If you’re considering buying a home, property taxes are an important element to plan for. As a homeowner, you will pay property taxes annually, even after your mortgage is paid off, so it’s important to properly account for them in your budget.
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Please note that this post provides a simplified overview of the property tax system in Ontario. Property taxes are complex and there are several nuances to consider across municipalities; it’s best to contact your municipality or your provincial assessment authority, which for Ontario is the Municipal Property Assessment Corporation (MPAC) for details and specifics.
Why do we pay property taxes?
Property taxes help municipalities raise funds from commercial, industrial and residential property owners to provide maintenance and services in the community. Each municipality sets a property tax rate that forms the majority of their annual operating budget.
Your municipality’s costs can differ depending on the services needed in your community and the cost of providing them. For example, the cost of transit service systems, city infrastructure maintenance, emergency and park services also vary widely depending on the size and density of a municipality, and this will be reflected in the tax rate set by your local council.
How is the residential property tax rate (%) determined?
Municipalities will compare the cost of providing services against the total value of all homes in your city and the population density to determine a tax rate that will help them cover their operating budget.
How are home values determined for property tax purposes?
Home values in Ontario are assessed every four years by MPAC and are based on a number of factors that will be specific to your individual home, as well as comparable factors in your neighbourhood. As stated on the MPAC website, these factors include, but aren’t limited to:
– Age of the property
– Major renovations or additions
– Living area
– Lot dimensions
– Quality of construction
How is my property tax bill calculated?
The dollar amount of property tax a homeowner will pay is calculated by multiplying your municipality’s residential rate by the assessed value of your home, as determined by MPAC. To put it simply:
Property Tax Amount ($) = Property Tax Rate (%) x MPAC Home Assessment ($)
Why is knowing the property tax rate (%) for different cities important?
Property taxes can be a significant carrying cost of owning a home, often amounting to thousands of dollars annually.
As we know, property taxes are a function of both the MPAC assessed home value and the property tax rate. While a home buyer has discretion over the home they want to buy within their parameters of affordability (e.g. size, property type, price, location etc.) home buyers cannot directly impact their property tax rate since the latter is set by the municipality.
Thus, being aware of the property tax rate can help you plan and budget for ongoing home carrying costs, particularly if you plan to own a home in a different municipality from the one you’re currently in. For instance, a homeowner who plans to sell their home to purchase a similarly-valued home in another municipality may initially assume that the property taxes due will remain the same because they have purchased a similarly priced property, but that may not be the case.
Let’s illustrate with a simplified example using municipalities with the highest and lowest posted tax rates in 2019: a homeowner in the City of Toronto (where the property tax rate in 2019 is 0.614770%) who plans to sell their property assessed at $500,000 (likely a one-bedroom condominium) to buy another property with the same value in another city with a higher posted tax rate such as Windsor (where the property tax rate in 2019 is 1.789394% and the buyer can likely a multi-bedroom, detached home) will find themselves paying a higher amount in property taxes ($) even if the home assessment value is similar.
Property Tax Amount Due Annually for Toronto Condominium Assessed at $500,000: $3,074
Property Tax Amount Due Annually for Windsor Home Assessed at $500,000: $8,947
Difference in Annual Property Tax Amount Due: $5,873
Does living in a municipality with a higher property tax rate mean I’ll pay more in taxes?
Living in a municipality with a higher property tax rate does not necessarily mean you’ll pay a higher amount in property taxes.
As we’ve noted above and in our report, the amount of property tax ($) owed is a function of both the property tax rate and a home’s value assessment:
Property Tax Amount ($) = Property tax rate (%) x MPAC Home Assessment ($)
Thus, it’s possible the amount of property taxes due on a home in a municipality with a higher property tax rate but with a lower assessment value may be similar to the amount of taxes due on a home in a municipality with a lower property tax rate but with a higher assessment.
How do I find the property taxes on a home I’m buying?
Sellers typically include how much they last paid in property taxes on their property listing.
The final property tax amount is confirmed by the buyers’ lawyer prior to closing on the property by purchasing a property tax certificate from the municipality, which will also outline property taxes paid by the seller to-date, so that any adjustments can be made at closing.
Does the current home purchase price equal the home value assessment?
No, the price you purchase your home for today is not necessarily the same as the home value assessment provided by MPAC.
MPAC issues property assessments every four years (their most recent assessment was issued in 2016 and the next assessment will be issued in 2020). When a new assessment is sent to the homeowner, the new value will affect their property taxes starting the following year (e.g. 2017 – 2020) and an increase is phased in gradually over four years. A decrease in assessed value is introduced immediately.
Apart from my mortgage, what other costs should I keep in mind as I budget to buy a home?
In addition to the price of the home itself, there are two main types of costs to consider:
Closing costs are one-time expenditures paid upon the closing of a real estate transaction. Examples of closing costs include land transfer tax, legal fees, title insurance, PST on CMHC insurance and more.
Carrying costs are recurring expenses. Examples of carrying costs include property taxes, utilities, insurance, maintenance fees (for condominiums), maintenance of the home itself (for freeholds) and more.
Where can I learn more about property taxes?
To learn more about property taxes in the municipality you currently live in or plan to move to, contact the municipality directly.
For more information about home assessments in Ontario, visit the Municipal Property Assessment Corporation (MPAC) website. If you live outside Ontario, connect with your provincial assessment authority.