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PROPERTY TAX ADJUSMENTS

In-law Suites: What Are They and What You Need to Know

One document we always review with clients in a real estate sale or purchase transaction is the Statement of Adjustments. This document reflects what is owing to the seller on the closing date after taking into account the purchase price, GST and rebates, deposits, and certain adjustments made between the seller and purchaser. The most common adjustments are for property taxes, condo fees and community fees.

Typically, the seller has paid property taxes on the property in full for the calendar year, or on a monthly basis (in the City of Calgary the monthly payment plan is TIPP). In Calgary the annual tax is issued around June, but it is for the full calendar year. If the seller has paid the taxes for the year, the buyer will have to compensate the seller for their share of the taxes from the date of closing until the end of the year.

For example, using round numbers, if the annual taxes paid in full on the property were $4,000.00, and the buyer took possession on July 1st (roughly the mid-point of the year) the buyer would have to add another $2,000.00 to the amount owing to the seller. Taxes are paid until December 31st, so the buyer does not need to set up TIPP until January 1st of the following year, or they pay the tax in one lump around the middle of the next year.

If the seller was making a monthly TIPP payment of $300.00, and the buyer took possession of the property on the 15th of the month, the buyer would have to add $150.00 to the amount owing to the seller. The buyer would then be responsible for making the next TIPP payment on the first day of the next month if they choose to pay monthly. Adjustments are always made pro-rata based on the number of days each side has possession of the property out of 365 days (annual basis) or days in the month (TIPP).

If the seller has underpaid their share of the taxes at the relevant closing date, there will be a credit to the buyer (discount off the amount owing). Condo fees and community fees are adjusted in the same way as property taxes.

Some buyers pay their property taxes along with their mortgage payments directly to the lender. Typically the lender is pooling these payments towards the taxes in the next calendar year. The buyer will still have to adjust for taxes with the seller for the current year. A seller that pays taxes with their mortgage will be credited by the lender for the amount remaining in the tax payment account in the mortgage payout statement.

Please contact us if you have any questions about interpreting a Statement of Adjustments.