Thanks to volunteer business lobby groups, the property tax levy on business properties in Vancouver has been reduced by more than 10 per cent.
In 2007, the City of Vancouver retained the Property Tax Review Commission (PTRC), which agreed with the Vancouver Fair Tax Coalition that a shift was required. As a result, the tax rate levy in Vancouver is now 4.5:1, down from a high of 5.9:1.
The tax rate ratio is the number of times the business tax rate is to the residential tax rate. So for every $1 paid by a residential property, a business property of the same value would pay $4.50. Metro Vancouver’s regional average tax rate ratio is 3.5:1.
In 2011, Vision Vancouver stopped shifting the burden of taxation onto to the residential class. At the same time, the municipal tax budget continues to grow every year. The number of new residential properties continues to grow substantially every year, while the growth in the number of business properties is anemic at best.
So as municipal budgets grow, it is easier to pass on the increases to the residential class where there are many new properties each year. In total, there are approximately 180,000 residential properties and only 14,000 commercial properties.
Why the problem is not fixed
First, at a tax rate ratio at 4.5:1, Vancouver is significantly above the regional average of 3.5:1. For major cities across Canada, the average ratio is 3.13:1. Toronto passed a policy to reach a ratio of 1.98:1 in the coming years. So Vancouver is not competitive on both a regional and national level.
Second, the City of Vancouver has undertaken two major consumption studies of property tax-funded municipal services. These studies have confirmed that business properties substantially subsidize the residential properties.
Residential properties consume about 76 per cent of services provided, yet only pay for 47 per cent. This means that Vancouver is exponentially growing a class of properties that do not pay for the services they consume and must be subsidized by a relatively dwindling number of business properties.
This is not a sustainable tax policy, and treats the business class unfairly. Better mechanics need to be put in place that account for tax distribution and at the same time remove the political element in this issue.
In 2007, the PTRC failed to clearly set out what ought to be measured and what it meant with regard to the correct allocation of taxes each year. If there had been empirical evidence each year about allocation, then councillors could make informed decisions on tax distribution rather than reacting to political interest.
The final major issue that has yet to be resolved is known as “hot spots.” Just under half of the community retail properties in the city are valued on the assessment roll as residential redevelopment land.
The appraisal principle is that no property is worth less than land value. When a low-density retail property on the income approach produces a valuation below land value, the assessor puts the property on the assessment roll at the maximum potential value as a mixed-use residential development site. To this residential value, a commercial tax rate is applied to the entire amount. It is often the case that the City will introduce a new land use policy, and assessed values can double (or more) overnight.
Retail tenants are often on triple net leases and shoulder the burden of these residential valuations taxed at commercial rates. These are not small increases, and can be tens of thousands of dollars in tax increase in a single year.
Municipalities throughout the province are paying more attention to this issue, however there is still a great deal of work to be done before a fair rate is achieved.
Paul Sullivan is a partner at Burgess, Cawley, Sullivan & Associates Ltd. He is also chair of the taxation committee at the Building Owners and Managers Association of British Columbia.