Buyer Beware! How Some Builders Are Overcharging for Taxes
Friday Mar 11th, 2016
How Some Builders Are Overcharging For Taxes
Thousands of purchasers of new condominiums are being overcharged for property taxes.
Here's how it works: when a new condominium is ready for occupancy, the buyer gets the keys and can move in - but title will not be transferred for some months.
The period between occupancy and the final closing, when title is transferred, is called the "interim occupancy period." During this time, buyers pay the builder a monthly interim occupancy fee.
The components of this fee are set out in the Condominium Act, and include an amount "reasonably estimated" by the builder for the unit's municipal taxes.
Most builders typically calculate the tax component of the interim occupancy fee by taking the purchase price of the unit as shown on the front page of the offer and multiplying it by 1%. The result is then divided by 12% to get the monthly charge.
The 1% figure is supposed to represent the city of Toronto's mill rate, which is a percentage used to arrive at annual taxes. The city sets the mill rate with its annual budget, and for every residential property in the city, the assessed value is multipled by the mill rate to yield the annual property taxes.
The way some builders calculate estimated taxes, however, is not the way the city does it. And the result is a significant overcharge to the buyers.
The correct method, which is how the city calculates taxes, is to take the assessed value of the unit, which is typically the purchase price minus the significant HST component, and multiply the result by the city's official mill rate, which last year was 0.7056037%.
Here's how the numbers work.
The purchase price including tax, for example, is just over $868,000 and the price without HST is $789,720. On occupancy, the builder calculates the estimated taxes using the total purchase price - including HST - multiplied by 1%. This results in estimated annual taxes of $8,377 for the unit.
The correct formula required the purchase price without taxes ($789,720 and not $868,000) to be multiplied by the city's actual mill rate (0.7056037% and not the builder's 1%). This yields a reasonably accurate estimate of $5,572 for 2015 taxes - a discrepancy of $2,805.
The purchasers are therefore overpaying taxes by almost $234 per month as part of their interim occupancy fee. For an interim occupancy period of 10 months, the tax overpayment would be approximately $2,314.
Technically, each purchaser in these builders should be entitled to a readjustment from the builder - if their lawyers crunched the numbers.
In the same vein, builders often charge purchasers an overestimate of final taxes to the end of the year of closing, and undertake to readjust with purchasers afterward - but typically only on request.
With tens of thousands of new condominiums closing annually, the potential windfall to developers is huge.
There are two solutions to this problem. The first is to require builders to calculate the tax component of interim occupancy fees in a manner which corresponds to the way the city calculates taxes.
And the second is for the purchasers and their lawyers to be on alert and require to more accurately calculate estimated taxes.