ADJUSTING TAXES

Now is the time of year to be particularly aware of the tax adjustments on your real estate deals.

As you know, unless a homeowner is enrolled on TIPP, in Calgary taxes must be paid in full for the year by June 30‘“. If they are not, the City immediately assess a 7% penalty. If they continue unpaid past September 30, another 7% penalty is added to the tax bill on October 1.

Remember the tax bill that is payable On June 30 is for the calendar year. So what people pay in June goes back for the period starting January 1, and goes forward to December 31. Many people, especially high ratio borrowers, still pay their taxes through their mortgage company.
That is, they make PIT payments (principle, interest, and taxes) on their mortgage, with the mortgage company banking the tax portion and then the mortgage company paying out the taxes each June. It is unpredictable when in June they are paid. Some banks pay the taxes out for the year early in the month. Also some people pay the taxes themselves once a year, especially business people.

So what happens when lawyers do a tax adjustment at this time of year? If the taxes have been paid by sellers themselves or by their mortgage company, then the buyer has to reimburse the seller for the rest of the year.

For example: – taxes are $4,000.00 per year your real estate deal has a June 30th closing taxes were paid by the sellers” bank for the year on June 20th result: the buyer needs another $2,000.00 up front to close the purchase.
Sometimes buyers are totally unprepared for that.

What if your clients are the sellers’ who pays their own taxes each year? If they have a deal closing in June or July they may not think to pay the taxes. They could get a 7% penalty.

For this reason, we prefer to see people pay their taxes on TIPP. On TIPP the taxes are paid directly to the City each month and therefore the tax adjustment is much less. Some banks discourage their borrowers from going on TIPP, and sometimes borrowers have to insist on it.

(Not all Alberta communities use June 30th as the tax due date. For example, in Chestermere taxes are due July 31.)

-Bill Fric

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