If your home goes up in value by 5% then – after the next assessment – you can expect to pay 5% more on your property taxes right?

In fact – what most people don’t know – is that this is actually totally wrong.

This is not how property taxes work in Toronto.

Background To How Property Taxes Actually Work

The actual system of property taxes in Toronto is a little  more  complicated than this,  so we’ll use some  examples throughout to illustrate.

How the system actually works is that it’s designed to be a little more ‘fair’ than a flat increase on everyone – just because your home price went up.

If this had happened, then the Toronto City Council would have been flooded with money during the recent property price explosion.

But – if you think about it – that means during a housing market crash their funds would  be depleted.

So – to avoid this happening – the system is a little more fair – where property taxes go up in a controlled manner when prices go up but also down in a controlled manner when they decrease.

This is why Toronto actually has one of  the lower property taxes in the GTA area just now.  Residents  of Hamilton, for example, pay a much higher proportion.


The Criteria For A Property Tax Increase Or Decrease

Property taxes can increase in Toronto – in line with house prices.  But it is limited and controlled to be ‘fair’.

Essentially: if your home increased in price faster than the average house price increase in Toronto, then your property tax will go up to account for this.

Similarly, if your home increased in price slower than the average house  price increase in Toronto,  then  your property tax will go down to account for this.

It’s a little tricky to explain in  writing, so let’s  look at an example using 3 different houses:

  • House A grew in value by 7.5%
  • House B grew in value by 5%
  • House C grew in value by 2.5%

Now let’s say the entire Toronto housing market grew in value by 5%.

What would happen under the current system is the following:

  • House A would see their property taxes increase – as they grew faster than the average house.  They benefited a little more than everyone else in Toronto, so are asked to contribute a little more.
  • House B would see their property taxes stay the same.  Their home grew in value line with everyone else.
  • House C would actually see their property taxes go down since their home actually didn’t grow in price as fast as everyone else.  Since their home did not benefit as much, they are asked to contribute a little less to reflect this.

How Are Increases And Decreases Calculated

So now that we’ve shown you the criteria for an increase or decrease, the next most obvious question is: how do increases or decreases work in practice?

Property Tax Assessment Dates

Property taxes aren’t assessed every year – that is, the increase or decrease in value of your home isn’t looked at every year.  Instead, they look at it every 5 years.

An assessment of the value of your home is performed by the city.  It is usually quite a conservative assessment – most homes are appraised at or sell at a higher amount than the cities assessment.

Then – using the calculations and methods above – they decide if you are required to pay more, less or equal amounts of property tax above what you’re currently paying.

If you’re required to pay more or less, this is phased in over 5 years.  So, rather than increasing your payment to the full amount immediately, they do it gradually – over 5 years.

So – this is actually why your property tax might be increasing or decreasing every year – your 5 year valuation is being phased in!

This is actually good for you – if you are in the situation where you need to pay more – as you get the time to adjust to it, rather than being hit with a large, brand new bill immediately.

Simple right!  Any questions?  Leave a comment below and we’ll answer them.