What is ‘Land Transfer Tax’?

As the name suggests, Land Transfer Tax is a tax paid on the transfer of land.  It is established under the Land Transfer Tax Act, R.S.O. 1990, and levies the tax upon the registration of a transfer in land under s.2(1).  It also taxes a change in beneficial ownership under s.3, but that is beyond the scope of this article.  Registration is what occurs when the lawyers sign off on the transfer once the money has been paid, and submit the signed transfer instrument to the Land Registry Office.  The tax is then paid by the lawyer acting on behalf of the buyer.

Land Transfer Tax, or LTT, is thus, somewhat obviously, a tax paid on the value of land when it is transferred.  This all seems quite simple and straightforward, but the situation gets a bit more complicated because of the way real estate transactions are actually carried out in Ontario.  For example, it is normal for some things to be transferred along with a property which aren’t actually part of the property itself.  In order to explain this, I need to explain a bit about what is considered part of land, and what isn’t.

How is LTT Calculated?

Consider first a parcel of vacant land.  If you were to purchase it you get the land, and that’s it.  This is pretty simple.  Now consider for a moment: what if, at the time you made the agreement to buy the land, the seller had a motorhome set up on it.  Does that come with the land?  It’s not part of the land; by definition it’s mobile.  What if it was a building?  That’s actually built into the ground.  So how do we decide what comes with a piece of land and what doesn’t?  This distinction is between things called ‘chattels’, which are not included by default, and things called ‘fixtures’, which are included by default.  The basic distinction between them is that fixtures are literally ‘affixed’ to the land, attached to it, for the purpose of improving the land.  A chattel is something which is not.  For example, a pile of bricks would be chattels, but if they were arranged into a wall, they become a fixture.  It’s important to remember that if you buy a house, you’re actually buying the parcel of land, the house is simply affixed to that land, even though it may be the principal reason you are buying that parcel.

Having considered what chattels and fixtures are, we can get into a more concrete example.  Let’s imagine you’re buying a detached house.  You’ll notice in the standard OREA purchase agreement that there are two sections on the second page: ‘chattels included’ and ‘fixtures excluded’.  This is so the parties can agree that some things which would not automatically transfer with the house would be included in the sale, and other things which would be included can be excluded.  Usually, the chattels included section will include things like the washer, dryer, refrigerator, dishwasher and other similar items, because they are easier to sell with the house than to move them to a new one.  Sometimes sellers will want to take a particular light fixture, and so that will be put in the fixtures excluded section.

Am I paying LTT on the value of appliances?

At this point you may be wondering what these two things have to do with one another.  I’ve mentioned LTT, and how it’s paid on land when transferred, and that there are things which often get thrown into a standard purchase contract which aren’t part of the land.  Well, this matters because of how the contracts are typically drafted and registered.  A normal registration doesn’t specify the value of the chattels as separate from the value of the land; there is just a single amount on the contract, and this is entered into the registration instrument by the lawyers’ offices as the value paid for the land.  Any agreement on the value of the chattels should be done when the contract is made, but realtors are not well versed in contract law, land law or tax law, and doing something like that just raises another issue which could form a point of disagreement, and realtors care above all about getting deals done, not making sure they are done in the best way.  Realtors get paid the same for a bad contract as a good one, so they don’t bother trying to make good ones.

What this means is that if you agreed to buy a house for $1,000,000 in Toronto which had chattels in it worth $10,000 you would effectively pay LTT (and MLTT) on the value of the fridge, stove, washer, dryer and anything else that makes up that $10,000.  This amounts to $600 of additional and unnecessary tax.  The way the transfer should be constructed is for the transfer of land to be valued at $990,000, and the chattels at $10,000.  This can be entered into something called the ‘Land Transfer Tax Statement’ which forms part of the transfer instrument prepared by the lawyers.  In order to do this, two things need to be true: it needs to be agreed in the contract that the value of chattels will be excluded from the amount on which LTT will be charged, and there needs to be a reasonable value for the included chattels.  This doesn’t by any means need to be a perfect valuation of the chattels.  Valuing used appliances is more art than science, but any value specifically attributed to the chattels will not attract LTT, which will lower your closing costs.  It is also worth noting that that this does not in any way impact the seller of the property.  The amount paid remains exactly the same, it is simply reported differently for tax purposes, resulting in less tax for the buyer.  The only party which loses is the government, and they are only losing out on taxes to which they were never properly entitled under law.

This brings me to consider why, if this is a win-win for buyer and seller, this is not already standard practise in real estate transactions.  The answer is simple: complexity.  Realtors are the ones who guide people through the process of making agreements to buy and sell land, and they are totally unaware that there is a tax distinction between chattels and fixtures which impacts their clients.  Further, realtors get paid to get deals closed, which means introducing the question of the value of chattels just raises another question on which the parties could disagree, and the realtors both have a very strong incentive (on the $1M home in the example, both buyers’ and sellers’ realtors could expect to pocket $25,000+HST) to drive their clients towards agreement without stopping to consider a detail as trivial as a $600 tax saving.  The lawyers, for their part, are aware of the distinction in law, but the cost pressures on the legal profession drive them to put the least amount of effort possible into each transaction, and to do nothing to annoy the realtors who provide the client stream upon which they rely.  Simply put, lawyers have had to drive their prices down for real estate transactions so far that it is uneconomical for them to raise the issue of the value of chattels as part of a transaction.

The Zero Value Realty offer generator includes a clause which says chattels will not be included in the value reported for LTT purposes, but when making offers you need to be prepared for realtors from the other side to raise uninformed questions and objections.  It may be necessary to choose between an unnecessary payment of tax, an being unable to buy a particular property, and that choice will always belong to you, as the buyer.