It is likely not news to any commercial real estate industry veteran, but Montreal, Toronto and Vancouver are expensive places to do business when it comes to taxes.
A recent study from the Real Property Association of Canada (REALpac) confirms that fact, finding those three cities continue to sport the highest commercial to residential tax ratios in the country. The trio all have commercial to residential tax ratios higher than 4:1, while the average tax ratio for all Canadian municipalities was 2.79.
However, there is some good news in the report. Toronto’s commercial to residential tax ratio continues its slow but steady decline over the 11 years REALpac has been keeping track. The ratio declined to 4.01 from 4.07 a year ago. That’s part of the city’s deliberate effort to cut commercial taxes and reverse the exodus of business to the suburbs. Its goal by the end of the decade is to trim its commercial to residential tax ratio to 2.5.
In contrast, the study found Montreal’s ratio increased for the 10th consecutive year, even though there were decreases in both commercial and residential rates over the past two years. In fact, Montreal’s residential tax rates is decreasing at a faster pace than commercial rates, with the ratio going to 4.49 times this year from 4.40 times in 2013. Vancouver remains relatively stable with a commercial to residential tax ratio approximating 4.33 over each year since 2011. (It went from 4.35 times to 4.33 times this year).
If nothing else, the latest version of the municipal tax rate study will provide REALpac with an opportunity to raise the issue with the worst tax offenders and continue to lobby for a reduction in commercial tax rates.
“We’ve dealt primarily with Toronto, but this year we are going to do more outreach with Montreal and Vancouver to find out what their story is and see if we can get a little bit more pressure put on them to address this big disparity in those cities,” said Michael Brooks, chief executive officer of REALpac.
After being the primary focus for so long, Toronto is moving in the right direction, even if it remains something of a two steps forward, one step back progression.
“Toronto has said that they are rolling it back, so it is starting to come down. Having said that, they agreed to roll it back before they put on double land transfer tax. So you’re given with one hand and taken away with the other,” said Brooks.
Good intentions do not let the country’s biggest city off the hook, though. “It’s still really high right now; it won’t be good news until it gets down to the national average which is 2.8 in our survey,” he added.
Just one other city posted a ratio above the national average, namely Halifax with a ratio of 2.81. Nonetheless, Halifax’s ratio has been declining since 2012. REALpac noted that a 6.8% increase in Halifax’s taxable commercial assessment base allowed for the drop in commercial tax rates.
The long game
REALpac’s long-term goal is to bring the commercial-res ratio close to a two-to-one relationship. “I’ve always said that 2:1 is justifiable from the point of view that commercial owners can deduct it from a tax point of view, whereas residential property owners can’t,” said Brooks.
“Much north of that and you risk driving business away,” he added. “After all, it is a capital tax. The Ontario government has done away with capital taxes, the federal government has done away with capital taxes. The only place in the country we still have capital taxes is in municipalities with these property taxes.
“Charging you four per cent a year to own commercial property, that is pretty punitive.”
Brooks also noted the CD Howe Institute has created its own capital tax investment study that shares many of the same findings.
REALpac is currently working on a study on the overall cost of development by municipalities, looking at charges such as development charges, parkland levies and community amenity contributions.
“The burden on development, the burden on investment is huge in this country,” said Brooks. “We want to highlight that total burden on investment. We also want to highlight the real disparities in ‘processing time’ for development because processing time for development equals risk.
“The longer it takes someone to get a development approval from a municipality, the more risk there is in the deal, the more they have to price that risk into the deal and the more it increases the overall cost.”
For the country’s 10 largest cities, REALpac hopes to measure the average time it takes to get a building permit, how long it takes to get a rezoning and how frequently a developer requires a rezoning.
“All of these types of issues, they add to the cost of real estate and in some cases unnecessarily. We don’t have in any municipality key performance indicators or a service standard,” added Brooks.
REALpac first surveyed some of those municipal numbers a year and a half ago in a development processes report. The association intends to use that as a model to create an annual report card similar to its property tax report, allowing the industry to compare development charges on a city-to-city basis and identify the worst offenders.
Big three skew the numbers
Excluding Toronto, Montreal and Vancouver, REALpac found the average commercial to residential tax ratio falls to the low 2:1 ratio range, much closer to REALpac’s ideal ratio, Brooks noted. That means its lobbying and education efforts can stay focused on pushing for declines among the big three.
Saskatoon and Regina posted the lowest commercial to residential tax ratios. That is partly due to those two cities also having the highest residential property tax rates in the survey, meaning homeowners contribute a bigger share to the cities’ coffers. Saskatoon has made it an initiative to maintain their target ratio of 1.40.
Winnipeg and Calgary experienced increases to their commercial to residential ratios of 1.9% and 2.25%, respectively, while Ottawa saw a slight increase of 0.4%. Ottawa’s ratio is expected to remain stable around 2.70 for the rest of Ontario’s 2013-16 property assessment cycle, the study declared.
The highest estimated commercial taxes per $1,000 of assessment are maintained by Ottawa, Halifax, and Montreal, although all three cities experienced a decrease in commercial rates of between three and five per cent. On the other end of the spectrum, Calgary, Vancouver, and Saskatoon possessed the lowest commercial rates.
All municipalities decreased their commercial rates in 2014 except for Regina and Saskatoon, which saw taxes increase by 3.3% and 2.9% respectively.