Rethinking Toronto’s Luxury Home Tax: A New Model to Boost Custom-Home Construction and Protect Affordability

Toronto’s housing challenges are deepening, and policymakers are searching for new levers to improve affordability while maintaining a healthy housing market. Mayor Olivia Chow has recently proposed higher Municipal Land Transfer Tax (MLTT) rates on homes valued above $3 million, framing the measure as a way for wealthier buyers to contribute more toward the city’s fiscal needs.

Luxury-home taxes are not new to Toronto, but each increase sparks the same debate: Will it make housing more affordable, or will it simply discourage investment and reduce the overall supply of housing? While the city expects tens of millions in new annual revenue from the higher tax tiers, the broader impacts on construction and market activity remain uncertain.

Instead of viewing luxury-home transactions solely through the lens of taxation, there is an opportunity to think differently about how this segment of the market can support Toronto’s wider housing goals. What if, rather than restricting demand, we strategically leveraged foreign and high-net-worth buyers purchasing homes above $3 million to stimulate custom-home construction — while keeping mid-market housing more accessible for Canadians?

This blog explores a fresh proposal: allowing foreign buyers and luxury purchasers to actively buy high-end properties, provided the focus is on building or rebuilding custom homes, thereby driving construction activity, stimulating the economy, and easing pressure on the rest of the housing market.

Understanding the Proposed Luxury Home Tax

Mayor Chow’s plan increases MLTT rates on all properties above $3 million, with progressively higher brackets for more expensive homes. The lowest luxury tier would see rates rise above 4%, while properties in the highest tiers could face tax rates exceeding 8%.

The intention is straightforward: those purchasing multi-million-dollar homes should contribute a larger share toward the city’s financial needs, particularly as Toronto faces significant budget pressures.

However, real estate and construction professionals warn that raising MLTT may:

• Reduce luxury-home sales,

• Decrease construction activity,

• Push high-net-worth buyers into lower-priced homes instead of the luxury segment, and

• Create uncertainty for builders, architects, trades, and developers.

If luxury buyers shift downward into the $1M–$2M range to avoid higher taxes, competition could intensify for the same homes that Canadian families are already struggling to purchase. That outcome directly contradicts the goal of making Toronto more affordable.

This is where an alternative approach becomes valuable.

A Different Strategy: Channel High-End Demand into Custom-Home Construction

instead of blocking foreign buyers and luxury purchasers, we can guide that demand toward building new homes rather than competing for existing ones.

Key Principles of the Proposal

1. Allow foreign and high-net-worth buyers to purchase properties over $3 million specifically for custom-home construction.

   
   

   This isolates their activity to the luxury segment, steering them away from the mid-market where most Canadians buy.

2. Use luxury demand as an engine for construction.

   
   

   Custom homes create significant economic activity — design services, architecture, engineering, trades, materials, and inspections — generating jobs and multiplier effects across the industry.

3. Protect affordability in the under-$3M market.

   
   

   By channeling well-funded demand upward, the mid-market sees less competition, creating better opportunities for local buyers.

4. Maintain or even increase MLTT revenue.

   
   

   Even if luxury-home buyers pay higher taxes, they continue contributing meaningfully to the city, especially if transaction volumes remain healthy.

5. Reinvest a portion of the luxury-home tax into affordable housing programs.

   
   

   This creates a balanced model where the top of the market supports the entire system.

Why This Model Could Work for Toronto

1. It Stimulates Construction Instead of Deterring It

Custom-home construction is often one of the strongest job creators in the residential sector. Rather than freezing this activity through punitive taxation, directing buyers toward new builds ensures ongoing demand for architects, builders, and trades.

2. It Reduces Pressure on Standard Homes

Right now, high-net-worth buyers sometimes compete for homes under $3M simply because of tax advantages or foreign-buyer restrictions. Allowing them clear access to the $3M+ market channels their purchasing power where it causes the least harm.

3. It Encourages Optimal Use of High-Value Land

Large lots in premium neighborhoods are often underutilized. When high-value buyers redevelop these properties into modern, efficient custom homes, it revitalizes older housing stock and increases long-term property tax revenue.

4. It Generates Predictable Revenue

If luxury buyers remain active and targeted toward custom builds, MLTT revenues become more stable, even with higher rates.

Potential Concerns and Considerations

Every proposal has challenges, and this one is no exception:

• Policymakers must ensure foreign-buyer participation does not lead to unused or empty homes.

• Requirements may need to include construction timelines or occupancy criteria.

• Zoning and permitting processes must be efficient to support custom-home activity.

• Safeguards should ensure this model does not inadvertently fuel speculation.

These issues are solvable with thoughtful policy design, including occupancy requirements, progressive vacancy taxes for unused homes, and streamlined approval pathways for legitimate custom-home projects.

Conclusion: A Balanced Approach to Housing Policy

Toronto needs bold, balanced, and innovative strategies to address its housing challenges. Simply taxing luxury homes may increase city revenue, but it may not meaningfully improve affordability unless paired with broader policy thinking.

By allowing foreign buyers and high-net-worth purchasers to focus on the $3M+ segment — and encouraging them to build custom homes — Toronto can:

• Drive construction activity,

• Support local jobs,

• Protect the mid-market for Canadian families, and

• Maintain strong municipal revenue streams.

This approach transforms luxury demand from a perceived threat into an opportunity. If designed correctly, it can support both Toronto’s economic ecosystem and its long-term housing affordability goals.