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Land Transfer Tax Affects Cheaper Homes Most

October 22, 2012

Toronto’s land-transfer tax has dented home sales in the city by 16 per cent over the past four years, a new report suggests.

The impact has been felt the most in lower-priced neighbourhoods, and a large number of homeowners are choosing to renovate rather than move because of the tax, according to the report by the C.D. Howe Institute.

The think tank sought to study the long-term impact of the tax, which came into effect in 2008, by comparing what has happened in Toronto to other nearby markets that are not subject to the tax. The report will be made public Thursday morning at 10 a.m. 

Its findings suggest that the tax is causing many residents to stay put in their homes rather than move, and that deterrent effect is mostly seen in the lower end of the market.

While that finding may seem counterintuitive, because the tax rises with the price of the home, each dollar counts more for people in lower-priced homes than for those in the high end of the market, said Benjamin Dachis, the report’s author.

His study also suggests that renovations, which were rising in any case, were much higher than they would have been without the tax.

The report did not include the condominium market, since a large proportion of condo sales are first-time homebuyers who are entitled to some tax rebates.

The city recently made public its budget details for the first six months of the year, which showed that it collected $41.7-million more than it had expected from the tax during that period. However, Mayor Rob Ford has indicated that he would like to do away with the land-transfer tax completely at some point.

Mr. Dachis argues that the city should repeal the tax. It has the room to increase the residential property tax instead, and that would have fewer economic consequences, he argues. The mayor has said that he wants to hold next year’s residential tax increase at 1.75 per cent.

By encouraging people to stay in their homes, the land-transfer tax likely discourages workers from moving, Mr. Dachis said.

“The higher transaction costs, owing to the land-transfer tax, may cause some households to tolerate living in ill-suited homes for longer than they would have otherwise desired,” the report says. “Other potential effects of LTTs include government revenue volatility, commercial real estate market distortions, and higher construction costs.”

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