property tax breaks

Alberta enables long-term property tax breaks

Sweeping option could complicate brownfield redevelopment economics
Friday, July 12, 2019
By Barbara Carss

Local governments in Alberta can now offer property tax breaks on commercial and industrial sites for up to 30 years. Newly adopted amendments to the province’s Municipal Government Act extend provisions that were initially devised to support the rejuvenation of derelict brownfields to all non-residential properties.

To take advantage of the new legislation — which was introduced on June 4th and attained Royal Assent on June 28th — municipal councils will have to adopt a bylaw that sets out parameters for bestowing property tax exemptions or deferrals “for the purpose of encouraging the development or revitalization of non-residential properties for the general benefit of the municipality”. Concessions for qualifying ratepayers would be assured for 15 years, after which councils could renew the incentives for an additional 15 years. Alternatively, councils could cancel the incentives at any time if property holders fail to meet the requirements spelled out in the bylaw.

“This legislation would empower municipalities to attract investment, create jobs and realize their full economic potential,” Kaycee Madu, Alberta’s Minister of Municipal Affairs, remarked last month when the amendments were tabled in the Legislative Assembly.

That’s couched as a means to stand out among North American jurisdictions. The accompanying government communiqué points to five-year and 10-year programs in neighbouring Saskatchewan and British Columbia, as well as shorter term initiatives in Texas and Louisiana. However, others caution the new option could aggravate imbalances within Alberta.

“Definitely, there’s a risk of inter-municipal rivalry,” says Kyle Fletcher, executive vice president, prairie region, for Altus Group’s property tax division. “There is a risk for any city that is not going to implement these changes of losing investment to one that does.”

“If a number of municipalities in Alberta adopt this power, it may attract more employment-based development to the province, but there will be less incentive for that development to locate on brownfield sites than is currently the case,” reflects Luciano Piccioni, president of RCI Consulting, a specialist in brownfield planning and economic development strategies. “If municipalities can defer or exempt property taxes on all non-residential development, it will make brownfield sites less appealing to developers.”

Risks of inter-municipal rivalry and ratepayer resentment

Few local governments have completed the required steps to authorize property tax incentives for brownfield sites in the 18 months since that enabling legislation was added into the Municipal Government Act. Those interested in pursuing the new opportunity will similarly need time to get supporting policies and approvals in place. Knowledgeable observers also speculate that at least one big player is unlikely to make any sudden moves.

“The municipality would have to be in a good fiscal position to start offering these kinds of incentives and, right now, Calgary is not,” observes Dave Mewha, who’s based in the city as Altus Group’s senior director, property tax. “Keep in mind, the property tax system is a closed circle so when you’re offering an incentive to one ratepayer, somebody else is picking up the cost.”

Tax shifts have already walloped many existing commercial ratepayers in Calgary as the sliding assessed value of downtown office towers reallocates the tax burden to smaller and suburban properties. Council recently approved a tax credit program, for the third consecutive year, to soften 2019 shift-related tax increases for approximately 12,000 non-residential ratepayers, which city staff pegged at about $10,000 on a property valued in the $5-million range.

While it may not be politically opportune for some, or many, local governments to consider locking in preferred property tax rates for a select group of investors, the new option positions other municipalities to take advantage of their neighbours’ struggles. For example, Fletcher and Mewha note that tax rates in suburban Rocky View County have been consistently lower than Calgary’s.

“Calgary has a disadvantage in competing for development dollars. If Rocky View implemented these kinds of incentives, that would just hurt Calgary more,” Fletcher says.

Economic development impact unclear

Enid Slack, director of the Institute on Municipal Finance and Governance at University of Toronto’s Munk School of Global Affairs and Public Policy, foresees property tax incentives influencing prospective investors’ choices within rather than between metropolitan regions. Most of the available evidence comes from American studies since property tax incentive programs are more common and longstanding in the United States. From an economic development perspective, analysts suggest the labour market, transportation networks and corporate income tax typically exert greater sway in location decisions, while property tax is more likely to become a consideration after a larger locale is targeted.

“The literature is really mixed. One question is: would the business have established there anyway in the absence of a property tax incentive?” Slack muses. “Businesses locate based on a number of factors and I don’t think property tax is the top one.”

There’s also a concern that municipalities may undercut their residents and businesses in an attempt to undercut each other. “When municipalities start to compete by lowering their property taxes, it’s a downward spiral. At the end of the day, services and infrastructure are going to be affected,” she maintains.

Thus far, there has been little feedback from Alberta’s commercial real estate industry. “Quite a few other things are happening that have overshadowed this and there aren’t a lot of details yet. Nobody has really raised any specific issue that has got anybody really on board or really against it,” Mewha reports.

In an online response to the amendment, reviewers from the Fraser Institute agree that municipalities should have more fiscal flexibility, but label property tax incentives “corporate welfare” that unfairly favour certain businesses and land uses. Meanwhile, the Alberta Urban Municipalities Association (AUMA) advises local governments won’t exercise the option lightly given that property tax is their primary source of revenue and property taxpayers are their political constituents.

“When considering property tax incentives, municipal leaders must be vigilant in how they apply them to ensure all local ratepayers are treated equitably,” it stated just after the Alberta government introduced the legislation. “AUMA appreciates the province’s efforts to offer an additional taxation tool for municipalities and for continuing to respect the principles of local autonomy in how municipalities choose to use those tools.”

Structured, transparent process takes municipal commitment

Alberta municipalities have actually already had an avenue to convey property tax relief for all property types. Section 347 of the Municipal Government Act, which was likewise added as an amendment during recessionary times (1994), gives authority to: cancel or reduce tax arrears; cancel or refund taxes; defer tax collection; or phase in increases or decreases arising from reassessment “if a council considers it equitable to do so”. Some municipalities have used it to support particular projects and/or precincts where they are trying to encourage development.

Legal practitioners suggest the new amendment could effectively take precedence, becoming the established and expected mechanism for providing non-residential property tax concessions. That would also be more transparent for prospective recipients and the public at large.

“There may be challenges to the way municipalities deal with tax incentives for brownfield and non-residential property if sections 364.1 or 364.2 are not followed,” says Jacquelyn Stevens, a partner with Willms & Shier Environmental Lawyers who is called to the Bar in both Alberta and Ontario. “The new incentives will require municipalities to establish criteria and create a structured process rather than having a developer approach a municipality and saying: I want to do this; can I get an incentive?”

Conversely, it could pose a greater obstacle for redeveloping brownfield sites in municipalities that don’t have incentives in place.

“If municipalities don’t feel they need to do anything to support brownfield cleanup, they are unlikely to invest the time and money to establish the criteria and pass the bylaw,” Stevens says. “It becomes an extra challenge, which many municipalities do not have the technical resources to deal with. It’s one more thing on the municipality’s plate for budgets that are already stretched.”

“The problem for municipalities right now isn’t how to provide incentives. It’s how to meet their budget,” Mewha concurs.

Barbara Carss is editor-in-chief of Canadian Property Management.

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