New Home Taxation

Most purchasers are very surprised to discover how much of a new home’s selling price is comprised of government taxes of one kind or another. On average, 56% of government charges are levied against land owners, developers or builders which are then passed on to home buyers. The other 44% of government charges are imposed directly on new home buyers. There are many different charges that are levied but the main ones are as follows:

Municipal Development Charges – These are levied under a Provincial Act where the need exists for municipal services such as parks and recreation, libraries, fire services, water, sewer, roads, transit etc.

Storm Ponds – This is an area specific charge for storm water management that has been practiced for several decades. This allows for the treatment of storm water runoff as well as its temporary storage and gradual release, thus reducing the size and cost of underground piping.

Education Development Charges – These are collected by municipal government on behalf of both public and separate school boards. They are used to fund the acquisition of school sites and related costs to accommodate growth related pupils.

Planning Review Fees – Projects always require some degree of planning work that would involve such things as official plan amendments, zoning bylaw amendments, plans of subdivision, site plan approvals and in some cases a condominium plan.

Building Permit Fees – These are charged for the review of house design plans to ensure that they comply with the Ontario Building Code and they also cover the site inspections that must occur during the construction process.

Engineering and Servicing Fees – These comprise a variety of charges for the development, review, inspection, connection and assumption of a development’s water, sanitary sewer and storm sewer services. The various engineering and servicing related fees may include servicing and subdivision agreement fees, and engineering inspection fees. Significant costs are also incurred by the developer in interest costs related to the bonding demands made by government during the construction phase.

Hydro/Utility Fees – These are connection charges levied by Ottawa Hydro to cover its plan review, design, and installation costs.

Property Taxes – During the development process, owners are required to pay property tax on the vacant land until such time as construction is complete and new home buyers assume responsibility. These costs are accumulated over the many years that it takes for a property to reach the land development and construction phase.

Parkland Dedication – Municipal government acquires parkland and other forms of open space through parkland dedication requirements imposed on new developments through the Ontario Planning Act. This amounts to 5% of the gross land area or 3 ha./1000 population, whichever is greater.

Section 37 – This section of the Planning Act allows for increases in permitted height and /or densities through the zoning bylaw in return for community benefits, provided that Official Plan policies are in place.

Tarion – This is an enrolment fee that builders are required to pay in order to cover the new home warranty. The fee varies based on the sale price of the home. As an example, the fee for a home in the $350,000 to $400,000 range would be about $900.

CMHC Mortgage Insurance – To obtain this insurance, lenders are required to pay a premium cost that gets passed on to the borrower. The insurance is calculated as a percentage of the mortgage loan and so the higher the price borrowed for, the higher the insurance premium becomes. If we assume a buyer with an 85% loan-to-value ratio, then a 1.75% loan insurance premium would be required.

Harmonized Sales Tax – New homes are subject to the Harmonized Sales tax of 13%, of which 5% is the federal portion (GST), and 8% is the provincial portion (PST). The GST is eligible for a 36% rebate on homes priced at $350,000 or less with the amount declining as the home price increases and disappearing completely at the $450,000 mark. The PST rebate is calculated by applying a 75% factor to the PST payable, up to a maximum rebate of $24,000. The full 13% HST is also applied to the purchase of all materials and services throughout the entire land development and home construction process.

Land Transfer Tax – The provincial land transfer tax applies to the purchase of homes in Ontario and progresses with price. At the low end it is 0.5% on amounts up to $55,000 and at the high end its 2% on amounts exceeding $400,000. First-time home buyers are eligible for a rebate up to a maximum of $2,000.

Only 25 years ago, prior to GST, PST and Development Charges, the total government fees, charges, taxes and levies added about 3% to the cost of a new home. The items summarized above now total about 23% and they’re rising quickly. This amounts to about $100,000 on the cost of a new single family home in Ottawa.

This $100,000 must be added to the purchaser’s mortgage and paid for with interest over its 30-year term. Housing affordability has dramatically declined and if future generations are going to fulfill the dream of owning a home, we need to open a discussion on alternative methods of funding urban growth. Government’s ability to borrow funds or sell bonds to finance municipal infrastructure over many years rather than having new home buyers pay for it all up front would be a more equitable solution to consider.

Source: John Herbert – Greater Ottawa Home Builders Association @ Ottawa

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