7 Things to Know About Closing Costs When Investing in a Pre-Construction Condo

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7 Things to Know About Closing Costs When Investing in a Pre-Construction Condo

It is important to understand the cost of buying a pre-construction condo beyond the purchase price of the unit.  Ideally, you should know what this cost is before your Agreement of Purchase and Sale (ASP) is firm (i.e. before the 10 day cooling period expires). 

As you’ll quickly notice below, closing cost for each pre-construction condo in Toronto will be different.  The cost is influenced by a number of factors including, but not limited to, the purchase price, services you purchase (like a lawyer), taxation and agreements you negotiated in your contract. 

For the purpose of this article, cost is defined as any fees paid by the purchaser as a result of the purchase of a pre-construction condo beyond the purchase price of the unit.  This post is purely for informational purposes only. Please consult with your lawyer regarding details of your closing costs.

Here are 7 things you should know about closing costs when investing in a pre-construction condo in the Greater Toronto Area (GTA) –

1. Land Transfer Tax

Land Transfer Tax (LTT) is one of the biggest closing expenses when buying a property in Ontario.  LTT is applied to resale homes and new builds including pre-construction condominiums. This is always paid by the buyer (not the seller) and is paid at the time of closing of the transaction (transfer of title to the buyer).   LTT is based on the purchase price of the property.  

How do you calculate the Land Transfer Tax? 

For most buyers of Single-family homes, you’ll be paying the Provincial Land Transfer Tax (PLTT).  If you purchase a property in the City of Toronto, you’ll also be paying the Municipal Land Transfer Tax (MLTT).  Toronto Real Estate Board has published a land transfer tax calculator to help with this.

In addition, if you are a non-resident, you will be taxed an additional 15% of the purchase price as part of the Non-Resident Speculation Tax.

Illustrative examples:

LocationPurchase PriceLand Transfer Tax
Toronto$550,000$14,950
Toronto$650,000$18,950
Markham$650,000$9,475

Provincial Land Transfer Tax 

  • amounts up to and including $55,000: 0.5%
  • amounts exceeding $55,000, up to and including $250,000: 1.0%
  • amounts exceeding $250,000, up to and including $400,000: 1.5%
  • amounts exceeding $400,000: 2.0%
  • amounts exceeding $2,000,000, where the land contains one or two single family residences: 2.5%.

Toronto Land Transfer Tax 

  • amounts up to and including $55,000: 0.5%
  • amounts exceeding $55,000, up to and including $250,000: 1.0%
  • amounts exceeding $250,000, up to and including $400,000: 1.5%
  • amounts exceeding $400,000: 2.0%
  • amounts exceeding $2,000,000, where the land contains one or two single family residences: 2.5%.

Non-Resident Speculation Tax 

The Non-Resident Speculation Tax, also known as Foreign Buyers Tax is a 15 percent tax on the purchase of a residential property located in the Greater Golden Horseshoe Region (GGH) which includes the Greater Toronto Area by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees.

Land Transfer Tax Rebate for First-time home buyer in Ontario (Provincial Land Transfer Tax Rebate and Toronto Land Transfer Tax Rebate)

To help offset this cost, eligible first-time homebuyers can receive a maximum refund amount of $4,000 on their Provincial Land Transfer Tax and $4,475 on their Municipal Land Transfer Tax. 

First-time homebuyers in Ontario can qualify for a rebate equal to the full amount of their land transfer tax, up to a maximum of $4,000.  First-time homebuyers who live in the City of Toronto can qualify for a rebate equal to the full amount of their municipal land transfer tax, up to a maximum of $4,475.  Your real estate lawyer typically handles the paperwork for the rebates as part of the closing of the transaction.

Illustrative examples:

LocationPurchase PriceLand Transfer TaxLand Transfer Tax RebateNet Land Transfer Tax
Toronto$550,000$14,950$8,475$6,475
Toronto$650,000$18,950$8,475$10,475
Markham$650,000$9,475$4,000$5,475

2. Municipal Development and Educational Levies

Development charges including Park Levies, Community Improvement Fees, Art and/or Education Levies are fees collected from developers at the time a building permit to help pay for the cost of infrastructure required to provide municipal services to new development, such as roads, transit, water and sewer infrastructure, community centres and fire and police facilities.  In turn, this is worked into the buyer’s closing costs. 

