Property Tax Mitigation: Interventions have record

MITIGATION MIRE

Efforts to Cushion Property Tax Shifts Often Entrench Inequities

By Kyle Fletcher

CANADIAN MUNICIPALITIES are facing increasing costs and deferred capital expenses. These two factors combined have led to some significant tax shifts for 2022, while even more dramatic changes are expected for the next year or two.

Municipal and provincial governments have the ability to intervene to manipulate assessments or tax rates in an effort to limit the impact of tax changes. This intervention occurs via various mitigation tools — including assessment phase-in, tax rate adjustments and capping or rebate programs — to adjust the amount of taxes some segment of properties will have to pay.

Consequently, this creates a pool of winners and losers as some properties benefit from tax mitigation and others must subsidize those benefits. Mitigation tools can have significant negative impacts on the transparency and efficiency of the tax system, but, more fundamentally, tax mitigation sacrifices fairness and equity in the pursuit of stability. ASSESSMENT PHASE-IN In an assessment phase-in system, significant increases in assessment are phased in over time. For example, Ontario first implemented its four-year assessment phase-in in 2009 after backing away from its intention to move toward annual assessments.

Under the rules, value increases related to reassessment are phased in over four years, while assessment reductions are implemented immediately. In the final year of the cycle, the tax rate can be based on the full current value assessment (CVA), but the tax rate must be higher in years one to three to account for the amount of assessment yet to be phased in. This higher tax rate effectively counterbalances the decrease in assessment so properties with reduced assessments don’t realize full relief until year-four when all properties pay taxes based on their full market values.

Elsewhere, the Halifax Regional Municipality is contemplating a phase-in of reassessment-related increases of more than 5%, beginning with the 2023 taxation year. This would cap allowable assessment increases at $500,000 per year, over three years, complicate tax calculation and delay full implementation of market value for several years.

Typically, phase-ins artificially slow the growth of the assessment base, compelling municipalities to increase the tax rate in order to raise the same amount of revenue from the tax class. Thus, all property owners pay taxes at a higher rate than would have been the case with full implementation, and some property owners pay taxes at a higher percentage of current market value than their competitors.

ASSESSMENT AVERAGING Land assessment averaging adjusts a property’s taxes to reflect average land values over a number of years. In Vancouver, for example, land averaging applies to residential (class 1), light industrial (class 5), or business and other (class 6) where the tax-

Phase-ins artificially slow the growth of the assessment base, compelling municipalities to increase the tax rate in order to raise the same amount of revenue from the tax class.

able value has increased over a specified threshold.

For 2022, that threshold was a 20.78 % increase for residential properties and a 21.24% increase for the light industrial and business classes. Taxes for properties falling into that category are calculated using an average of the assessed land value for the current and prior four years, plus their current assessed improvement value.

Land averaging makes taxation less transparent, greatly complicating the tax calculation for impacted properties, and obscuring the relationship between assessed value and taxation. Again, because averaging reduces the total amount of taxable assessment, the tax rate must increase to compensate.

In practice, properties with assessment increases below the specified threshold will pay that higher rate of tax on the full assessed value. Properties with value increases above the specified threshold also pay the higher rate of tax, but it will be applied to a reduced average value.

TAX SUB-CLASSES Extreme shifts in market value or issues for vulnerable businesses are sometimes addressed through the application of differing tax rates for various categories of property. For example, Montreal and Toronto both provide reduced commercial tax rates for properties below a threshold of value.

For 2022, these thresholds were $900,000 in Montreal and $1 million in Toronto. In addition, for 2022 taxation, Toronto implemented a new small business property tax sub-class, which provides a 15% reduction in the municipal and provincial portion of the tax rate for eligible properties.

Ottawa has also implemented a small business sub-class for select types of property in the commercial/new construction commercial (CT/XT) or industrial/new construction industrial (IT/JT) classes. For some types of properties, the assessed square footage must be 25,000 square feet or less. Ottawa’s 15% reduction is being phased in over two years.

In both Toronto and Ottawa, the municipal portion of the rate reduction is funded through an increase in the tax rate applied to all other non-residential properties. The size and value thresholds for inclusion in sub-class means that small business tenants in larger properties will be among the ratepayers absorbing those added costs.

Ontario municipalities can also enact a number of optional classes for business properties, including (among others): vacant land; parking lot; industrial; large

NEW BRUNSWICK MUNICIPALITIES AWARDED MORE TAXING LEEWAY

Property tax relief could be short-lived for New Brunswick’s commercial and industrial ratepayers. Beginning in 2023, municipalities will have flexibility to pull more revenue from their non-residential tax base, potentially cancelling out a phased 15% reduction in the provincial property tax rate that was introduced earlier this year.

“The provincial tax rate in New Brunswick was the highest in Canada. It was offside,” says André Pouliot, Senior Manager, Property Tax, with the Atlantic Canada based real estate advisory firm, Turner, Drake & Partners. “Basically, 50% of the [property] taxes you paid in New Brunswick went to the province.”

That’s a burden assigned to residential landlords, commercial and industrial property owners since owner-occupiers of residential properties have long been exempt from the provincial levy. Notably, non-occupierowned residential properties are now in line for a phased 50% provincial tax cut, to be complete by 2024, in tandem with the phased 15% decrease for non-residential properties.

The provincial property tax reduction is one of just three new measures the New Brunswick government adopted in a roughly six-month period between December 2021 and June 2022. That began with a move to stretch out the allowable residential-to-non-residential property tax ratio from the traditional 1-to-1.5, so that municipalities now have leeway to tax non-residential properties at anywhere from 1.4 to 1.7 times the residential rate.

Next, the provincial government carved out a new heavy industrial tax class. It encompasses a range of defined activities such as manufacturing, mining, milling, electricity generation, oil/natural gas extraction, processing and storage, along with the manufacturing/processing of “products, material or substances” and other uses that might be prescribed in future regulations.

