At first glance, the cottage on a quiet bend of Lake Simcoe seems idyllic; a piece of paradise in one of Ontario’s most sought-after cottage regions. This November, it came up for sale. The price? A meager $72,000, in an area where cottages regularly go for seven figures.
In Canada’s ballooning housing market, waterfront property at this price seems impossible. But the Lake Simcoe cottage wasn’t at the whims of the private market. It was put up for sale by the local township—not as a high-flung private listing, but as a tax sale.
What is a tax sale?
We’re used to hearing about the high-stress world of real estate, with bidding wars and price spikes that have only been exacerbated by the pandemic. That conversation has mostly been about the private market, where individual sellers usually work with an agent and advertise on popular real estate platforms. On the opposite side are tax sales, a complex process bound by Ontario’s Municipal Act, and managed by municipalities.
If a home or landowner has not paid their property tax for a period of about two years (it can vary by municipality), it can become eligible for a tax sale. At that point, the municipality has the right to step in and list the property for the amount of taxes owed (in the above case, it was $72,000). Put simply: if an owner falls behind on their property taxes, municipalities can intervene and sell the property to recoup the owed amount.
“I’ve seen some good deals go through, and I’ve seen some really bad deals go through,” said Scott McEachran, a lawyer in Bracebridge, Muskoka. Years ago, McEachran regularly handled tax sales as a clerk for a township in Southern Ontario.
A tax sale can be a lengthy process. When the property becomes eligible, the municipality will notify the owner, giving them some time to resolve the issue, McEachran says. If the taxes remain unpaid, it is then listed on the municipality’s website and in The Ontario Gazette, the province’s official publication for things like legislation decisions or tax sales. The municipality then accepts bids, and whoever wins becomes the new owner.
As McEachran says, tax sales can be “like winning the lottery”; you can get a great property for far less than its market value, and come out ahead. However, like the lottery, it depends on a number of uncontrollable factors and can be incredibly high risk. Sometimes a tax sale can leave you, quite literally, with far more than you bargained for.
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What’s at stake for buyers
One of the crucial things to understand when considering a tax sale are liens. This is a technical term for a type of debt linked to assets, like a house or car. A mortgage, for example, is a lien: an agreement between a homeowner and a lender structured around a piece of property.
Scott McEachran explains that in a tax sale, some liens are erased, and some remain; a mortgage would usually disappear, but anything that’s of “Crown interest” sticks, like an outstanding provincial or federal tax. This is something prospective buyers need to be aware of, but lien information isn’t always available in the listing.
This is why McEachran says it’s important to perform something known as a title search (or sub-search), which will turn up any registered liens on a property. You can contact the local municipality to do so, and it usually comes with an administration cost of about $100. For the Lake Simcoe cottage, a title search revealed an eye-popping lien of two million dollars, registered with the Attorney General of Canada. As per tax sale regulations, the new owner would be the one responsible for it.
While that case is on the more extreme side, it tells an essential cautionary tale about tax sales: find out about the liens, and decide for yourself if it’s worth pursuing. McEachran points out that in some situations, the taxes owing plus the liens might still equal less than the overall value of the property. For example, if the tax sale is listed at $50,000 and the property has a $25,000 lien, but its assessed value is $300,000, you’d still get the property for a steal; having to pay just $75,000.
It may seem puzzling that by buying someone else’s property, you’re suddenly responsible for their debt, but McEachran says that’s the whole point of registering liens in the first place. “It’s to let the whole world know, this property is tied up in that debt, so the purpose is to not have somebody go and sell it without getting that debt paid off.”
Brownfields, bidding and neighbours
Aside from liens, another risk with tax sales is that in most cases, you have to buy the property sight unseen, or at least without the kinds of conditions common in the private market. Tax sale listings typically include no pictures of the property, so your only option is to drive by. It’s important to note you are not legally allowed to set foot on the property and you could be charged with trespassing. McEachran has handled cases where a tax sale went through, and the buyer went to the property to find water in the basement; when they wanted to back out, it was too late. The legislation, McEachran says, is very strict, and once the deal goes through, municipalities can’t usually make exceptions.
What’s more, being unable to see it beforehand could leave you dealing with a “brownfield” property, where the house is in extreme disrepair, or the land has environmental issues. McEachran says there’s a risk you could end up being ordered to clean up pollution, for example, if you buy on or near an old gas station.
Another consideration is that former claims by neighbours can carry over to new ownership. Like some liens, a claim such as the property’s fence line may remain and can be difficult to change. This is called an “adverse possession claim”, and while it’s uncommon, McEachran says it’s still something to watch out for. Furthermore, some tax sale properties still have people living in them, so the first thing a buyer could have to deal with is imposing an eviction notice, or potentially wading into messy legal problems.
The bidding process is also quite different from the private market. “When you submit your bid, you put up a 20 per cent deposit, and when it comes time to open all the bids, they’re going to declare [the highest bid] the winner,” McEachran says.
Once the bidding closes, the winner will have 14 days to pay the remaining balance in cash. During this time, the owner could pay off the taxes and nullify the bid. While it’s always a good idea to have financing in order, no matter what kind of property you’re buying, with tax sales the timeline tends to be a little more rushed, so McEachran says it’s important to have it sorted out before you even put in your bid.
Winning the lottery
With these myriad risks in mind, it’s understandable why prospective buyers would give up on a tax sale property. But as McEachran says, some stories aren’t as complex; sometimes an owner is growing older and doesn’t have support to manage their affairs, and while taxes get behind, the property is still decently maintained and worth pursuing.
Still, he says in his experience, it’s usually the more rundown properties that come up. “If people are having trouble paying their taxes, they’re usually having trouble maintaining the property.”
From the outside, the Lake Simcoe cottage certainly looks like it could have been a lottery win, a slice of paradise for just $72,000. But with such a high lien attached, most buyers would probably steer clear; as of right now, the sale is listed as “cancelled”, which means the outstanding taxes were paid (the municipality responsible was unable to comment further, as those details are private).
If a property were to receive no bids, McEachran says that sometimes municipalities will try to work with the parties attached to the lien to help move the process along. “Property that sits there and does nothing is not good for society, and we all want the land to be productive,” he says.
With more and more Canadians priced out of the private market, tax sales may be worth considering for some buyers. If you do decide to go this route, McEachran says, it’s crucial to consult a lawyer, know the legislation, and understand the risks. Most municipalities have information available on their website and have employees that specifically handle tax sale inquiries. “You need some money and you need some patience,” McEachran says. “But the potential for high rewards are there.”
