Important Property Tax Information
The first two years of property taxes can create a bit of confusion for new home owners. There are a couple ways that property taxes are handled as part of your purchase and how the lender handles the payment of taxes in your first year of ownership.
In most municipalities except the City of Vancouver property taxes are due usually the 2nd business day of July and are for the Calendar year of 2008. For 2008 the due date is July 3. The City of Vancouver property taxes are due in two installments. The first bill is due the 2nd business day of February and the second bill is due the 2nd business day of July.
Property Tax Adjustments for the Year of Purchase
Taking Ownership January to July 1
If you take ownership in the first half of the year the seller of the property owes you property taxes for the portion of the year that they owned the property but have not paid the taxes yet. At closing of the purchase the Solicitor will calculate the per-day tax rate and credit to you on the statement of adjustments x days/365 of the tax amount. You will then be responsible for the entire tax amount due on the tax due date. How your taxes are paid depends on the arrangement with your mortgage lender.
Taking Ownership July 1 to December 31
If you take ownership of your new home in the second half of the year the seller should have already paid the property taxes for the entire year (your solicitor will confirm with the city if this is the case or not). You therefore owe the seller the tax amount for the remaining days in the year that you will own the property. Your Solicitor will calculate the per day tax rate and debit you on the statement of adjustments x days/365 of the tax amount. This will result in a higher amount of money you will need at closing to cover costs related to taxes due at the end of the year.
Property Tax Payment for Future Years
Property taxes are paid directly by you; or collected on your behalf by your mortgage lender and then paid to the city on your behalf. For insured mortgages by CMHC, Genworth etc., some lenders require that they collect and remit taxes on your behalf. This is to protect them as there could be insufficient equity in the property to cover an outstanding tax bill. The government’s tax obligation takes precedence over a mortgage registration on title
Depending on your financial situation, money management skills and the services provided by your City, it can be more convenient to pay taxes directly to the City and not through the lender. Many cities allow you to pay monthly through pre-authorized automatic withdrawal. They credit you interest for the money you have on deposit with them at a rate higher than you usually would get in the bank. Contact your city for more information on the programs they have available.
Lender Collected Tax Account
When the lender collects taxes for you they create a phantom account that is often referred to as a "Tax Account". The effective result is that any money you pre-pay into the account credits at your mortgage's interest rate and any advance the lender makes for the taxes are lent at your mortgage’s interest rate.
For the first year or two the tax portion of your monthly payments that the lender collects will be greater than 1/12 of the annual tax amount. Most lenders take 1.5 x the tax amount / 12. This builds up the amount in the tax account more quickly in order to get your account on regular annual cycle. How your monthly payment is calculated may be impacted depending on when you take ownership of the property in the first year. My advice to most people is to either pay taxes directly if it is an option or just accept the monthly tax payment amount the lender advises you have to make.
When you sell a property any credit or debit is appropriately applied against your mortgage balance so you never loose any of your money.
Every year, usually between July and September the lender will adjust your tax payment amount based on an estimated increase in property taxes for the following year.