This allows for the application of differing tax rates on heavy industrial versus commercial/light industrial properties. However, the latter uses will be taxed at the heavy industrial rate if they are located on an integrated campus with heavy industrial activities.

Municipalities will have these new taxing opportunities in place for the 2023 tax year, presenting the possibility that some non-residential ratepayers could see further tax relief if local councils opt to adjust the rate down to 1.4. However, most informed observers suggest that won’t be the prevailing trajectory.

Pouliot also notes that New Brunswick’s residential-to-non-residential ratio is deceptive in the context of national surveys that peg the average discrepancy much wider — for example, at 2.8 times the residential rate in 2022.

“1.5 times is actually a pretty competitive multiplier if you look at it compared to other jurisdictions, but when you factor in that non-residential pays provincial taxes and homeowners don’t, the multiplier ends up being close to three times,” he advises.

Creation of the new heavy industrial tax class is seen as a response to active lobbying from the City of Saint John. Elsewhere, Pouliot speculates most municipalities wouldn’t derive a lot of extra revenue from singling out such properties for a steeper tax allocation. Alternatively, it might be used as a means to give those industries a tax break compared with commercial/light industrial properties.

– REMI Network

B.C. ADDRESSES DEVELOPMENT PRESSURE ON ASSESSED VALUES

Municipalities in British Columbia have new options to provide tax relief in cases where development pressure has escalated the assessed value of commercial or light industrial properties or sites, such as meeting halls, owned by non-profit organizations. Newly enacted amendments to the B.C. Community Charter and the Vancouver Charter allow local governments to apply a reduced tax rate on properties if the assessed value based on highest-and-best use surpasses the value based on the current use by a specified margin.

Municipalities will have to pass a bylaw for every tax year they choose to take advantage of this flexibility. Through this mechanism, they can establish different tax rates for “different areas, properties or kinds of properties” to provide an even more precisely targeted degree of relief.

“Local governments have been asking for a tool to help support small businesses and non-profits in their communities under the weight of increasing costs,” reports B.C. Finance Minister Selina Robinson.

“Local governments were consulted as a part of the process of developing this legislation,” affirms Jen Ford, President of the Union of B.C. Municipalities. “This change enables local governments to provide tax relief for commercial properties that have seen dramatic increases in the assessed value of their land.”

The new tax relief option will be available beginning in the 2023 tax year. Properties that meet the criteria will be eligible for up to five years. Municipalities can also require commercial and industrial landlords to notify their tenants about relief received.

“In addition to the dramatic increases in assessed value experienced over the past number of years, businesses are facing a number of financial challenges including higher inflation, rising interest rates and increased labour costs. All steps to provide relief are welcome,” notes a statement from the BC Chamber of Commerce following the introduction of the legislation earlier this fall.

– REMI Network

Tax mitigation complicates tax calculations, and prolongs and exacerbates inequities.

industrial; office; and shopping centre. Each of these classes may be taxed at a different rate, and, within certain limits, the tax rate can be used to increase the share of taxes borne by a sector of businesses.

When assessments shift between classes, the resulting tax shifts can be moderated by increasing or decreasing the tax rate. For example, if the next reassessment shows a sharp increase in the value of commercial warehousing, an Ontario municipality could choose to reduce the general commercial rate by increasing the tax rate applied to sectors experiencing declining values, such as shopping centres and office.

TIERED TAX RATES Halifax is proposing to provide relief to small business through tiered tax rates. The city has designated five business zones: Small/Medium Enterprise (SME), High Density (Downtown), Industrial Parks and Business Parks (retail focused), and is proposing varied tax rates depending on the value tier and the zone. The proposal reduces taxes for all properties valued at less than $2 million, as well as properties located in the SME and High Density zones.

The reductions would be funded by taxing higher valued properties in Industrial Parks and Business Parks at rates up to 16.8% higher than currently. This proposal will not only create inequitable taxation between properties in different value categories, but also between regions within the municipality.

CAPS AND CLAWBACKS When Ontario finally updates assessments from the 2016 values now in place — an exercise that will occur no earlier than 2024 — new valuations are expected to bring extreme shifts between property classes. That is also expected to trigger a resurgence of the tax caps and clawbacks initially implemented in response to the provincial general reassessment in 1998, which updated values for the first time in 50 years in some jurisdictions of the province.

In the first three years of that era, caps restricted tax increases to 2.4%, 4.8% and 7.2%, while many regions invoked 100% clawbacks — with no possible relief through appeal since any reduction in taxes was subject to clawback.

Over the ensuing decades, most Ontario municipalities have been able to eliminate the capping and clawback mechanism as assessment-related tax shifts evened out. However, the City of Toronto was compelled to re-institute a 10% cap in 2018 after a new four-year assessment cycle brought large tax increases for some properties. (That tax cycle has now been extended past the intended 2021 end date.)

Effectively, caps and clawbacks preserve historic inequities between properties, with the result that properties with declining values or in struggling industries end up subsidizing those that are successful. They are also a cautionary example of the potential fallout when reassessment is delayed or changes in relative property values are not quickly reflected in assessment.

Tax mitigation complicates tax calculations, and prolongs and exacerbates inequities. Inequitable tax treatment may drive businesses to regions offering more competitive tax treatment — particularly those businesses that have been hardest hit by the pandemic. The best way to avoid resorting to tax mitigation tools is to conduct frequent reassessments and to encourage a robust appeals process. zz Kyle Fletcher is President, Property Tax, Canada, with Altus Group. His firm’s 2022

Canadian Property Tax Rate Benchmark

Report can be found at www.altusgroup. com/reports/canadian-property-taxbenchmark-report.