There is a perception among some municipal officials that commercial property owners, by and large, would rather have a tax rebate than a paying tenant.

That is, of course, not the case. But Ottawa Mayor Jim Watson expressed these sentiments last week in this Ottawa Citizen article, in which city hall and owners squared off over the touchy subject of tax rebates for vacant properties.

Let’s be clear: Vacant properties cost their owners money, they don’t generate profit, even with a tax cut taken into account. It therefore behooves an owner to get that property back in the game as soon as possible.

There are, of course, a small minority of owners who may qualify for the label of “slumlord” who are less diligent about the quality, appearance and occupancy of their properties.

But they do not represent the vast majority.

Take Ottawa, where a flurry of mixed-use condo development has overbuilt the market. Owners are facing a tough road to find tenants for their new ground floor commercial space.

Considering the capital they have invested in their projects, a tax rebate is a temporary balm for a bruised bottom line. It’s certainly no cure for a lack of tenants.

Remember the old business occupancy tax?

Ottawa’s annual tax rebate is 30 per cent for commercial and 35 per cent for industrial if parts of those buildings are vacant for 90 consecutive days. This amount is mandated by the province – many other municipalities offer it as well.

The province is looking to make changes. That’s led Ottawa to consider scrapping the program. Watson calls it a tax “loophole” that is costing the City of Ottawa money and claims it is a disincentive to landlords to find tenants.

BOMA Ottawa argues otherwise in the Citizen article. The association cites the fact that 19 years ago, commercial landlords assumed responsibility to collect the former business occupancy tax from tenants. The city now collects this revenue through property taxes.

Saved the city millions of dollars

BOMA argues this has saved the city millions in administrative costs. The whole point of the vacancy rebate is to protect landlords from having to pay an occupancy tax on an unoccupied unit. Prior to 1998, owners didn’t pay the business occupancy tax if there wasn’t a tenant.

But now Ottawa, along with other municipalities in recent years, is facing the hard reality of increasing rebates while at the same time seeing their own operating costs rise.

About $59.2 million worth of rebates were issued in Ottawa between 2009 and 2015. That bill increases to $85.3 million when rebates on education taxes, costs to administer the program and interest are also added.

Annual program costs doubled from 2009 and 2015.

Diminishing returns, declining revenues

I took a cross-country train trip with my wife earlier this month and it struck me again how thinly Canada is populated. Most of us are now concentrated in our 10 largest urban centres. The role and influence of a small number of municipal governments has grown substantially as a result.

Growing cities need revenue to build and repair infrastructure. Smaller towns and cities, on the other hand, are faced with static, if not declining, populations. Many have lost the anchor employers that create jobs and contribute to the local tax base.

It should come as no surprise cash-starved municipalities would take aim at any kind of rebate program that further erodes their revenue.

Proportionally greater share of tax burden

But city hall must also keep in mind non-residential properties already shoulder a proportionally greater share of the tax burden across Ontario than do homeowners with comparable assessed values. You can only squeeze so much blood from a stone.

Take New York City. It imposes its own income tax on residents in addition to whatever people pay in state and federal income taxes. This vast metropolis obviously hit a limit on the amount of property tax it believed it could charge and got creative.

My nephew works in the Big Apple, but lives in Jersey and commutes across the river to avoid paying the tax. I’m sure none of us want to see this model popping up in Canada.

The problem with our current system of rebates for commercial and industrial vacancies is the volatility it creates for local government. We shouldn’t ditch the vacancy rebate, but we do need to consider how we can make it fairer for everyone.

A proactive, rather than reactive, approach

As it stands, property owners get their tax bill, and then in the next year apply for a rebate based on their occupancy levels. This creates fiscal uncertainty for city hall as it has already received the tax money and now has to return some of it.

The amount of rebates is not known until the year after the taxes are paid.

It’s a clumsy process and expensive to administer – for both parties. It would be much more efficient if the financial impact of rebates for the following year could be known when city hall is preparing its budget.

Onus would fall on MPAC

The onus would then fall on the Municipal Property Assessment Corporation (MPAC) and its assessors. If a property owner reported a chronic vacancy, an assessor could then classify the property for the rebate during the year.

The classification on that property could be changed for a rebate to apply to the following tax year – city hall heads into its budget planning process knowing the dollar amount of the rebates to be paid, or rather, how much income it can expect not to receive. This would eliminate volatility for the city, while providing a cushion for owners with systemic vacancies.

To discuss this or any other valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am also interested in your feedback and suggestions for future articles.