When transit arrives on time (or when it doesn’t — if you’re in Toronto), roads are clear and maintained, garbage and recycling are collected, street lights are on and government services are staffed with teachers, police, doctors and the like — you can thank homeowners, in large part, for footing the bill. Property taxes are one of the many costs that come with homeownership and they are an imperative one — a critical source of revenue for municipalities used to support the local infrastructure where you live. How much you pay in Canada depends on what municipality you live in and what the assessed value of your property is.
Livabl spoke to the Centre for Urban Research and Land Development’s director, David Amborski, to get the scoop on what first-time homebuyer’s need to know about property tax.
How is your property tax calculated?
Every municipality has an established tax rate. To determine what your property tax will be for the year, you apply the tax rate to your assessed property value. In Ontario, the Municipal Property Assessment Corporation (MPAC) assesses the property — considering the property age, size of the home and lot, location, construction quality, and how it stacks up to average property values in your municipality. They release new assessments every four years, with the next one scheduled to land in your mailbox in 2020.
If your property is $500,000 and the tax rate is one percent, you will owe $5,000 that year. Aside from Toronto, each municipality in the GTA has both a local and regional government (for example, Oshawa is local, Durham is regional), which set two tax rates. Every municipality also has an education tax rate lumped into the total.
If the value of your home increases dramatically, MPAC uses what’s called a “phase-in program,” to protect homebuyers from getting a shocking sticker price when the next assessment rolls around. Instead, the value is gradually phased each year until it reaches the full assessed value. If the value of your home drops, your assessed value will drop with it — along with your property taxes.
However, it’s important to note that changes you make to increase the property value of your home will not necessarily result in increased property taxes. MPAC gets the figure by comparing it to the average property in the municipality. It’s not about whether or not your individual property rises or falls, but rather, how much it’s rising and falling in relation to other properties throughout the city. Say your condo doubles in value, but so has every other condo in the city — your property taxes will stay the same. But if your property value goes up greater than the average, property tax follows suit. On the other hand, if your property value rises, but at a rate lesser than the average, you will actually pay less tax.
Why do tax rates change?
In the same way we budget for holidays, housing and gym memberships, the government also has a budget, albeit, a much more complicated one. To balance our personal budgets, we can pick up side hustles, get a promotion, spend less or receive a financial gift. The government, on the other hand, uses taxpayer money managed through the budget process.
“There are two budgets,” explains Amborski. “The operating budget, which deals with the day-to-day expenditures — wages, salaries, maintenance and so on. And then there’s a capital budget for anything with a life longer than one to five years — infrastructure, buildings, roads and so on. Municipalities must strike an operating budget so that planned expenditures equal planned revenue. They can’t budget for a deficit. So at that point, they have to determine a tax rate they’re going to collect to meet their obligations for that year.”
Relative to other municipalities, Toronto actually has a very low property tax rate. Amborski’s colleague Frank Clayton from the Centre for Urban Research and Land Development, released a report arguing Torontonians could stand to have property tax increased by as much as 20 percent and still be in the median. Clayton looked at 29 municipalities and ranked Toronto sixth-last (in 2016, the average property tax bill was $4,027). Compare that to King, a township in York Region north of Toronto, which ranked first and had an average property tax bill of $6,798.
Toronto mayor John Tory has kept the tax rates at the rate of inflation but this can be problematic. “Part of the problem is it doesn’t give you much room to enhance your expenditures,” explains Amborski. He argues that by simply raising your property taxes based on the rate of inflation, the city can only keep its head above water. “It doesn’t give you much room to provide enhancement to quality of services or to invest in more infrastructure. The City of Toronto has been reluctant to raise taxes. “It’s very typical among politicians, of course. It relates to people getting reelected.”
On the flip side, if you look at the commercial tax burden in Toronto, it’s much higher. “Retail properties in 416 pay higher property taxes than those in 905. For example, if you go along Steeles, which a boundary between York Region and Toronto, you’d see very different tax burdens on the two sides of Steeles Avenue.”
What about Land Transfer Tax?
Anytime you buy a home in Ontario, you have to pay land transfer tax. If you’re in Toronto, you get dinged twice — paying the province’s land transfer tax, but also a municipal land transfer tax. This can easily cost you tens of thousands of dollars. The tax rate applied depends on the value of the property.
