Commercial ratepayers carry heftier tax share

Commercial ratepayers carry heftier tax share

Burden expands in eight of 11 large Canadian cities in 2023
Tuesday, October 17, 2023

Commercial ratepayers in Montreal took on an even heftier share of the municipal property tax burden in 2023, paying at a rate 4.33 times greater than that applied on residential properties. Montreal once again posted the widest discrepancy in Altus Group’s annual survey of commercial-to-residential tax ratios in 11 of Canada’s largest cities.

That ratio stretched wider in eight of the 11 cities this year, while commercial ratepayers in Vancouver, Toronto and Edmonton saw a slight shrinkage in their tax apportionment compared to 2022. Nevertheless, Vancouver and Toronto are among the six cities — also including Calgary, Halifax and Quebec City — where the commercial tax rate is more than triple the residential rate.

The average commercial-to-residential tax ratio is pegged at 2:82-to-1 across all 11 cities, representing an extra 0.84 per cent of the property tax burden that has shifted to commercial ratepayers since 2022 when the ratio was 2:80-to-1. Altus analysts tie these allocation patterns to historic reluctance to increase the residential tax rate and to various market-specific efforts to mitigate or stabilize taxes for some ratepayers, which then shift a greater burden onto those not designated for protection. As well, a prolonged delay in reassessing properties in Ontario is criticized for thwarting assessment growth and encumbering ratepayers with outdated assessed values.

“While we acknowledge the budgetary challenges faced by governments, this is not about the size of the pie. It is about the fairness between the slices of that pie,” says Michael Brooks, chief executive officer of REALPAC, which has been a longtime co-sponsor of the property tax rate benchmark report. “Some commercial property owners and their tenants are struggling to fund property taxes that are not aligned with current assessment values.”

Montreal and Calgary at front end of the shift

In Montreal, 2023 brought the launch of a new three-year assessment cycle with assessed values now tied to a July 1, 2021 valuation date. Assessment growth will not be fully realized until the 2025 tax year due to the regulated gradual phase-in of tax increases attributable to the updated values, but reassessment underpins a 34.2 per cent uptick in the value of the city’s total property tax base.

Property tax rates this year equated to $34.51 per $1,000 of assessed commercial value and $7.97 per $1,000 of assessed residential value. With reassessment, residential properties typically posted a 30 to 39 per cent gain in value, with the average increase at 30.7 per cent for condominium units and at 38.6 per cent for single-family dwellings.

Commercial adjustments were much more varied across asset classes, ranging from an average value increase of 60.5 per cent for industrial properties to a 2.1 per cent decline in value for shopping centres. Office properties registered a relatively modest 6.5 per cent increase in value, while vacant land shot up by 42.8 per cent.

In 2023, the new assessments flowed through in the form of a 6.36 per cent decrease in the residential tax rate and a 0.66 per cent cut in the commercial tax rate, with further trimming expected over the next two years. “The assessment base will grow substantially each year as the assessment increases are phased in, which should result in a drop in tax rates for each year of the cycle,” Altus analysts observe.

Looking to other cities where the commercial tax rate is more than three times greater than the residential rate, Calgary cut the residential tax rate by more than 8 per cent this year, while increasing the commercial tax rate by 0.64 per cent. That equated to $22.07 per $1,000 of commercial assessment and $6.57 per $1,000 of residential assessment. It was also the largest shift of the tax burden among the 11 cities, as the commercial-to-residential tax ratio expanded to 3:36-to-1 from 3:07-to-1 in 2022. That transferred an additional 9.5 per cent share of the tax burden onto commercial ratepayers this year.

Reassessment occurs annually in Alberta with assessments for the 2023 tax year based on property values as of July 1, 2022. In Calgary, that update resulted in average gains of 14 per cent for residential properties, 7 per cent for industrial properties and 5 per cent for retail properties, while average office values fell by 3 per cent. On the tax rate side of the equation, Calgary’s city budget grew by 4.4 per cent in 2023 with increases in the range of 3.7 per cent projected for the next three years.

The 2024 tax apportionment will be based on assessed values as of July 1, 2023. “We expect that value increases in the industrial sector may be moderate, while the downtown and suburban offices will continue to decline. The retail sector remains strong and may see slight upward adjustments in value,” Altus analysts project.

Anomalies and inequities in Halifax and Ontario

Along with Nova Scotia’s annual reassessment, another instrument for shifting commercial property taxes debuted in the Halifax Regional Municipality (HRM) this year. HRM’s new commercial property tax policy effectively establishes 15 different tax rates, based on five different tax categories and three tiers of properties, delineated by value, within each of those categories. This is designed to be value-neutral across the entire commercial tax base, but has resulted in significant tax shifts among the various new categories and tiers.

“The new policy shifts the tax burden away from the lower-valued properties and onto the higher-valued properties, particularly for those located in areas designated as business parks and industrial parks,” Altus analysts advise. “The tax rate for a commercial property valued at $10 million located in a business park will be 13.52 per cent higher than the tax rate applied to the same property located outside the designated park, and 19.85 per cent higher than the rate applied to a $2 million property in any area.”

This occurred in the context of an overall widening of the commercial-to-residential tax ratio, which stretched from 3.06-to-1 in 2022 to 3.1-to-1 for 2023. This year’s tax rates garnered $34.54 for $1,000 of assessed value across the entire commercial sector and $11.15 per $1,000 of assessed residential value.

Turning to Ontario where tax apportionment will be tied to 2016 property values for at least one more year, Altus analysts compare some recent sales values to the same properties’ outdated assessments. Notably, a Class B industrial property in Mississauga realized a nearly 427 per cent jump in value, from a 2016 assessed value of $22.6 million to a 2023 sale price of $119 million. Meanwhile, the value of regional shopping mall, also located in Mississauga, dropped by more than a third, from a 2016 assessed value of $411.4 million to a 2023 sale price of $272 million.

“In today’s rapidly changing commercial real estate environment, it is crucial for governments to take a proactive approach in addressing shifts in property values while maintaining tax fairness for both commercial and residential property owners,” maintains Ryan Fagan, head of operations and technology with Altus Group’s Canadian tax division. “Jurisdictions such as Ontario need to consider more frequent property reassessments to align with market dynamics.”

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