when buying a property is the land transfer tax (LTT). This is a one-time tax paid by the buyer when the title is transferred. The amount varies based on the purchase price, and there are calculators online to help estimate it.

Note that if you’re buying in Toronto, you pay both the Ontario land transfer tax and a municipal land transfer tax, effectively doubling the tax.

For example, on an $800,000 property in Toronto:

• Ontario LTT: $12,475
• Toronto LTT: $11,725
• Total: $24,200

Toronto is currently the only municipality in Ontario with the right to charge that additional Land Transfer Tax but other municipalities are absolutely eager to follow their lead. So far, the Ontario government has refused to allow it but it could happen at some point.

This must be paid at closing and should be included in your budget.

If you’ve got any other questions about taxes or want some help figuring out what you should budget for a purchase or sale – and need our help with that transaction – then don’t hesitate to get in touch!