What is a State of Adjustments?
Statement of Adjustments defined:
When you buy or sell a home a Statement of Adjustments will be prepared. The Statement of Adjustments is a document that sets out the purchase price, credits the deposit, and prorates any prepaid items such as property taxes. Generally, the Statement of Adjustments will be prepared by the Seller’s lawyer. Your lawyer will review the Statement of Adjustments to ensure that all items which need to be “adjusted” are included.
The most common item that is adjusted is the property taxes. The method of adjusting property taxes is to take the total taxes for the year and divide it by 365. This will give you a per diem tax rate. The seller is responsible for an amount of taxes equal to the number of days that he owned the property. You multiply the number of days that the seller owned the home by the per diem tax rate. The resulting figure is the amount of property taxes the seller is responsible for.
If the seller has actually paid more property taxes than he is responsible for then the purchaser is required to reimburse the seller for the amount of the overpayment.
If the seller has paid less property taxes than what he is responsible for, the seller must credit the purchaser for the underpayment.
Statement of Adjustments for Properties
When you purchase a home you need to be aware that the property tax adjustment may require you to pay upfront property taxes that the seller has prepaid. This could amount to an expense that you were not planning on.
If the seller is in arrears of property taxes your lawyer will either ensure that the purchaser receives a credit for any penalty that may be assessed by the municipality or obtain the Seller’s lawyer’s undertaking to pay any taxes and penalties in arrears.
If the property you are buying or selling has fuel oil or propane the seller will want to receive a credit for the fuel or propane that he is leaving in the tank. There may also be propane tank rental to be adjusted. A seller should advise his lawyer early on in the event there is fuel to be adjusted on closing.
If the property is property used in a business or a vacant lot that is being sold by a developer there will likely be HST to be added to the purchase price. This amount will show on the Statement of Adjustments. If you are an HST registrant you will not need to pay the HST on closing but may report the transaction on your HST return If you are not an HST registrant you will be required to pay the HST on closing. There is no HST on the purchase of used residential property or on personal use property.
It is hoped that this brief overview will give you a better understanding of the document known as the Statement of Adjustments.