An Opportunity Squandered

As if building and development costs in Canada were not high enough, the City of Toronto has now proposed implementing its own 0.5 per cent land transfer tax (on top of the approximately 1.5 per cent land transfer tax already imposed by the province). The coming into force of the new City of Toronto Act permitted Toronto to impose a wide variety of new taxes in lieu of traditional property taxes, starting on January 1, 2007. In July, a formal motion was put before Toronto’s city council to implement a new vehicle registration tax and the now much-hated new land transfer tax. By the absolutely narrowest of margins (23 to 22), Toronto’s City Council decided to defer consideration of the new land transfer tax until after provincial elections in October.

Of course, developers and builders with Toronto-based holdings are crying foul. Based on average Toronto home price of just under $400,000, the new Toronto land transfer tax would represent a nearly $2,000 additional cost at closing (in addition to the approximately $4,500 in land transfer tax already payable to the Provincial government on the same transaction — a nearly 45 per cent increase in land transfer tax!) applicable on both housing and industrial /commercial stock.

While there is currently cohesive, industry-wide opposition to the new land transfer tax, there is some question as to whether such solidarity will hold until the new council vote in October. Since the new land transfer tax has force and effect only within the boundaries of Toronto, it won’t be long before builders and developers outside of the City of Toronto start benefiting directly from the imposition of the tax only on sites being developed by their Toronto competitors. Indeed, one of the criticisms of Toronto’s new proposed land transfer tax is precisely that it will add to urban sprawl by pushing marginal buyers from Toronto to other sites within the Greater Toronto Area but away from Toronto.

However, it would be shortsighted to see this as a Toronto-only problem. Although such additional taxing powers continue to elude other Ontario municipalities, it is no secret that Toronto is acting as a guinea pig in a huge fiscal experiment. The historic downloading of social services by the Provincial government, while perhaps most deeply felt in Toronto, was and remains a province-wide affliction, and all Ontario municipalities are suffering, to one degree or another, from the fiscal imbalance that such provincial downloading has created. If the Toronto experiment with land transfer taxes is “successful” (and, unfortunately, such “success” will be measured only in short term dollars added to municipal coffers), then it will not be long before other municipalities in Ontario get the same land transfer taxation powers. And, as is all too often the case, so Ontario goes, other provinces will soon follow.

Nor should the building and development industry react in a “knee-jerk” manner to the proposed new tax. The industry’s complaints about real-estate-based taxes are far more sophisticated than the general howling and protesting that inevitably follows every new tax announced by any level of government. Indeed, as perverse as the argument may sound, the building and development industry should actually be applauding the provincial government’s decision to finally allow a municipality to raise revenue by means other than a property tax. The taxation of property ownership has long since been an inefficient and unfair way (albeit an admittedly very convenient way) of distributing the burden of municipal services. It is just ridiculous, however, that the City of Toronto, once finally freed from the shackles of a property-ownership-based tax regime, squanders the opportunity by opting for yet another property-ownership-based tax regime!

So, before Toronto can implement this ill-conceived tax, and before this new level of taxation becomes commonplace in the country, the industry should remain resolute and united to nip its progress in the bud, by actively endorsing first, that municipalities be accountable for the efficient use of the taxpayers’ money; and, second, that if additional taxes are then still required, such additional tax revenue come only from a tax base other than the long-suffering property owners in that municipality.

Jeffrey W. Lem, B.Comm. (U of T), LL.B. (Osgoode), LL.M. (Osgoode), practises in the areas of commercial real estate and finance with the law firm of Davies Ward Phillips & Vineberg LLP, and has been called to the bar in Ontario, England and Wales. He is an executive member of the Real Property Section of the Ontario Bar Association and is editor-in-chief of the Real Property Reports, published by Carswell Thomson Professional Publishing.

This article provides general information only and is not intended to provide specific legal advice. Readers should not act or rely on information in this article without seeking specific legal advice on their particular fact situations.

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