Property tax and real estate tax are two terms often used interchangeably, and the difference between property tax vs land tax is not always clearly defined in news articles, online blogs and real-estate social media posts, but each refers to different things. Understanding the nuances between the various types of tax levies is essential for anyone who already owns or is planning to purchase real estate.
Property Tax Meaning and Comparison to Real Estate Tax
In Canada, property taxes and real estate taxes are the responsibility of the provincial and territorial governments. These taxes are levied on all real estate holdings, including residential, commercial, and industrial properties. Property taxes are reviewed annually and are determined by a calculation that uses the property’s assessed value as a key factor in declaring the amount of tax due.
The local municipality or government agency determines this value by considering the property’s:
- Location
- Lot dimensions
- Living area
- Age of the property
- Condition of the property
- The latest selling prices of comparable properties in the area
This value is then multiplied by the municipal tax rate, which can vary not only by province or territory but also by each municipality WITHIN each property or territory.
There are generally three components to the tax rate:
- Municipal tax rate: Set by the local municipal government to fund municipal services.
- Education tax rate: Set by the provincial government to fund public education.
- Special area rates: These apply to specific services or improvements within a municipality.
Property owners may be able to take advantage of various property tax exemptions and, if eligible, can apply to have their property taxes cancelled, reduced, refunded or fully- or partially deferred and can apply for various rebates and grants as well.
Examples of rebates include:
- Vacancy rebates: For commercial and industrial properties that have been vacant for a certain period.
- Charitable rebates: For properties occupied by eligible charities.
- Senior and low-income rebates: For seniors or low-income homeowners.
- Property taxes fund local government services, such as schools, fire departments, and infrastructure.
On the other hand, a real estate tax is a type of tax levied on the sale or transfer of a real estate property. These taxes are also collected by the provincial and territorial governments and are usually based on a percentage of the sale price of the property. The purpose of real estate taxes is to generate revenue for the government, and they are often used to fund a variety of programs and services.
As noted, the specific rules and regulations regarding property and real estate taxes in Canada can vary by province and territory. For example, some provinces may offer tax exemptions or reductions for certain types of properties or individuals, such as seniors or farmers. And again, depending on the property’s location, different rates and calculation methods may be used for both property and real estate taxes.
H2 How Property Taxes are Used in Canada
Property taxes generate revenue for local governments and fund essential public services, such as schools, fire departments, police departments, road and park maintenance, garbage collection, snow removal, sewage upkeep and public transportation. Depending on municipal regulations, homeowners may be allowed to make their property tax payments monthly, semi-annually, or annually.
Property taxes are a more stable source of revenue for local governments than other sources, such as sales or income taxes, which can fluctuate with economic changes. This stability allows local governments to plan and budget more effectively over the long term.
The type of home you own can impact your property taxes. For instance, condo owners often have lower property taxes because their condo fees are designed to cover things such as garbage collection, maintenance of shared and outdoor spaces, and building upkeep, compared with single-family homes, which may pay none of these fees.
In addition to funding public services, property taxes also help to encourage responsible property ownership. When property owners are required to pay taxes on their property, they are incentivized to maintain and improve it to maximize its value. This, in turn, benefits the community by increasing property values and promoting economic growth for all.
Is Real Estate Tax the Same as Property Tax?
One common area of confusion for those entering the real estate market is the difference between the terms “real estate tax” and “property tax,” which are often used interchangeably. So, the real question is, are real estate taxes and property taxes the same?
In short, real estate tax is a type of property tax.
While a property tax does apply to real estate, it can also be levied on items other than real estate, depending on your jurisdiction’s laws. That said, the most common property tax is paid on real estate, which is why the terms property tax and real estate tax can be used in reference to the taxes paid on real estate. However, the term real estate can’t be used in reference to property tax paid on items that are NOT real estate.
