Stakeholder consultation on the future of property tax rebates for vacant commercial and industrial space has been a rote exercise in Toronto given that City Council had already voted to eliminate the program two months prior to a recent public meeting to discuss the issue. Elsewhere, municipal officials in Ottawa have proceeded in a more conventional sequence, but real estate industry advocates are preparing for the same result.
This follows the Ontario government’s announcement last fall that municipalities would be given leeway to discontinue the rebate that was first introduced in 1998 in tandem with a province-wide overhaul of property assessment and taxation. Toronto and Ottawa are among what’s likely to be a crush of local governments requesting provincial approval to dismantle the vacant unit rebate program.
“I guess we’re not surprised, but we are disappointed,” reflects Dean Karakasis, executive director of the Building Owners and Managers Association (BOMA) of Ottawa. “This is a change of tax policy, and the way it has been characterized seems to be a bit of an attempt to smokescreen what’s really happening.”
Past, present and would-be recipients bristle at suggestions that the rebate is a subsidy or a disincentive to improve the marketability of their properties. Rather, they point to the program’s historical rationale. It was meant to mitigate the added liability that commercial/industrial ratepayers assumed when the former business occupancy tax (BOT), which had been charged directly to tenants, was rolled into a single property tax bill levied to landlords.
“It’s a tax policy to acknowledge there is a vacant space where the business would otherwise reside,” Karakasis says.
Under existing rules, landlords qualify for partial reimbursement of property tax paid on commercial or industrial space that’s vacant for 90 or more days during a tax year. Applications with supporting documentation are typically submitted in February of the following year, and payouts — equivalent to a 30 per cent refund on vacant commercial space or 35 per cent on industrial space — occur after municipal officials verify the claims.
In theory, the revenue underpinning the rebate is collected upfront and then held in trust for the recipients, but many municipalities report discordance between their budget estimates for the program and the eventual expenditures. Ontario Ministry of Finance data shows that, province-wide, the value of the rebate jumped from $32 million in 2008 to $60 million in 2014 — suggesting that it could be problematic to base budget allocations on the previous year’s costs. Notably, a report prepared for Ottawa councillors chronicles recent shortfalls of $10 million as “over the years, the budget has not kept pace with the actual use of the program”.
“It’s an obligation on the municipality. They have to make up that revenue in the budget and build it into their rate structure, but it’s unpredictable and it can be very hard to estimate these things with accuracy,” says Almos Tassonyi, executive fellow and director with University of Calgary’s School of Public Policy and a research associate with International Property Tax Institute. “For example, how many municipalities actually thought Target was going to go out of business?”
Decisions precede consultation
Based on the schedule endorsed in Toronto’s budget vote earlier this winter, the full rebate will still apply for vacancies in the first six months of 2017. It will then be cut to 15 per cent from July to December before it is eliminated entirely beginning in 2018.
However, the city still has to formally submit its request to the Ministry of Finance so opponents of the move — including REALPAC, NAIOP and many of the city’s business improvement areas — are pushing for a more gradual phase-out or a mechanism to enable commercial/industrial ratepayers to self-fund a rebate program. They note that Council had little opportunity to reflect on the industry’s concerns or consider alternatives before making its mid-February decision since the public meeting on the issue was not held until April 20.
“The mayor opined fairly early that he thought the rebate was a subsidy for big business and he wanted to kill it,” recalls Brooks Barnett, REALPAC’s manager of government relations and policy. “The Province also wanted municipalities to consult with the business community, and not all of them have done that to the extent we would like to see.”
Outside Toronto, commercial/industrial ratepayers in Mississauga, Brampton and Caledon have been invited to public meetings later this week to discuss Peel Region’s proposal to reduce the rebate to 20 per cent in 2018, and to 10 per cent in 2019, before eliminating it entirely beginning in 2020. Meanwhile, an early April report to Hamilton councillors promised “engagement will occur during April and into May of this year”, but the Chamber of Commerce, which is prominently listed as a group to be consulted, had not been contacted as of April 27.
“We suspect a lot of these consultations are just checking a box,” says Terry Bishop, president, property tax, with Altus Group Limited. “Municipalities know what they want to do.”
The city of Ottawa convened its public meeting in early March, and considered submissions from BOMA Ottawa and other stakeholders, but appears to have rejected BOMA Ottawa’s proposal that funds be levied specifically from the commercial/industrial property classes to support the rebate’s continuation. This week, the finance and economic development committee will consider recommendations for a two-year phase-out that would see it reduced to 20 per cent of property tax paid on vacant units in 2017 and down to 10 per cent in 2018. City Council will make the final decision later in the month.
Property tax consultants foresee a drop in applications as the rebate is phased out.
“At a 10 per cent rate, clients will likely not even bother because the cost to obtain it will outweigh the benefit unless it’s a significant amount of space,” predicts David Gibson, a director with Yeoman & Company Paralegal Professional Corporation. “These vacancy applications are incredibly arduous. I have claims from 2015 that are still in play and it will be mid-2017 before they will be settled.”
Passage of time obscures original rationale
Burdensome administration is one of municipalities’ frequently highlighted complaints with the program, but that’s also true of the forerunner business occupancy tax. A 1999 joint publication from the Ontario government and the Association of Municipalities of Ontario outlining the many details of what was known as local services realignment states: “Outdated and arbitrary, the BOT was the source of a large portion of municipalities’ tax arrears, and municipalities and businesses have long asked for its elimination.”
Proponents of continuing the rebate have offered some suggestions for curbing municipalities’ costs, including: scoping eligibility to at least 120 days of vacancy; placing limitations on the number of consecutive years a property could qualify; and drawing funds for the rebate solely from the commercial/industrial tax base.
“We recognize the administrative costs have become quite significant to administer the program and validate applicants’ claims,” Barnett affirms. “Changing the application fee structure so there’s more cost recovery there for the city is something we could get on board with.”
Other arguments for dismantling the rebate are seen as much more contentious. The real estate industry typically rejects the theory that the Municipal Property Assessment Corporation (MPAC) accounts for vacancy in evaluations, and highly resents the accusation that landlords aren’t actively trying to lease space because the rebate offers an undue safety net.
Ontario’s four-year assessment cycle makes it a clumsy instrument for addressing periodic vacancies in any case, but property tax experts stress that the rebate is an entirely separate mechanism from the vacancy allowance MPAC applies. It was specifically designed to address the extra tax burden assigned to property owners when the BOT was eliminated.
“The business occupancy tax might be gone, but the cost of this tax is still in place on a gross basis. So instead of the tenant paying the business tax portion and the landlord paying the realty portion, now the landlord is subject to both portions,” Gibson explains.
Nevertheless, with the passage of time, there are fewer municipal officials who experienced the relief of shedding the administratively cumbersome BOT firsthand. In the intervening 19 years, they’ve become more focused on other financial pressures.
“There is no question that it (eliminating the rebate) is a change in tax policy, but this is now viewed as just a subsidy that is in the system,” Tassonyi observes.
In practice, existing tenants will make up for the loss of the rebate as landlords pass through property taxes. Thus, Barnett urges decision-makers to take an economic development perspective.
“It’s not a subsidy. It’s something that keeps the industry relatively competitive if it sees a lot of vacancies,” he asserts. “Removing this would be removing a major slice of the tax competitiveness pie.”
Barbara Carss is editor-in-chief of Canadian Property Management.