Who’s on the hook for supplemental property tax bills?
By AdvocateDaily.com Staff
No one wants to pay extra property taxes, but that’s the risk buyers of newly built homes take when they don’t seek legal advice before signing purchase agreements, says Toronto real estate lawyer Sarita Samaroo-Tsaktsiris.
People buying houses in the same year they're built may end up paying a supplemental property tax bill that should have been the responsibility of the previous owners, she tells AdvocateDaily.com.
Here’s how it works: In new developments, builders pay a vacant land tax (or a tax on the lot itself) while the project is under construction — up to the date the property is transferred to the owner and officially registered in their name, explains Samaroo-Tsaktsiris, principal of SST Law Professional Corporation.
Once the home is built on the lot Municipal Property Assessment Corporation (MPAC) establishes the updated value for the property, and issues a supplementary tax bill to the homeowner.
During the purchase process, buyers and their lawyers have access to property tax certificates and assessment values for the lot itself, however sometimes not included in the tax certificate is the higher assessed value.
As a result, homeowners are sometimes surprised when the supplementary tax bill arrives and their property has been assessed at a higher value despite the information provided in the tax certificate, says Samaroo-Tsaktsiris.
"There’s confusion as to who is responsible for the extra tax and unless the agreement of purchase and sale includes a clause to address it where a vendor recently purchased a property from a builder. The buyers may be on the hook until recovered from the previous owner," she says.
Determining property value is a somewhat complex process where MPAC considers more than 200 factors, but the main ones are land title documents, location, living area, lot dimension and quality of construction, says Samaroo-Tsaktsiris.
“MPAC conducts on-site inspections and compares that to data collected from other homes in the area to determine the overall value of the property,” she says.
Real estate lawyers are responsible for checking parcel registers for ownership to determine when the property was transferred from the builder to the new homeowner.
Samaroo-Tsaktsiris says part of her due diligence on every real estate case involves ordering a tax certificate from the municipality, but that only reflects the current assessed taxes on the property, not those taking the newly built home into account, which makes its value higher.
Samaroo-Tsaktsiris says one of her clients was hit with a supplemental tax bill the day after closing on a new home.
“It was unfortunate our tax certificate didn’t provide any notice of the reassessment, so there was no way of catching it prior to closing,” she says.
The problem is that until MPAC issues an assessment notice, no one is aware of the potential for an additional tax bill — not the buyer, the seller or even the municipality, Samaroo-Tsaktsiris says.
“It’s not fair if the new owner has to shoulder the entire supplemental tax bill because the seller should have paid the portion of the bill from the date of registration until the home was sold to the new owner," she says.
"If the registration date is Aug. 1, and the property sells two months later, the new owners should only be responsible for taxes from October onwards,” she says, noting the value of the property can change by hundreds of thousands of dollars, therefore increasing the tax bill significantly.
Those considering a property that was recently purchased from a builder should advise their real estate solicitor early on to ensure adequate funds are held back on closing to cover the additional taxes, Samaroo-Tsaktsiris advises.
“Title insurance would cover the supplemental tax bill received by the new owners, but rather than having the new owners pay the bill up front and making a claim to recoup the cost, it's easier to account for the supplemental amount in the purchase agreement.
To do that, you would add a clause to hold back funds from the sale proceeds to satisfy the supplementary tax amount that the vendor will inevitably be responsible for,” she says.
Samaroo-Tsaktsiris expects that going forward, it would be prudent for realtors to include a standard clause that addresses the obligations regarding a supplemental tax bill, where a property was recently purchased from a builder and sold shortly after to a third party.