In Ontario, the following rates are charged according to the value of the property:
- 0.5 percent of the value of the property up to and including $55,000
- 1 percent of the value which exceeds $55,000 up to and including $250,000
- 1.5 percent of the value which exceeds $250,000 up to and including $400,000
- 2 percent of the value between $400,000 and $2,000,000
- 2.5 percent for amounts exceeding $2,000,000, where the land contains one or two single-family residences
In Toronto, you also have to pay the following tax rates according to property value:
- 0.5 percent up to and including the first $55,000
- 1 percent of the value which exceeds $55,000 up to and including $250,000
- 1.5 percent of the value between $250,000 and $400,000
- 2 percent of the value between $400,000 and $2,000,000
- 2.5 percent of the value over $2,000,000
To illustrate this, let’s say you purchase a condo for $500,000. The taxes are calculated on a marginal basis, so this is where some semi-complicated math comes in.
- On the first $55,000 you would pay 0.5 percent (or $55,000 x 0.005). That’s $275.
- Next up you calculate for the next bracket. You need to first subtract $55,000 from $250,000, which gives you $195,000 and calculate 1 percent of that amount ($195,000 x 0.01). That’s $1,950.
- Stay with us! You now have to calculate for the next bracket since your purchase cost still exceeds it. Now subtract $250,000 from $400,000 and you get $150,000. Calculate 1.5 percent of that amount ($150,000 x 0.015) and you get $2,250.
- We’re nearly there… You’re in the final bracket for the $500,000 purchase cost now. You don’t need to use the full bracket since your purchase cost isn’t anywhere near the upper bound of the bracket ($2 million). So you subtract $400,000 from $500,000 to and calculate 2 percent of $100,000 ($100,000 x 0.02). That’s $2,000.
- Now add those four numbers up and you get $6,475. Multiply that total by two since we’re calculating tax paid to both the Toronto and Ontario governments.
That’s $12,950, my friends! If you’re not in the mood for all that math, you can always use a handy online land transfer tax calculator.
Why did the government do this, you ask? “The city was looking for revenue tools with the new City of Toronto Act, where they were given broader taxing authority,” explains Amborski. “They were looking for a way to raise money — I would argue — without raising the property tax. They went into land transfer tax and the market started to boom. Now, it would be hard to replace.”
There have been questions about whether or not it’s a fair tax. “I would have rather seen, back then, property tax increase,” says Amborski. “When people pay their property tax bills, they write out a cheque and make the councillors accountable for that money. Whereas, with land transfer tax, councillors aren’t as accountable — that money just comes in.”
Thankfully, there is a land transfer tax rebate for first-time homebuyers equal to the full amount of their land transfer tax, up to a maximum of $4,000 to help offset the cost. There is also a rebate to cover Toronto Land Transfer Tax for first-time buyers — equal to the full amount of their municipal land transfer tax, up to a maximum of $4,475. Curious about other tax breaks and rebates you get for being a homeowner in Ontario? We wrote a complete guide.
What if my assessment seems too high?
“When the owner of the property gets the assessment statement, they look at that and say, ‘Is that the value of my property or not?’ If the value is higher than they think the value of their house is, they can appeal that,” explains Amborski.
You can call MPAC and ask them to send you a free assessment of properties similar to yours. You also send them a list of comparable properties in the ‘about my property’ section of the MPAC website or make a ‘request for reconsideration’ — an informal, free process, where you state your case in writing and typically get a response within 60 days.
“There’s an open and transparent system,” says Amborski. “MPAC get the figure by looking at comparable sales for similar properties in the neighbourhood, and then they adjust this property to other ones. They also look at past sales.”
What happens if you don’t pay your property tax?
If you fail to pay your property tax, you will be charged interest on unpaid tax with the same ferocity as a credit card company. While this is rare, if you refuse to pay, the municipality can seize your property and sell it. After they recoup the taxes from the sale, any remaining profits will be given back to you.
Taxes are usually paid either monthly or four to six times a year. Most lenders will give you the option to lump your property taxes on top of your monthly mortgage payments. You can also do it yourself by calling your municipality, mailing a cheque or paying online with a pre-authorized payment plan.
