A new report indicates seven out of 11 cities surveyed in Canada have a commercial tax rate which is more than double the residential tax rate of equally valued properties.
The report indicates the average commercial-to-residential tax ratio in Canada is 2.73, up three per cent from 2.65 in 2020. It said this trend is in part driven by a significant increase in Vancouver’s ratio, which rose 48.3 per cent to 3.41 in 2021. This is due to the reversal of the commercial Education Tax reduction implemented by the province for 2020 in response to the economic circumstances driven by the pandemic.
The Canadian Property Tax Rate Benchmark Report for 2021 was an initiative of the Altus Group Limited, a leading provider of commercial real estate services, software, and data solutions, and the Real Property Association of Canada (REALPAC).
Terry Bishop, president of Property Tax Canada at Altus Group, said this is the 18th edition of the annual report.
“It does come down to fairness. In a perfect system, the taxes on all properties are equal, but what’s happened over time is that political decisions are made. There’s more weight put on the commercial sector and it starts to become a question of where’s the line? What’s fair?” said Bishop.
“The purpose of the report really is to give a focus on it and open up some discussion with that.”
Property tax rates in Canada’s major cities
Here are some of the highlights of the report for major Canadian cities:
– Vancouver’s ratio began trending down in 2017 to a historic low of 2.30 in 2020, but the 2021 reversal of the Provincial School Tax reduction of 2020 caused the city’s ratio to rebound to 3.41;
– Calgary’s downtown office properties continue to struggle, resulting in a shrinking non-residential tax base. With increasing commercial tax rates and a decreasing residential tax rate, Calgary returns to the trend of a rising commercial-to-residential ratio, now sitting above the survey average at 2.78;
– Montreal continued a three-year trend of posting the highest commercial-to-residential ratio, currently sitting at 4.17. The city’s ratio rose 1.5 per cent in 2021, marking the second consecutive year it posted a commercial-to-residential ratio exceeding 4.1. The ratio first rose above the survey average in 2008 and has been steadily climbing since, increasing in 16 of the last 18 years;
– Quebec City first climbed above the average in 2013 and remains well above the average in 2021 with a ratio of 3.47;
– Halifax saw a slight decrease in commercial rates and a lesser decrease in residential rates, resulting in a ratio decrease of 0.79 per cent to 2.85;
– Edmonton saw an increase to the city’s ratio of 5.7 per cent in 2021, but remains just below the average with a ratio of 2.52;
– Ottawa has slowly been decreasing since 2017 and now posts a ratio of 2.37;
– Toronto continued its 17-year trend of decreasing its ratio. This is consistent with the city’s strategy to enhance the business climate by reducing tax rates for commercial, industrial, and multiresidential properties to target 2.5 times that of the residential tax rate, said the report. The city expects to reach this targeted tax ratio by 2023. However, commercial rates will need to come down more if Toronto is to meet this goal;
– Winnipeg saw a slight decrease in commercial rates and a simultaneous increase in residential rates, resulting in a ratio decrease of 0.6 per cent to 1.93; and
– Saskatoon and Regina ratios decreased in 2021 by 6.3 per cent and 13.4 per cent, respectively, after remaining relatively stable from 2017-’20.
Residential tax increases unpopular
Bishop said a higher commercial tax ratio makes a city less competitive for businesses to establish their operations.
“They can find other jurisdictions that have lower tax rates. It just makes the competitive environment not quite as good for them,” he noted.
“Right now, commercial values have dropped significantly and the cities are reluctant to take the tax load down at the same rate as the assessments so they end up increasing the tax ratio to try and basically recover the same tax load from the commercial base even though the values have dropped significantly.”
Bishop said one of the reasons for the rising commercial tax rates is the reluctance of politicians to increase taxes on the residential base.
“You have a lot of municipal governments trying to limit taxes to the rate of inflation on residential ratepayers and when they do that, if they need more money, there’s only one other place to go for it and they have to go on the commercial side to raise the rate,” he said.
The report also points out market value assessments in some cities are severely delayed and outdated.
Updating property assessments
There is a large variation in market value property assessments across Canada due to valuation date lags, differing cycle lengths and, in some cases, delays of reassessments.
The result is that tax decisions will be based on data that is up to eight years out of date and does not reflect the actual market value of properties, increasing the risk of unfair property taxation impacting Canadian businesses.
“So many cities are behind when it comes to property assessments and it’s a big issue that some assessments are on track to be eight years outdated,” Bishop said.
“The one thing I’ll say for Alberta and B.C. is they’ve done a good job keeping the assessments up to date because if you let your assessments get too outdated between reassessments then you have a lot of shifting in the tax burden when you finally do a reassessment because you know the markets are fairly dynamic and values change at different rates,” he said.
“What ends up happening then is when they do a reassessment and there are large shifts between commercial properties and residential properties, the residential ratepayers have a high outcry and the reaction is usually to bring in tax mitigation tools, phase-ins of assessment increases and increasing the tax ratio or bringing in graduated rates capping taxes.”
He said Ontario is on a four-year assessment cycle with the valuation date two years prior to the cycle, so by the end of the cycle the values are six years out of date.
“They’ve now postponed the reassessment for three years in a row,” Bishop said.
“So now, by the end of the assessment cycle, the assessments are going to be about nine years out of date and then when they finally do a reassessment it’s going to become a harder political pill to swallow because there will be such shifts because a lot’s happened in the market over nine years.”