Property taxes a burden on Canadian businesses

Rising valuations impacting sustainability of small business as cities perform balancing acts to provide relief

Property taxes a burden on Canadian businesses

Altus, in conjunction with Real Property Association of Canada, recently released the 2019 Canadian Property Tax Benchmark Report, which provides an in-depth look at property tax rates, both commercial and residential, in 11 major urban centres across Canada. The report found that eight of the 11 cities surveyed have a commercial rate which is at least double that of the residential tax rate. This means that a commercial property would incur property taxes more than twice the amount of an equally valued residential property, having dramatic impacts on Canadian small businesses.

Montreal, Toronto and Vancouver posted the highest commercial-to-residential ratios in the country, for a 12th consecutive year. However, Calgary and Montreal saw the highest ratio increases in 2019, indicating a growing burden on commercial rate payers in those cities.

“Ideally, the tax rate on residential and commercial property should be the same and applied to current market values of both, but over time we’ve moved well beyond that, and municipalities across the country have been reluctant to increase taxes on residential rate payers who vote for them [versus] on commercial rate payers who don’t vote for them,” said Terry Bishop, president of Property Tax Canada at Altus Group. “Over the years, we’ve gotten a gap between the rates, and that’s really the purpose of the report . . . to shed some light on that.”

Property tax is the main source of revenue for Canadian municipalities and is used to fund services such as road repair, education, recreational programs and public transit. Both residents and business owners pay property taxes, but the rate they pay varies depending on whether the property type is commercial or residential – taxing authorities set these rates at their discretion.

The average commercial-to-residential tax ratio for all municipalities surveyed in 2019 was 2.84 as compared to 2.90 in 2018. This minor decrease is the result of eight cities lowering their ratio in 2019 as opposed to five cities lowering their ratio in 2018. Most significantly, for the first time in at least 20 years, Vancouver’s ratio dropped below 4.0, with a decrease of 17.17%. While Montreal, Toronto and Vancouver continue to post the highest commercial-to-residential ratios, Montreal has now taken the top spot for highest commercial-to-residential property tax ratio, reaching 3.93. Additionally, Calgary saw the largest increase in the survey for the second year in a row with a jump of 8.31% to 3.31. For the first time in six years, Halifax now sits slightly above average with a ratio of 2.87.

Increased Pressure on Small Business

The rising valuations on commercial properties in Vancouver, Toronto and more recently Montreal, have begun to put more pressure on the sustainability of small commercial businesses. In those locations, retail prices are being driven up by speculation, where people are buying retail locations for future development potential. While small retail in these markets is being impacted by rising values, Calgary retailers are being equally impacted, but by declining values. Since the energy crisis began, the city has experienced a drop in their commercial assessment base, but have been trying to collect the same amount of taxes from a declining property tax base, thereby shifting the tax burden from one sector onto another.

“I think the way to approach it is to try and target any tax relief efforts at the specific problem in that jurisdiction, and there are ways of doing that on an assessment basis or a tax basis,” Bishop said. “It’s a jurisdiction by jurisdiction issue that needs to be dealt with within those jurisdictions.”

The answer to widening ratios won’t be the same for every municipality, but there are choices that have to be made in terms of how they’re going to tackle a widening spread: either they have to tighten their belt on expenses, transfer some of the tax burden onto residential rate payers, or put businesses at risk, and if they put businesses at risk it could have other implications.

Effect on residential market

Those implications could have a knock-on effect on the residential market. Many urban and suburban homebuyers want to live in areas with vibrant commercial activity, and if high property taxes prove to be a burden, those businesses won’t be sustainable.

“It starts to change the complexion of the community, particularly in some of the areas with small retail strips. When businesses start to go dark, it starts to have a negative impact on the residential values as well in the community,” Bishop said.

Brokers might also want to keep an eye on clients looking to finance a property with development potential; future tax consequences could impact a borrower’s ability to pay.

Altus Group has conducted this report analyzing the differing tax ratios between commercial and residential properties for more than 16 years, and the average ratio has stayed between 2.5-3%, which indicates a balancing point somewhere in that range.

“Despite seeing some major shifts this year, the commercial-to-residential tax ratio is still an issue of relative fairness as we continue to see several cities across Canada shifting the burden of property taxes to business owners,” Bishop said. “Expecting businesses to shoulder the same burden while values decline, or taxes increase beyond business growth, is unsustainable. Measures that compress the gap between residential and commercial tax rates are positive steps that can help the viability of all businesses.”  

Although each city is addressing this issue with their own unique approach, these solutions will compound the problem of inequities in commercial property taxes and create further disparities in commercial tax rates. Assessment phase-ins and tax mitigation measures such as capping, rebate programs and graduated tax rates, only serve to compound the existing inequities in taxation and prolong the inevitable tax increases. Reducing the gap between residential and commercial tax rates is a measure that can help the viability of all businesses.

More Market Trend Analysis

  • Quebec City’s commercial-to-residential tax ratio is the fourth highest of all cities surveyed. It has been steadily climbing for 15 years; however, it decreased by 3.75% this year.
  • Halifax’s commercial-to-residential tax ratio has slowly been increasing over the past few years. It now sits above the average for the first time in six years.
  • Ottawa’s commercial-to-residential tax ratio of 2.51, sits just below the average ratio for the 10th consecutive year.
  • Edmonton sits just below the average with a ratio of 2.41 and has remained relatively stable over the last four years.
  • Winnipeg’s ratio has remained stable for three years, it posted the highest 2019 residential rate at $12.33, an increase of 1.76% from last year.
  • Regina remains quite stable posting a 1.74 commercial-to-residential tax ratio, with only slight increases in both commercial and residential tax rates in 2019.
  • Saskatoon continues to show the lowest commercial-to-residential tax ratio at 1.71, a slight decrease from last year.