Smoothing of tax inequities

REALPAC calls for smoothing of tax inequities

Ontario commercial ratepayers confront location-based education levies
Monday, September 17, 2018

An illogical quirk in the apportionment of business education tax continues to undermine competitiveness for some of Ontario’s major cities, advocates for the commercial real estate sector maintain. REALPAC, the organization representing many of Canada’s largest real estate companies and institutional investors, is urging the provincial government to replace the current patchwork of differing tax rates — inherited from the pre-1998 era when property tax directly funded school boards within the jurisdiction where it was collected — with a benchmark rate of 0.86 per cent.

“It would bring all Ontario cities to parity and relieve some tax pressure for businesses, small and large,” says Brooks Barnett, REALPAC’s director of policy and government relations.

Such a move would simply fulfill the promise made to commercial and industrial ratepayers more than 10 years ago, when the Ontario government of the day announced it would incrementally reduce higher business education tax (BET) rates over a seven-year period to bring them down to a consistent province-wide maximum threshold. However, that phase-down stalled in 2012 as the Province struggled to balance its own budget.

In contrast, all residential and multi-residential property taxpayers have had a harmonized education tax rate since 1998, which was pegged at 0.17 per cent in 2018. Scholars attribute the bumpier commercial/industrial BET landscape to a reluctance to inflict the significant tax increases that a uniform rate would trigger in some municipalities.

“Both Progressive Conservative and Liberal governments limited themselves to reducing rate variation. To that end, they deployed tax cuts where rates are relatively high, while avoiding increases where rates are relatively low,” Adam Found of Trent University, and Peter Tomlinson of University of Toronto, explain in a report commissioned by the Toronto Financial District Business Improvement Area (BIA) last year.

Thus, the report recommends the “optimized ceiling rate” that REALPAC is now promoting. That’s essentially a smoothing of tax inequities that Found and Tomlinson calculate could save businesses approximately $966 million per year. This approach would additionally support another long-stated goal of the Ontario government — to narrow the gap between residential and non-residential tax burdens.

Competitive imbalances

Today, discrepancies are less pronounced than examples in the early 2000s of commercial/industrial ratepayers in some municipalities carrying a share of the education tax burden 50 times greater than their counterparts in luckier locations. Yet, there are clear competitive imbalances among neighbours. Notably, commercial ratepayers in Halton Region, comprised of the Greater Toronto Area municipalities of Burlington, Oakville, Milton and Halton Hills, enjoy one of the lowest BET rates in the province — set at 0.84 per cent for 2018 — while their peers in neighbouring Hamilton were levied at a rate of 1.09 per cent this year.

“Toronto pays 33 per cent more than Halton. Waterloo, Kingston and London pay 62 per cent more than Halton,” Barnett reports. “Why does Ontario exact different rates for similar properties across the province? Business education taxes need to be reformed.”

Found and Tomlinson calculate that, in 2017, Toronto businesses paid $280 million more in provincial property tax than they would have if they were located in Halton. Elsewhere within the GTA, York Region — home to Markham, Vaughan, Richmond Hill and Newmarket — boasts one of the more attractive BET rates, at 0.96 per cent for 2018; Durham Region — encompassing Oshawa, Whitby, Ajax and Pickering — shoulders the less favourable rate of 1.07 per cent.

“The province uses an arcane rate-setting system that arbitrarily burdens some jurisdictions over others for no added benefit or service,” Barnett asserts. “It is important that the province recommit to gradual BET reductions to reach a 0.86 per cent uniform ceiling rate.”

The Toronto Region Board of Trade called for even more aggressive cuts earlier this year, as part of a strategy to capture a larger share of investment and spur economic development. Dubbing it a “competitiveness play” that is, in part, a response to dramatic corporate tax cuts introduced in the United States for the 2018 tax year, the Board of Trade recommended reducing the BET rate to 0.33 per cent — the lowest rate currently levied in the province. (A negligible number of commercial property taxpayers actually benefit from that preferred rate found only in Northeast Ontario’s Chamberlain Township, which registered a population of 332 in the 2016 Census.)

Those recommendations arise from the joint efforts of the Board of Trade, the Conference Board of Canada and Council of the Great Lakes Regions to gauge Ontario’s ability to attract business relative to Quebec and 13 U.S. states. The resulting report, released ahead of last spring’s Ontario election, argued that reducing and harmonizing the BET would promote fairness, reduce the overall tax burden on business, and provide a “substantial relief to small businesses, which are most affected by high energy and wage costs”.

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