You and I both know that Toronto real estate is a hot topic these days and oftentimes, a very sensitive matter as well. For these reasons, this is probably why you are following these blog posts closely. The most common topics that are brought up include: prices, sales, the amount of construction and locals being priced out of the market. As great as those topics are to write about, there has already been a lot of press in the news about it since they’re all essentially “eyeball magnet” topics. So today, I want to shed some light on some important issues that haven’t really been addressed a whole lot yet – the loss of revenue for the City of Toronto.
The Villain – As a world-class city, there are many improvements that need to be continually made as we grow and need more and more revenue to support these developments. Every mayor wants to improve our City, however, the issue always seems to be where will that money come from. Who has the guts to be the villain and increase taxes in order to further improve our City?
The David Miller Factor – Back in 2008, David Miller implemented the Municipal Land Transfer Tax (MLTT) in addition to the Ontario Land Transfer Tax. It essentially doubles the land transfer tax if you buy a property within the City of Toronto. For a $500,000 property (i.e., an average entry-level condo), the land transfer tax is $6,475 for Ontario and $6,475 for Toronto, for a grand total in land transfer tax fees of $12,950.
Pot of Gold – To date, the MLTT has unexpectedly produced over $9 billion dollars in revenue as a result of the growing real estate market. In 2017, it accounted for 9% of the City’s total annual revenue. Have a look at the disproportionate growth of the MLTT relative to the other sources of revenue between 2011 and 2018.
For reference, 47% of the City’s revenue comes from property taxes despite having the lowest property tax rate in the Ontario (the latter of which is shown in the chart below).
Unexpected Cash – The MLTT tax has basically become a cash cow for the City. This has allowed Mayor John Tory to freeze all increases on the property tax rate during his tenure. In the last few years, Toronto’s budget has had an unexpected increase of tax revenue from MLTT as follows:
2015 – Unexpected $75 million
2016 – Unexpected $101 million
2017 – Unexpected $182 million
This all sounds great for the City, but with the decline in sales volume, this poses a huge issue for Toronto’s budget. The following is word-for-word excerpt from Toronto’s 2018 Principles of the Long-Term, Financial Plan:
“Revenue from the Municipal Land Transfer Tax has been the dominant force in maintaining stable revenues in spite of low property taxes. When the Municipal Land Transfer Tax was introduced in 2008, it was expected to be a small portion of total revenues. As has been well documented and flagged, it has grown considerably with the real estate market, bringing the City considerable and unforeseen revenue increases along with revenue risk. It is important to take appropriate steps to mitigate the cyclical risk of this tax. Municipal Land Transfer Tax revenues do not need to decline to pose a significant problem. If the tax does not continue to grow, Council may have to make difficult decisions to close the structural budget gap each year.”
The scary thing is if the tax revenue flat-lines, it could prove to be an issue for Toronto.
By the Numbers – Although the real estate market is healthy in various pockets of the GTA, the damage has already been done. Have a look at the chart below for MLTT that has been collected in the first 7 months of 2018 relative to 2017.
Keep in mind that the first 4 months of 2017 were all record-setting years. However, don’t forget that the balance of 2017 was super weak. At this point in time, the City already has a $244 million dollar (30%) deficit relative to last year. The 2018 Fall market is going to have to perform incredibly well in order to cover this deficit and maintain the revenue levels being generated in the years prior.
Development Charges, Explained – It is for all of the reasons above why I believe the development charges were doubled back in February 2018 (Pre-Construction Condo Prices Are Primed to Increase!). The doubling of development charges will yield the City approximately $300 million dollars in tax revenue. However, the issue with that is since development companies are for-profit, they will not be absorbing this tax. It will ultimately be passed onto you and I as the end-consumers and citizens – all of this has effectively driven up real estate prices for us.
The Wrap – At the end of the day, the City of Toronto is a business as well – it needs to have enough revenue coming in to support the dollars it spends. Money must come in one way or another. Unless the real estate market explodes in the Fall of 2018, Toronto is going to need to find a way to fill the financial gap created by the potential loss of the MLTT revenue in 2018. Personally, I don’t think something drastic will be coming because a municipal election is happening in October and nobody is going to run on a platform of increasing taxes. However, I wouldn’t be surprised if we see some changes in the future!