Toronto Taxes and the Toronto Real Estate Board
As you might reasonably expect the Toronto Real Estate Board (TREB) has voiced its opposition to the Toronto Land Transfer Tax. This tax has now been in force since January 2008, and by January 2013, that will be 5 full years. So, the economic impact should be well known by now.
TREB has initiated a campaign known as “Let's get this Right Toronto"and you can locate this campaign at its website:
The C. D. Howe Institute issued a report which analyzed the economic impact of the tax, drew certain conclusions and made recommendations.
You may read that report online at:
C.D Howe Institute Report
Let me say at the outset that I don’t fully understand the report. I don’t think that this was their best report and while it is shrouded in scientific and mathematical analysis, in my opinion, some of the underlying assumptions are rather suspect. I don’t think that their methodology will work. However, I don’t have a better formula. So, in that regard, I suppose that they did they best they could in the circumstances.
What is the likely impact of the Toronto Tax? Perhaps, conducting a survey, with all its inherent problems, and margin of error would be just as good, and perhaps better.
C.D. Howe Report Synopsis
Here is a section drawn from the commencement of the report:
“Now, nearly a year after the tax was implemented, it is possible to evaluate the impact of the tax on real estate transactions and prices in Toronto, and to reach conclusions about the desirability of using the LTT as a source of municipal funding.
The Toronto real estate market experienced a decrease in both volume and average price after the introduction of the LTT in 2008. (Figures 1a and 1b show transaction volumes and prices for 2005 through 2008 both inside and outside the City of Toronto.) It is tempting to attribute this decline entirely to the LTT.
However, transactions and values also declined in the surrounding municipalities; thus, other forces were also at work. To assess the desirability of the LTT as a source of municipal funding, we must first correctly distinguish its effects from those of other factors affecting real estate markets.
To accomplish this, we restrict attention to real estate transactions near the border of the municipality of Toronto, and compare changes in transaction volumes and values in Toronto with the changes in transaction volumes and values in adjacent municipalities. After the LTT’s imposition, transaction volumes and prices in Toronto dropped relative to adjacent areas not subject to the LTT.
More specifically, our analysis indicates that Toronto’s LTT caused a 16 percent decrease in the number of single-family home sales (excluding condominiums and apartments). The decrease in transaction volume appears to be larger for houses below average value, and smaller for those above.
Our analysis also indicates that Toronto’s LTT caused an approximately 1.5 percent reduction in the average sale price of a Toronto home. This amount is close to, or above, the average LTT exaction. The decline in prices appears to be larger for houses above average value, and smaller for those below.
Thus, while the LTT reduces the wealth and mobility of all Toronto property owners, it has a relatively larger effect on the mobility of the less affluent and a relatively larger effect on the wealth of the more affluent.
Both an LTT and an ordinary property tax are expected to have similar effects on property prices. However, unlike an LTT, an ordinary property tax does not discourage mobility and does not involve the extra administrative expenses of the LTT. More concretely, if Toronto raised property tax rates by about 8 to 10 percent, property owners would pay about the same amount of tax as under the LTT.
Nonetheless, because an ordinary property tax does not discourage mobility, they would:
(i) pay these taxes on houses that suited them better; and
(ii) be relieved of the extra administrative expenses of the LTT.
It follows that the welfare of Toronto residents could be improved if the city reduced its reliance on the LTT in favour of the property tax already in place, or increased user fees.
It is reasonable to expect that the effects of Toronto’s LTT are similar to the effects of LTTs imposed by the Province of Ontario and by other provinces and municipalities.
Thus, our analysis also suggests that welfare improvements are possible if these other governments decrease their reliance on LTTs in favour of regular property taxes. Other municipalities and provinces that currently levy LTTs, or are considering doing so, should consider an alternative tax to raise the equivalent funds.”
If you are interested in the detail you should read and review the report in its entirety.
C. D. Howe Update
On 15 October 2012, the institute updated it commentary by publishing: “How Toronto’s land transfer tax grab hurts home sales”.
You may read that commentary at:
So, basically five years after introduction, the Toronto Land Transfer Tax is continuing to have adverse negative affects upon the Toronto market.
Brian Madigan LL.B., Broker is a Manager at RE/MAX West Realty Inc., Brokerage 416-745-2300.