Illustrative examples:

Condo size

Approximate Levies (in 2020)

1 bedroom

$8,000 to $10,000

2 bedroom

$15,000 to $18,000

3. Legal Fees

Real estate lawyers manage all the legal paperwork that deals with buying, selling, leasing, or mortgaging property. Your lawyer will be responsible to make sure your paperwork is filed, your rights are protected and your transaction closes.  This generally includes conducting a title search, purchase of title insurance, registering the home in your name, preparing the statement of adjustments, managing the financials of the transaction on closing, and getting you your keys to your new condo.

Selecting a Lawyer who understands Pre-Construction Condos

It is best to use a real estate lawyer who has experience dealing with the particular building’s developer, as they would be able to anticipate any issues that they have had in the past while closing other client’s deals with that developer.  The lawyer will review your agreement and go over it with you during your 10 day cooling period, you’ll talk to them again during interim occupancy and a third time during final occupancy.  

Legal Fees

Make sure you asked your lawyer what they charge and if it includes the legal fees and disbursements (lawyer’s expenses incurred by working with you).

Some lawyers will offer a fixed rate that may make budgeting simpler for you.  The legal fees and disbursements for buying a house cost generally between $1,500 to $2,000 inclusive of title searches, execution certificates, conveyancing charges, etc. 

4. New Home Warranty Plan Enrollment Fees

About Tarion

Tarion helps protect consumers (including buyers of pre-construction condos) and regulates new home builders and sellers by administering and enforcing the Ontario New Home Warranties Plan Act and Regulations.

Tarion Warranty Coverage

Generally speaking, the Ontario New Home Warranties Plan Act covers all new homes. The legislation may entitle a home buyer to one, two and seven-year limited warranties, plus deposit protection and delayed closing compensation.  

Here’s a summary of the warranty coverage:

  • The One Year Warranty addresses construction practices and defects, unauthorized substitutions and the fitness of a home for habitation, among other points. 
  • The Two Year Warranty addresses topics such as defects and violations of the Ontario Building Code to do with health and safety. 
  • The Seven Year Warranty concerns major structural defects.

It’s also important to note what is not included in the warranty.  Things like normal wear and tear, and third party damage are not.

Tarion Warranty Fee

The builder pays for the fee for Tarion warranty protection for a home—and this is generally passed along to the buyer. The fee amount, which ranges from $600 to $1500, reflects the price of the home.

5. Miscellaneous Expenses

These miscellaneous fees cover things like Utility Hook Up Fees, Deposit Administration/Letter Charges, Discharge of Construction Mortgage, Site review by Tarion, Electronic Registration Fee, HST on Appliances, Status Certificate Fees. These are miscellaneous costs that can add up to approximately $3,000 or $5,000 for a typical condo.

6. Occupancy Fees

In order to live in your new condo before you own it, the developer or vendor will charge an interim occupancy fee (aka “Phantom Rent”).  This is paid out to the builder when you get your keys (Interim Closing) and will stop when the condominium is registered (Final Closing).  

The Occupancy Fee is made up of three parts: 

  1. Interest on the unpaid balance of the purchase price of your condo 
  2. An estimate on the municipal taxes for your unit 
  3. A projected common expense contribution to keep the building running

The fee is usually charged monthly and requested in the form of post-dated cheques made out to the developer or vendor. It’s a misconception that a builder profits or has any benefit to gain from extending this phase in the building of a condo. In fact, there are stipulations in the Condominium Act around the calculation of the occupancy fees which attempt to prevent the developer from making a profit. 

Furthermore, it is in a builder’s best interest to transfer title as soon as possible. Builders make their money when they are able to provide title and register the project – which can only be done when the building is complete.  

