Property Tax Adjustments
Whenever real estate changes hands, one of our tasks is to make sure each party pays their appropriate share of the property taxes. We refer to this as the property tax adjustment. Here’s how it works.
In the City of Edmonton and most other municipalities in Alberta, property taxes are due and payable on June 30 each year. There are rare exceptions where property taxes are due on August 31 or September 30. No matter the due date, when the property taxes are paid, they cover the calendar year. Paying property taxes in full on June 30 covers the taxes owing for the previous 6 months and the ensuing 6 months. The June 30 payment covers January 1 to December 31 of that particular year.
When the property is sold, if the taxes have been paid in full, then the buyer will owe the seller money for their proportionate share of the taxes. If the taxes have not been paid then the buyer will receive a credit for the seller’s share of property taxes. These calculations are done to the exact date of closing. By convention in Alberta, the seller is responsible for the entire closing day even though the exchange of keys typically takes place at 12:00 noon.
Many people now pay their taxes by automatic monthly withdrawals from their bank account. These are payments that go directly to a municipality. This is different than paying your property taxes monthly as part of your mortgage payment to the lender. Paying the property taxes as part of your mortgage payment will be discussed separately.
When taxes are paid monthly, we calculate the exact amount of taxes owed by the seller up to the closing date. We then look at what they have actually paid and then credit the appropriate party with the difference. This can range from under $10 to about $200, depending on the timing of the closing date and the actual payments the seller has made.
Once the sale is complete, the seller’s monthly payments will stop. As part of our standard service, when we are the lawyer for the seller, our office sends the request to stop the seller’s monthly payments. It is then up to the buyer to make their own arrangements for monthly payments. We cannot initiate monthly payments for the buyer as the municipality requires direct authorization from the new property owner. This can only be done after the title is in the name of the new owners.
If the new owner does not make immediate arrangements for their own monthly payment to the municipality, they will receive a bill for the full amount owing to December 31. If the closing date is prior to June 30, they will have up to June 30 to pay this outstanding amount without penalty. If the closing date is after June 30, they must pay this remaining amount in full within 30 days to avoid penalties.
When we are the lawyer for the buyer, we recognize the long list of issues buyers must look after when buying a property. We ask buyers to bring in sufficient funds to cover the remaining property taxes for any purchase that closes after June 30. This means we will pay the taxes on your behalf to ensure they are paid in full to December 31. You can then look at enrolling in the monthly property tax payment plan anytime between the closing date and December 31 so that the monthly payments will start in January of the following year. This is an example of the many services included in our flat fee.
Many mortgage lenders, especially in the case of first time buyers, will insist that property taxes be included in the monthly payments under the mortgage. This can lead to additional payments at the outset and confusion. In an effort to eliminate the confusion, here’s how it works. If the lender is collecting and holding payments for property taxes, they must pay the taxes on June 30 in the next year. To have sufficient money on hand to pay the taxes, they must start collecting monthly payments in July of the previous year. In other words, all the property tax payments you make to the lender from July to December of this year will be used to pay next year’s property taxes. In the meantime, it is your responsibility as the buyer to pay this year’s property taxes. We will ask you to bring in as part of the cash-to-close enough money to cover the property taxes from the closing date to December 31 of this year. You will still include property tax payments as part of your mortgage payments as soon as the mortgage is funded as these payments to the lender go towards next year’s taxes. And you will be responsible for any shortfall in the tax account should there not be sufficient funds in the account when taxes are due.
Here are some examples of property tax adjustments.
| Seller Has Not Paid Any Taxes – Closing Date April 1 |
|
| Total Taxes | $2,400.00 |
| Seller’s Share - $2,400 x 90/365 | $591.78 |
In this case, the seller will receive $591.78 less than the full sale price and the buyer’s cash-to-close will be reduced by $591.78. When the taxes come due on June 30, the buyer will now pay the entire property tax bill owing to the municipality as they have received a credit from the seller for the seller’s share of taxes.
| Seller Has Paid Taxes In Full – Closing Date August 1 |
|
| Total Taxes | $2,400.00 |
| Seller’s Share - $2,400 x 213/365 | $1,400.55 |
| Buyer’s Share | $999.45 |
The seller has paid the taxes in full. The buyer will be asked to include their share of the property taxes (in this case $999.45) as part of the cash-to-close, and the seller will receive this extra money. The buyer has now paid the taxes in full up to December 31 and must make their own arrangements starting January 1 of the next year.
| Seller Pays $200 Monthly – Closing Date April 1 |
|
| Total Taxes | $2,400.00 |
| Seller’s Share - $2,400 x 90/365 | $591.78 |
| Seller Has Paid (3mos x $200) | $600.00 |
| Overpayment | $8.22 |
In this case, the seller is paying property taxes monthly and has overpaid by $8.22. The buyer will pay the extra $8.22 to the seller as part of the closing. The buyer will then be responsible for property taxes starting April 2 and must either make arrangements to enroll in the monthly payment plan or pay the remaining amount of $1,800 in full on or before June 30.
| Seller Pays $200 Monthly Up To July – Closing Date August 1 |
|
| Total Taxes | $2,400.00 |
| Seller’s Share - $2,400 x 213/365 | $1,400.55 |
| Seller Has Paid (7mos x $200) | $1,400.00 |
| Underpayment | $0.55 |
The seller has paid $1,400 of their total share of $1,400.55. The buyer will receive a credit of $0.55 which will reduce the required cash-to-close. As part of the request to the buyer for shortfall money, we will ask the buyer to provide an additional $1,000. If we are the buyer’s lawyer, we will the pay the property taxes in full at the time of completion. The buyer must now make arrangements to enroll in the monthly payment program starting in January of the following year or pay the taxes in full in June of the following year.