Memo #21: A Tale of Two Cities: How Differences in Provincial Commercial Property Tax Policies Affect Small Businesses in Vancouver and Toronto
By Glenn Miller
As Canada readies itself for a second COVID summer, independent commercial property owners on Main Streets across the country can be forgiven for staring despondently at their final 2021 property tax bills. Higher, again! And hundreds of tenants on triple net leases responsible for paying property taxes and maintenance in addition to rent are also in for anxious months ahead, hoping that revenues will bounce back sufficiently to cover ever-rising expenses.
The plight of restaurant owners, specialty shops and other small business owners on Main Street suffering from lost revenues as a result of the pandemic has been well documented. Less well understood is the extent to which different approaches to provincial tax policy and municipal property assessment policies can affect the size of the tax bill for small business owners. While annual increases needed to help municipalities match revenues with expenditures are a grudgingly accepted fact of life in places like Vancouver and Toronto, the question of why the assessed value of small commercial properties on Main Street often reflect what could be built on the site rather than the reality of what is in place remains a sore point for many.
To the appraisal professionals responsible for calculating the assessed value of commercial properties, however, the answer is straightforward, and is standard practice across Canada. The assessed value reflects the ‘highest and best use,’ not the current use. Surprisingly, although B.C. and Ontario both rely on the same basic concept, the principles of ‘highest and best use’ are applied very differently.
In B.C., property owners receive their assessment notice from BC Assessment every January, based on their property’s estimated value as of July the previous year. As noted on the City of Vancouver website, property is assessed by BC Assessment at its "highest and best use, meaning development potential—even if it is not yet built.”
This differs from the approach taken in Ontario, where MPAC (Municipal Property Assessment Corporation) calculates the current value of small commercial properties based on sales in the area, meaning “the amount of money, the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer.” The base for current value assessment (CVA) is re-evaluated every four years, but the province decided to delay the planned 2020 reassessment until after the pandemic has passed.
“Higher assessed values are a reflection of increased sales and prices of similar properties, with similar planning permissions, in a given area,” notes Chris Rickett, MPAC’s Director, Municipal and Stakeholder Relations. When a “willing buyer” makes a deal with a “willing seller” for a well-located site on a Main Street in a place like Toronto, the sales price can – and often does – reflect the buyer’s intention to redevelop. Multiple sales with lofty price tags then drive the assessed value of all properties in the affected area higher, even for owners who have no plans to redevelop.
Although the Ontario system ensures a time lag before higher assessed values per property are reflected on individual tax bills, the upward trend in the overall assessed value of property across a municipality like Toronto is relentless. Small business owners on successful shopping streets like Bayview Avenue in central Toronto believe that their street has been spared spikes in assessed values (prior to 2016) because the area had not seen the same redevelopment pressures experienced in nearby neighbourhoods. “That’s starting to change,” says Henry Byers, who previously worked with the Bayview BIA. “With several condo projects now underway, this will inevitably result in higher taxes for all owners when reassessment eventually takes place, even the ones with no plans to redevelop their properties.”
Municipal politicians in both cities are sympathetic to the financial challenges faced by small business owners. In Vancouver, the City at one point encouraged Main Street businesses to seek ‘split assessments,’ which result in ground floor uses such as restaurants and hairdressers taxed at commercial rates, but allow unused air rights over a commercial property to be taxed at much lower residential rates.
This approach initially helped a number of small business owners reduce their tax burden, but then in 2018, the provincial government introduced the Speculation and Vacancy Tax (SVT) in a bid to “encourage” property owners to create much needed housing on vacant land and underdeveloped properties. Through a quirk in interpretation – questioned by many, including the Canadian Federation of Independent Business – the undeveloped air rights are treated the same as vacant land, and taxed accordingly. The result, delayed until this tax year, piles thousands of additional dollars onto an already steep tax bill. Even widespread media coverage of this “bureaucratic nonsense” to quote one frustrated restaurant owner, has failed to impress officials at BC Assessment, leaving local councillors to wonder if business owners would have been better off with the status quo. To rub salt into the wound, affected property owners are also likely to be liable for a share of the provincial education tax applied “to thin air.”
In Toronto, concerns about what one Toronto councillor dubbed the “Condo Tax” were brewing long before COVID. A staff report considered by Council in April indicated that “development assemblies and land speculation in Toronto result in unprecedented property tax hikes that are a threat to many surrounding small businesses and the character of cherished neighbourhoods.” The staff report also cited a 2017 study of properties on Yonge Street that identified increases in assessed values “on two and three storey modest buildings” ranging from 300 to an astounding 400%!
But, spurred on by the severity of the impact of pandemic lock-downs on small businesses, which even MPAC describe as “extreme,” and led by Councillors Kristyn Wong-Tam and Mike Colle, plans are being made to establish a new property sub-class that would benefit small independents in designated areas of the City, reducing the tax burden on some Main Streets by up to 25% for the 2022 tax year. (A 10% cap on increases has been applied in the interim.)
The mechanism to facilitate this new approach was first broached in last fall’s provincial budget (building on ideas hatched by the BIAs and City staff). Although intended to be applicable Ontario-wide, a committee comprising representatives from MPAC, TABIA (Toronto Area BIAs), the Ministry of Finance and other stakeholders is working out details for local implementation in time for next year’s budget cycle. The province is also considering offering relief from the education tax to affected properties. Meanwhile, in Vancouver, that city is also proposing creation of a new property sub-class similar to the Toronto solution, but needs support from the B.C. government to make it happen.
Glenn Miller, FCIP, RPP is a senior associate with the CUI.