The items in the occupancy fee changes to the following once you hit Final Closing – 

  • Item 1 becomes your Mortgage payments; this will generally be larger on item 1 which is only represents the interest portion of the outstanding balance of the purchase price.
  • Item 2 becomes your property tax payments to the municipality.
  • Item 3 becomes your maintenance fees to the condominium corporation

7. HST Rebates

There are two common use cases to understand when it comes to HST Rebates for pre-construction condos.   First, you are either an end-user or an investor. End-user means that you plan to move in and live in the new condo as your primary residence for at least the first 12 months of closing.  And investor if you are not planning to move in yourself. 

End-User (New Home Rebate for pre-construction condos)

Ontario HST rebate is frequently assigned to the vendor upon closing who consequently lowers the purchase price by the rebate amount. This allows the home builder or condo developer to effectively advertise a lower “sticker price”, increasing sales, and enables a buyer to qualify more easily for a mortgage large enough to afford the property.

For end-users, this is fairly straightforward.  The pre-construction price already took account of the HST rebate.  This means that you do not owe any additional money to the builder and/or the government.  The list price you paid for the unit assumed that you are an end-user and the builder already factor the HST rebate in the price list. 

As of summer 2010, new home buyers in Ontario are charged 13% HST on their purchase, which consists of a 5% federal tax and 8% provincial tax. 

The new house HST rebate in Ontario essentially kicks back 75% of the 8% provincial portion of the HST, up to a new condo purchase amount of $400,000. This results in a maximum rebate at a provincial level of $24,000 ($400,000 x 0.08 x 0.75). The Ontario Rebate amount is limited to the lesser of $24,000 and 75% of the provincial portion of HST with no limit on the purchase price.  The provincial rebate only applies to the first $400,000 meaning the largest rebate possible even for a million-dollar home is $24k provincially. 

Generally, an eligible new condo buyer can claim a rebate for 36% of the federal portion (5%) of the HST paid on a new condo with a pre-tax price less than or equal to $350,000. Where the pre-tax price is more than $350,000, but less than $450,000, the rebate for the federal portion of the HST is gradually clawed back and the rebate IS NOT available where the purchase price is more than $450,000. 

Here are some conditions to remember – 

  • The new homebuyer (or a direct blood relative; per CRA definition, only children, parents, siblings, spouses or common-law partners are considered blood relative) must occupy the new home as their principal residence for at least 12 months after closing. 
  • It is important to note that if one or more people that is not a blood relative (aunts, uncles, friends, etc.) owns even a small percentage of your new pre-construction condo (or be added to the title for mortgage purposes) and the condo is not their primary residence, you are not eligible for the HST new home rebate. Either everyone qualifies for the rebate or no one does. 
  • If you sell the property before the first 12 months after closing, then you’ll owe the HST rebate in full. 
  • You’ll need to demonstrate that you moved into the new property like updating your driver’s license with the new address.  

Investor (Residential Rental Property Rebate for pre-construction condos)

Investors, either Canadians or foreign investors, are eligible to receive the HST rebate for a new pre-construction condo.  This comes in the form of the Residential Rental Property Rebate which requires proof that the property is leased for the first 12 months after closing.

If you sell the property before the first 12-month lease, then the HST rebate is no longer available to you and all taxes must be paid in full.  

From a cash flow perspective, unlike the New Home Rebate, you are required to pay the HST upfront and you will receive the rebate between 6 to 8 weeks after you apply for the rebate.

When you are reviewing your Agreement of Purchase and Sale (ASP) with your lawyer, make sure you confirm what the max HST you’ll owe.  This is likely to be the $24,000 given the condo prices in the Greater Toronto Area in 2020. 

Here are some conditions to remember – 

  • Investors must provide a 12-month lease agreement as part of the application.
  • If the investor sells the unit within the first 12 months, then the HST rebate is no longer available. 
  • You will be expected to pay the HST upfront.  
  • Be aware of the timelines on applications.  You’ll want to do this within the first two years of closing.  If you don’t make the claim within the first 24 months of closing then you forfeit your right to the rebate.

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