Property taxes are the single-largest operating expense for most commercial real estate properties.
Canadian property taxes are ad valorem, or market-value based. In other words, within classes of property, higher-valued properties pay more property tax.
Annual property tax reassessments are the gold standard in market value-based property tax systems.
Annual reassessments link the quantum of property tax to the market value of property; they improve the accuracy, correctness and equity of the assessment roll and expedite the review, and where appropriate, the appeal of property tax assessments by owners.
CRE owners, users pay price of reassessment delays
Where reassessments are not annual, and particularly in extreme cases where reassessments have not occurred for many years, all stakeholders suffer.
Owners of real estate are, however, particularly negatively impacted by reassessment delays. This is especially true for owners and users of commercial real estate.
In Toronto, Ottawa and elsewhere in Ontario, commercial property tax rates are significantly higher than those of residential taxpayers.
In 2022, commercial property owners in Toronto and Ottawa were respectively paying 3.36 and 2.39 times the property tax rates paid by residential property owners.
This occurs despite commercial property taxpayers not receiving the scope of services provided residential taxpayers.
In Ontario, the inequity of the property taxation imposed on commercial taxpayers has been compounded by recent reassessment delays.
Absent a reassessment, the primary recourse of commercial real estate owners and users is the property tax assessment review and appeal process, and more particularly, the annual right of appeal.
This is as true in jurisdictions with multi-year assessment cycles as in jurisdictions with annual reassessments.
Recently in Ontario, the Municipal Property Assessment Corporation and some municipalities have challenged the annual right of appeal.
In the context of the extended seven-year assessment cycle, this has reinforced the value of annual reassessments and appeals.
Precedents for appeal rights
Fortunately, there are favourable precedents from Ontario courts and those of other jurisdictions regarding annual appeal rights.
Most recently, on Jan. 6, 2023, the Saskatchewan Court of Appeal in Brandt Properties Ltd. v Sherwood (Rural Municipality) reinforced the function of annual appeals during multi-year assessment cycles:
"As noted, the assessment appeal for each year is independent of appeals in other years. As a practical matter, it can of course be expected that, if the assessor takes the same approach in Years 1 and 2, and the property owner, on appeal, advances the same evidence and argument in Years 1 and 2, the results in both years will be the same. But, for Year 2, the issue will always be whether the evidence and argument advanced in relation to that year’s assessment establish assessor error. It will never be appropriate to approach a Year 2 appeal as if the property owner has the burden of overcoming the board’s or the committee’s Year 1 decision."
That said, the reassessment freeze, which produced this seven-year cycle, has compounded the challenges faced by commercial real estate owners and users in Ontario.
The amount of property tax remains based on real estate values as of Jan. 1, 2016.
Accordingly, relative changes in value between types of property are not reflected in taxation.
Usually, in market value-based property tax systems, the relative value of property is frequently adjusted with corresponding changes in property taxes. That has not occurred in Ontario since before the pandemic.
To illustrate, consider the change in value experienced by industrial as compared with office property from 2016 through 2022, and the relative change in value of the five major commercial property classes: industrial, retail, apartment, hotel and office during this same period.
There was no corresponding change in property taxation during this period.
Annual assessments benefit all stakeholders
Infrequent reassessments entrench inequity of taxation. Municipalities do not reimburse or provide other financial compensation to commercial real estate owners or their tenants if the property tax they paid failed to reflect their properties’ relative market performance.
While property taxes will be increasing, the redistribution of property tax associated with a reassessment will not occur as, for 2023 taxation, property assessment values continue to be based on values as of Jan. 1, 2016.
The transparency and fairness of the property tax assessment system in Ontario require property assessments based on current or nearly current values.
Even if this inequity is addressed by tax mitigation tools, transparency, equity and efficiency – the hallmarks of a market valued-based property tax assessment system – are sacrificed.
The solution is a reassessment for 2024, and reassessment annually thereafter. All stakeholders benefit when changes in property values are promptly reflected in annual assessments.