Last year, the City of Ottawa handed out more than $11 million in property tax rebates on vacant or partly vacant commercial properties in the municipality.

It’s not the only one. Since the late 1990s, commercial property owners across Ontario have been able to apply for rebates for vacant periods through the province’s vacancy rebate program. If a commercial property is vacant and meets set criteria, the owner can apply for a 30 per cent reduction in their taxes for the vacant part of the building. For vacant industrial properties, the rebate is 35 per cent. 

The principal is sound – support local businesses when times are tough. Vacant property doesn’t generate revenue, and there are no tenants making lease payments to share the tax bill.

But for Ottawa city hall, this hit to the bottom line is growing. In 2011, the total refund was $2.6 million on 700 properties. Last year, it was $11 million on 1,100. From the perspective of local government, this creates a hole in its revenue, particularly as the refunds are applied for in the year after the taxes were paid.

Both sides have merit

Ottawa, Toronto and other municipalities have been complaining about this program for years. They argue, correctly, that it injects instability into their cash flow, and siphons cash that could be used for other worthy priorities, like battling homelessness, repairing infrastructure or improving community housing. It may even encourage unscrupulous sorts to let their properties fall into disrepair and become eyesores.

On the other hand, commercial properties already pay more than their fair share of municipal taxes, and for a property owner, a vacant building creates greater instability in their income. A home and a business with the same assessed value do not pay the same property taxes. The business will pay substantially more for property with the same assessment as the home. This is a normal situation for non-residential property owners.

But a commercial property in search of tenants, particularly if the search extends over a long time, is obviously of less value than one fully occupied. It’s certainly generating less income for the owner. Doesn’t it only create fairness for its tax bill to reflect this?

Ontario’s property tax system is on a four-year cycle. This is a long period. Circumstances can change: The economy can take a downturn, affecting some property types while others are OK. The arrival of a bad element in a neighbourhood can depress property values and scare off tenants or customers. Even redevelopment and revitalization projects that disrupt traffic can put a damper on business for months at time.

Any of these things can leave the owner with a historical assessment that doesn’t reflect recent local or property-specific changes.

But how do we ensure fairness?

Without the vacancy rebate program, the owner is left to pay what is now a tax bill based on what may have become an historical and outdated assessment that doesn’t take into account a chronic vacancy. This hardly seems fair. And that’s what the rebate program is intended to provide – fairness for owners. They are not getting all their taxes back, only about a third.

Now I agree that the system should have checks and balances. The rest of us taxpayers are on the hook, after all, for any shortfall in the municipal budget. The idea put forward by Ottawa city council a couple of years ago, to limit a rebate to three years, is certainly a fair one. A property owner with long-term vacancies should appeal their assessment to reflect their personal systemic problem.

City hall, like the rest of us, has to budget for the unexpected

But city hall, like any of us who must manage our budgets with rainy day savings, should have a contingency in place. It should and does expect the unexpected and budget accordingly because it is impossible to exactly anticipate all the variables. All it can do is make educated assumptions based on previous years. The annual spectacle of the City of Ottawa’s snow removal budget is a perfect example – we never know just how deep that snow is going to go, but we know we have to budget enough of a cushion.

It’s not unlike the typical income tax payer, who must wait until February to get all their receipts together and know their final tax position for the previous year.

And let’s keep this in perspective. The rebates paid by the City of Ottawa may have soared in recent years, but the city’s annual budget is more than $3 billion. That $11 million paid in rebates is still only about a third of one per cent – $11 million is still a lot of money, but in relation to the budget, is it really a material percentage?

Local business is the goose that lays many of the golden eggs that keep the economy running. Business owners make substantial tax contributions to municipal government, and sometimes you have to give the geese a little food to live on.

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.