Property taxes are one of the least understood obligations that home owners have – people recognize they have to be paid, but most people don’t realize the special rights that property taxes have been granted under Canadian law.
Let’s start with the fundamentals – property taxes represent a charge on the property being taxed. That means if the taxes aren’t paid they act like a lien or mortgage on the property. Property taxes are effectively a secured debt.
In addition, municipalities have the right to apply payments towards property tax arrears against the most recent taxes first. This may not sound like a big deal, but it can become one if you fall two or three years into arrears. Once a property tax account falls three years into arrears the municipal government has the right to seize and sell the property for property tax arrears. The practical application of the first rule (allowing the municipality to apply payments to the newest taxes first) means that you can never fall three or more property tax years in arrears – if you do the municipality might sell your property.
Now let’s consider what all of this means if a person is considering bankruptcy or a consumer proposal. Since property taxes are a form of secured debt (secured against the property being taxed) they are excluded from bankruptcy or a consumer proposal unless the property to which they are attached is surrendered. When you surrender the property the property tax account will be paid in priority to other liens and charges on the property so the debt will be cleared. If you are keeping the property then the property tax arrears must be repaid or the municipality may exercise their right to seize and sell the property.
If you are considering bankruptcy or a consumer proposal and you have property tax arrears we strongly suggest you discuss all of your options regarding the property and develop a plan to deal with the arrears as part of your overall plan to sort out your financial problems. For advice on property tax arrears and debt problems, talk to a local Bankruptcy Canada trustee today.