Hold-Back For Back-Tax!

Remember when you were eight-years-old, you won a bet for $2.00 with your friend Jeff, and he never paid you the money?  How long did you chase him for that shiny, red two-back?

If you had agreed to put the $2.00 in a lawyer’s trust account when you first bet whether or not Jeff could ride his bike down the slide without falling off and hurting himself, then you would have ensured yourself fair payment!

I wish I’d thought of that in 1988…

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At the end of a long work day, when I head home and hang up my real estate cape and remove my spandex SuperRealtor shirt, I have what I like to call my “private life.”

Of course, when you write five blogs per week and talk constantly about your private life, it really isn’t that private…but I digress…

I have several nicknames: “Pipes,” “Spiff,” and “Commish” come to mind.  But the latter comes with painstaking duties and has for the past decade.

As the “Commish” of three fantasy sport leagues (yes, I’m a nerd…), I have grown accustomed to chasing my fellow fantasy-chums for their pool fees each and every season.  It’s usually the same handful of guys that never pay.  Christian – just because you’re in Montreal, doesn’t mean you can’t mail me a cheque…

My attempts to get the money in advance of every fantasy league draft has made the process easier, but there are always a few people that come up with excuses.  Tucker loves to say, “I’m gonna win this damn league anyways, so you’re just gonna give me the money back in a few months anyways!”

This leaves me chasing them for months on end…

All over the city right now, there are condominium owners who are owed back-taxes by the former owners of their units.

I’ve heard numerous horror stories about people chasing the former owners for months or often years to get the taxes that should have been paid up in advance.

The world we live in is not fair all the time, or even part of the time, if you ask me.

Just because somebody “should” pay the taxes for the period of time that they lived in what is now your condo, doesn’t meant they’re going to.

Let me start from the beginning…

With any new condominium development, it takes a few months or years to get the ship running full steam ahead.

Just as it takes 4-6 months for the developer to actually finish construction, and just as it takes upwards of 12 months for the building to be registered as a condominium corporation, it takes the City of Toronto up to three years to assess the property taxes.

Every building is different, and that’s what makes the process frustrating.

It took almost three years for the taxes to be assessed at my current residence, but at my last investment property, I received a tax bill after only six months!

There’s really no way of knowing when the City of Toronto is going to come through, so just like you do on American Thanksgiving while watching football on your couch and writing blog posts – you just sit back, and relax.

Don’t forget – with any new development, there is the occupancy phase, and then the actual ownership phase.  This makes things twice as complicated for when taxes are assessed.

Let’s say that you take occupancy on February 1st, 2009.  The building takes eight months to get registered, and thus you “own” your condo on October 1st, 2009.

You sell your condo on March 1st, 2010.

You’ve lived there for a total of 13 months, and thus you owe 13 months worth of property taxes when they are assessed.

But hold on – did the developer include a portion of your “occupancy fees” as payment for property taxes?

Maybe yes, maybe no.

The occupancy fee traditionally consists of three parts: mortgage, maintenance, taxes.

Your $1,280 “occupancy” fee might consist of $780 worth of interest on the balance owing, $300 in maintenance fees, and then $200 for property taxes.

But just to complicate things even further, not every developer includes a portion for property taxes.

This makes things very tricky when you purchase a condo where taxes have not yet been assessed.

In the example above, let’s assume that property taxes are assessed at $2,400 per year.  Let’s assume that the property assessment comes in December of 2010.  The buyer/owner of the condo will be assessed for ALL taxes owing since the occupancy started on February 1st, 2009 – a total of 22 months, or $4,400.

Consider that the previous owner is still on the hook for the first 13 months, or $2,600.

THIS is why lawyers get paid…

When a buyer first purchases a condo where the taxes have not yet been assessed, you need to hold-back a portion of the sale proceeds in the seller’s solicitor’s trust account until the time when the taxes are finally assessed.

If you don’t, then you end up chasing the previous seller for money just like I have been frivolously chasing Bubs for his 2010 Fantasy Football entry fee…

Of course, every Realtor should be proactive and include the following clause in the Agreement of Purchase & Sale:

It is hereby acknowledged between the Buyer and the Seller that the subject property has not had a Final Realty Assessment and thus a supplementary Realty Tax Bill will be issued in the future.  The Buyer and Seller agree that the Seller’s solicitor shall hold back the amount of (insert – $$$) for the payment of any outstanding property taxes for the period prior to completion of this transaction.  The Buyer or the Buyer’s solicitor shall forthwith, after notification by the municipality, notify the Seller’s solicitor of the amount of finally assessed property taxes.  The Seller’s solicitor shall immediately, after notification, pay the hold back or the amount thereof necessary to be paid in payment of the taxes accruing or owing prior to date of completion.  If there has been no notification to the Seller’s solicitor as aforesaid within (insert #) years after completion of this transaction, the Seller’s solicitor may release the holdback to the Seller.  The Seller’s solicitor shall supply a personal undertaking on completion to the Buyer to evidence the foregoing.

This is the clause that our office uses for condominiums where properties have not yet been assessed.

Last week, I saw the following clause:

Buyer and Seller agree that $3,000 of the sale proceeds of the property shall be held in the Seller’s solicitor’s trust account until the Property Taxes are assessed, upon which time the amount owing by the Seller shall be forwarded to the Buyer’s solicitor.

That clause is okay, I guess.  But it was clearly written by an agent (or somebody else who is NOT a lawyer…) and I’m not sure it’s “full” enough.

The first clause clearly spells everything out in plain English (or legal rhetoric…) and I see no grey areas or any ways in which the responsibilities of all parties involved could be misconstrued.

The amount of the hold-back, if you are the buyer in the transaction, should always be more than what you estimate will be appropriate.  In the case above where the seller is on the hook for 13 months, I would estimate $200 per month (which turned out to be accurate), and round up to $3,000.  Whatever excess is left over gets sent to the seller anyways.

Where things get confusing is when the occupancy fee paid by the original owner (the seller) contained a portion for property taxes.  This amount is usually given back to the owner upon final closing after the property has been registered, so although the money was collected by the developer and held-back, it’s gone right back into the owner/seller’s pocket.

This is why, in my opinion, you need to take the TOTAL number of months that the seller has occupied the unit (occupancy phase + ownership) and hold-back an amount that is more than ample to cover it.

Ultimately, the lawyers can battle back and forth before final closing about how much should be held back.

If the Agreement of Purchase and Sale calls for $4,000, and the buyer’s lawyer believes that the taxes owing “could” be as high as $5,500, then they can adjust for this upon closing.

However, the seller doesn’t have to agree to anything that wasn’t in the original Agreement of Purchase & Sale, and this could potentially stop a deal from closing.

If the seller lives abroad, or moves abroad after closing – you’d better make sure there was enough money held-back to cover the taxes owing!

Or you’ll be like me, still chasing Mr. Sunday for his $100 fee for the 2010 Football Pool…

3 Comments

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  1. steve says:

    getting title insurance at closing protects you from a myirad of potential issues, including any taxes owing prior to your taking ownership. it’s a smart investment that you can arrange with your solicitor at closing for a few hundred dollars.

  2. JG says:

    Just when I think I have a handle on all aspects of purchasing/selling a property, I come across a post like this!

    Very informative – thanks for the Post.

  3. moonbeam! says:

    Not just condos! I lived in my newly-built house for over 2 years before I got a tax bill — and then I owed all the property taxes due since occupancy, ouch! and my neighbours had to cough up the unpaid taxes owed by the previous owner who sold them the house & left town….
    Buyer beware & set aside money for back-tax or taxes owing!

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