For aspiring real estate professionals in Ontario, understanding the financial mechanics of a closing day is paramount. While lawyers handle the actual transfer of funds, real estate salespersons must be able to explain closing costs and financial adjustments to their clients accurately. Misinterpreting these figures can lead to client distress, unexpected out-of-pocket expenses, and potential violations of the Trust in Real Estate Services Act, 2002 (TRESA) regarding registrant competence.
In Ontario, the document that reconciles the final amount the buyer must pay to the seller is known as the Statement of Adjustments (often referred to generically as a settlement statement). This comprehensive walkthrough will dissect the Statement of Adjustments, explain how prorations work under standard Ontario practices, and prepare you for the calculation questions you will inevitably face on your licensing exams. For a broader overview of your testing journey, be sure to bookmark our Complete Ontario Real Estate Salesperson Exam Exam Guide.
What is the Statement of Adjustments?
The Statement of Adjustments is a financial document prepared by the seller's lawyer and reviewed by the buyer's lawyer prior to the completion date (closing day). Its primary purpose is to calculate the exact Balance Due on Closing. It ensures that neither the buyer nor the seller pays for expenses related to the property during the time they do not own it.
It is crucial to distinguish the Statement of Adjustments from the Trust Ledger Statement. The Statement of Adjustments only deals with the financial relationship between the buyer and the seller. It does not include third-party closing costs like legal fees, title insurance, or the Ontario Land Transfer Tax (LTT). Those are accounted for separately by the buyer's lawyer.
Key Components of the Statement of Adjustments
The statement functions as a balance sheet, using debits and credits to arrive at the final payable figure.
1. The Purchase Price and Deposit
The foundation of the statement is the agreed-upon purchase price from the Agreement of Purchase and Sale (APS).
- Purchase Price: Credited to the Seller (this is what the seller is owed).
- Deposit: Credited to the Buyer (this is what the buyer has already paid into the brokerage's real estate trust account).
2. Prorated Adjustments
Adjustments are made for prepaid or in-arrears expenses. In Ontario, standard OREA (Ontario Real Estate Association) forms dictate specific rules for how these days are apportioned. According to standard Clause 14 of the OREA APS, the day of completion itself is apportioned to the Buyer. This means the seller is responsible for expenses up to, but not including, the day of closing.
Common adjustable items include:
- Property Taxes: If the seller has prepaid the taxes for the entire year, the buyer must reimburse the seller for the days the buyer owns the property.
- Condominium Fees: Typically paid monthly. If closing happens mid-month, the buyer reimburses the seller for the remaining days of that month.
- Unmetered Utilities or Fuel: If the property uses a heating oil tank, the seller is usually required to fill the tank to the top on closing day, and the buyer reimburses the seller for the cost of a full tank of oil.
Walkthrough Scenario: Calculating Property Taxes
Calculation questions are a staple of the Ontario Salesperson Exam format and structure. Let’s walk through a typical property tax proration scenario.
A property is closing on September 15th in a non-leap year (365 days). The annual property taxes are $3,650. The seller has already paid the property taxes in full for the entire year. Calculate the adjustment.
Step 1: Calculate the daily rate.$3,650 ÷ 365 days = $10.00 per day.
Step 2: Determine the Seller's days of ownership.The seller owns the property from January 1st to September 14th (because the buyer owns the day of closing).
- Jan (31) + Feb (28) + Mar (31) + Apr (30) + May (31) + Jun (30) + Jul (31) + Aug (31) + Sept (14) = 257 days.
365 total days - 257 seller days = 108 buyer days. (September 15 to December 31).
Step 4: Calculate the adjustment amount.108 days × $10.00/day = $1,080.00.
Conclusion:Because the seller prepaid the taxes, the buyer must reimburse the seller. This appears as a Credit to the Seller (and a Debit to the Buyer) for $1,080.00 on the Statement of Adjustments.
Visualizing Common Adjustments
To help contextualize the financial weight of these adjustments on closing day, the chart below illustrates the average monetary values of common prepaid adjustments credited back to a seller in a typical Ontario residential transaction.
Average Prepaid Adjustments Credited to Seller in Ontario (Sample $)
Other Closing Costs (Beyond the Statement of Adjustments)
As an expert real estate salesperson, you must remind your buyers that the Balance Due on Closing is not the only money they need to bring to their lawyer. They must also provide funds for:
- Provincial Land Transfer Tax (PLTT): Calculated based on the purchase price. (Note: Toronto properties are also subject to Municipal Land Transfer Tax - MLTT).
- Legal Fees and Disbursements: The cost of the lawyer's services, plus expenses like registering the deed at the Land Registry Office (LRO).
- Title Insurance: Protects against title defects, fraud, and issues related to understanding easements and encumbrances.
Understanding these financial nuances not only helps you pass your Humber College exams but also ensures you maintain the high standards of practice expected throughout your career, even as you navigate future continuing education requirements.
Frequently Asked Questions (FAQs)
1. Who is responsible for preparing the Statement of Adjustments in Ontario?
Standard practice in Ontario is that the seller's lawyer prepares the Statement of Adjustments and forwards it to the buyer's lawyer for review and approval prior to the closing date.
2. Who pays for property taxes on the actual day of closing?
According to the standard Ontario Real Estate Association (OREA) Agreement of Purchase and Sale, the day of completion is apportioned to the buyer. Therefore, the buyer is responsible for property taxes, utilities, and other costs on the actual day of closing.
3. Are real estate commissions listed on the Statement of Adjustments?
No. The Statement of Adjustments only calculates the balance owed between the buyer and the seller. Real estate commissions are typically paid out of the buyer's deposit held in the listing brokerage's trust account, and any balance of commission owed is directed by the seller's lawyer to be paid from the closing proceeds on the seller's trust ledger.
4. How are heating oil tanks adjusted on closing?
If a property is heated by oil, standard Ontario practice requires the seller to fill the tank completely on or just before the day of closing. The buyer is then charged (debited) for the cost of a full tank of oil at current market rates, which is credited to the seller on the Statement of Adjustments.
5. Is the Land Transfer Tax (LTT) included in the Statement of Adjustments?
No. Land Transfer Tax is a tax paid by the buyer to the provincial (and sometimes municipal) government. It is not owed to the seller, so it does not appear on the buyer-seller Statement of Adjustments. It will, however, appear on the buyer's Trust Ledger Statement prepared by their lawyer.
---