Property Tax Rates in Canada
When researching property taxes and how they will affect your finances – you may come across the terms “mill rate” and “mill levy.” These terms relate to how your real estate tax is calculated. The mill levy is the tax rate imposed on your property value, with one ‘mill’ representing one-tenth of one percent (or 0.1%). This means that if a real estate property is valued at $400,000, the associated mill rate would be $400 ($400,000 X 0.1%).
Calculating Property Tax Rates
Property taxes are calculated based on the value of the real estate property, both the land itself and any buildings on it. A property tax is a combined rate for municipal and provincial property tax rates. The rate is determined based on the property’s value and whether the real estate falls under the residential or non-residential category.
After the initial appraisal of the property when purchased, an official tax assessor visits the property every one to four years to update the property’s value and adjust the property (or real estate) taxes accordingly.
The assessor can determine the property tax and value of the property through three methods:
- by performing a sales evaluation
- following the cost method
- estimating the amount of income that would be generated should the property be rented
An excellent way to see whether your property taxes are reasonable is by comparing your taxes to those for comparable homes in your immediate area. As mentioned above, reducing your property taxes might be possible by looking for local and regional tax exemptions that apply to you or your property.
Factors That Can Affect Property Tax Rates
Some of the common reasons why property tax rates may shift include:
Reductions in governmental revenue from grants or fees – Municipalities rely on the fees and grants allocated to them by provincial and federal governments. If the number of allocated funds changes, municipal property tax rates often shift accordingly to accommodate this change.
Increases in municipal spending – The flip side of reduced municipal revenue is increased spending. Though the opposite in most respects, this scenario also affects the real estate tax rate and almost always results in an increase.
Failure to pay property taxes – In some municipalities, penalties are associated if a property owner fails to pay the mandated taxes. As a result, the owner will often see an increase in their property taxes as a function of a fixed penalty or added interest on the amount owing. Luckily, this factor is entirely in the hands of the property owner. Additional expenses can be avoided as long as real estate taxes are fully paid and on time.
Exempt properties – Some properties are deemed exempt from the standard property tax rate for various reasons, but mainly because these properties have been considered valuable to society. Further drawing from the income of these properties would negatively impact these valuable contributors. Some examples of exempt properties include farming residences, hospitals, churches, and schools.
Property Tax vs Land Tax
In October 2024, the Government of Canada announced a plan to build nearly four million new homes by 2031. To help achieve this ambitious target, the government is rolling out a suite of policies aimed at unlocking more land for new housing development, including surplus, underused, and vacant public land that is currently zoned for residential development (including mixed-use residential development).
The federal government recognizes that such a policy may need to be tailored to address the unique circumstances and requirements of each region and is currently undertaking a consultation to “hear views from various stakeholders on the potential application of vacant land taxes, including feedback on their potential drawbacks or unintended consequences, design and impacts, and to gauge interest from provinces, territories, and municipalities on the potential introduction of vacant land taxes at the provincial, territorial, and municipal levels, with federal funding to support their implementation.”
The government’s intent is to spur new housing development on privately owned vacant land, discourage “speculative holding of land,” and generate a new source of revenue for the government that could be redirected to solving Canada’s housing crisis. Suggested alternatives include offering tax incentives that would push developers to start projects now rather than waiting for higher returns.
Clearly, this prospective new land tax is VERY different from typical property tax levies.
Staying Up to Date on Taxes
Real estate taxes can seem like a lot of money for property owners to pay, especially when they can change from year to year based on municipal budgetary needs.
However, property taxes are an essential source of income for governmental bodies. The money is then redirected to the construction and maintenance of schools, various city amenities, emergency services and more. When you pay real estate taxes, it’s important to remember you are contributing to crucial community services and infrastructure and, in actuality, you’re helping maintain or even increase the value of your home by creating a well-managed municipality.
Once you thoroughly understand property taxes – from how they are calculated to their purpose – the best way to ensure that you are paying the correct amount is by staying educated. This means staying up to date with your municipality’s budget, spending and changing rates from year to year, finding out about any deductions you might be eligible for, and taking an active role in checking that the assessment of your property is correct.
