Prepaid vs. Arrears Adjustments in Ontario Real Estate Closings

When you receive the statement of adjustments before your Ontario real estate closing, two types of entries tend to confuse buyers and sellers most: prepaid adjustments (which create credits for the seller) and arrears adjustments (which create credits for the buyer). Getting these backward is one of the most common errors a non-lawyer might make when estimating closing costs. This guide explains both, walks through the logic with examples, and tells you what to watch for.

The Core Principle: Who Has Paid for Days They Won't Use?

Real estate adjustments exist for one reason: to ensure neither party pays twice — or not at all — for ongoing costs like property taxes, utility charges, and condo fees. The question that drives every adjustment is:

Has the seller already paid for a period that extends past the closing date, or has the seller consumed a period they have not yet paid for?

If the seller has prepaid beyond the closing date, they deserve a credit. If the seller has used days without paying (arrears), the buyer deserves a credit.

Prepaid Adjustments: Seller Gets a Credit

A prepaid adjustment arises when the seller has paid a cost in advance that covers a period that extends beyond the closing date. The buyer will benefit from that pre-payment for the remaining period, so the buyer compensates the seller through a credit on the statement.

Most common prepaid adjustments:

1. Prepaid property taxes Ontario municipalities bill property taxes in various installments throughout the year. If the seller has already paid a tax installment that covers a period past the closing date, the seller gets a per-diem credit for the days the buyer will occupy the property under that payment.

Example: Closing is August 1. The seller paid a tax installment that covers July and August. The seller has prepaid August's share of property taxes, so a credit for the August portion flows to the seller.

2. Prepaid condo fees Condominium common expense fees are typically paid at the beginning of the month for the full month. If closing is on the 12th, the seller has prepaid the remaining 18 (or 19) days of the month, and a per-diem credit is owed to the seller.

3. Prepaid heating oil or propane If the home has an oil tank or propane tank and the seller has recently filled it, the fuel remaining in the tank on closing day is often treated as a prepaid item. The buyer pays the seller for the estimated remaining fuel at the going rate. The specific fuel amount (and method of measurement) should be agreed upon in the agreement or at closing.

4. Prepaid rent (in tenant-occupied properties) If the property has a tenant who paid rent for the full month and closing is mid-month, the seller holds rent they have received but will not "earn" (since the buyer becomes the landlord). That unearned portion is a buyer credit — but see arrears discussion below for the mirror image.

Arrears Adjustments: Buyer Gets a Credit

An arrears adjustment arises when the seller has consumed a period for which they have not yet paid. Rather than demanding payment from the seller before closing, the buyer receives a credit representing the amount the seller "owes" for those days.

Most common arrears adjustments:

1. Property tax arrears Property taxes in Ontario are sometimes billed after the period they cover. If the current tax installment is not yet due — but the seller has been living in the property and using municipal services for the covered period — the buyer gets a credit for those days. The buyer will eventually pay the installment when it comes due, but is compensated in advance through the adjustment.

Example: Closing is March 10. The spring tax installment covers January through June but is not yet due. The seller "owes" January through March 10 (the days they occupied the property before closing). The buyer receives a credit for those days and will pay the full installment later.

2. Water and utility arrears If water is billed in arrears and the final meter read has not yet been processed, the seller may owe for days of usage up to the closing date. This is sometimes included as an estimated credit on the statement, to be trued up once the final bill arrives.

3. Rent arrears (from tenants) If a tenant owes unpaid rent, and that obligation passes to the seller (who should have collected it), the buyer may receive a credit representing the tenant's outstanding balance.

How Per-Diem Calculations Work

Most adjustments use a per-diem formula:

Annual amount ÷ 365 × number of days = adjustment or Monthly amount ÷ days in month × number of days = adjustment

Your lawyer will use the applicable formula based on how the underlying cost is billed (annually, by installment, or monthly). The number of days is calculated from the adjustment date specified in the agreement — usually the closing date itself.

Common Mistakes to Avoid

• Assuming the tax installment schedule is the same in every city — it is not. Mississauga, Toronto, Brampton, Hamilton, and other municipalities each have their own billing cycles. Your lawyer will pull the municipality's current tax information.
• Forgetting that the fuel tank needs a read — if there is oil or propane, arrange to have the level read (ideally by the fuel supplier) on or very close to closing day.
• Relying on the listing agent's estimate — real estate agents are not lawyers and should not be preparing adjustment calculations. The seller's lawyer prepares the statement of adjustments; your lawyer reviews it.
• Assuming arrears means trouble — an arrears adjustment is routine. It does not mean the seller is in default of anything; it simply reflects that the billing cycle has not yet caught up.

Frequently asked questions