When the OECD revealed that Canada’s tax revenue ranks second-highest globally—dropping just one spot from first place in 2021—I wasn’t surprised. If anything, it was a clear reflection of the ongoing issues our Canada-based clients have faced over the last few years as they navigate a volatile property market exacerbated by Covid-19 disruptions.
I’ve spent the last 16 years committed to knowing the ins and outs of Canada’s property tax system and working closely with clients on assessment and taxation matters, with the goal of mitigating tax burdens and ensuring fair assessments. Our nation’s issue with property tax assessments is particularly apparent when we look at Ontario as a case study.
Ontario’s Property Tax System
Ontario runs on an ad valorem tax system, meaning the funding requirements of parties such as local governments and school boards are distributed to taxpayers according to their wealth, which is measured by the assessed value of their property. Under this system, the charged tax rate can be calculated by dividing the funding requirement by the total of all property assessments, while the individual share of taxes can be calculated by multiplying the individual property assessment and the tax rate.
This system is employed in all provinces across Canada and across most of North America. The Ontario government implemented the current value assessment system in 1998 and has defended this system as an equitable and fair means of distributing the tax among all properties.
However, for taxpayers to perceive this system as fair and equitable, the International Association of Assessing Officers developed a set of standards. Perhaps most relevant is the principle that assessments should be based on market value with regular—preferably annual—updates. Further, just as taxes are expected go up when the property value goes up, property owners expect the opposite should also be true.
When you consider that Ontario’s last reassessment was based on a 2016 valuation date, it’s no wonder the province is facing scrutiny for basing property taxes off assessments that haven’t kept pace with market values. The dramatic change in values of commercial properties is especially problematic. In 2016, for example, property sectors such as retail and hospitality were assessed at high values, and yet these same properties experienced a decline in value particularly during Covid-19 restrictions.
Under this cycle, reassessment increases are phased in over four years, while reductions are implemented immediately. The higher tax rate means declining properties don’t see full relief until year four, when all properties pay taxes based on full market values.
Issues With Outdated Assessments
With Ontario’s property tax reassessments repeatedly paused by the provincial government, by 2024, seven years will have passed since the last reassessment cycle. During this time, nine other provinces have reassessed properties more than five times over. The result has been issues with assessment accuracy, transparency, and stability, and often higher property taxes than needed.
In contrast, most jurisdictions in North America are on annual assessment cycles, which ensure the latest market values are on hand. With this approach, inequities in taxation between property classes, within property classes, and across regions are avoided.
A final issue with outdated assessment cycles is that longer delays between assessments cause larger value changes and tax burdens that harm all taxpayers. This leads governments to rely on complicated tax mitigation tools such as tax capping, claw-backs, and assessment phase-ins to delay the inevitable shifting of tax burdens, which leads to unfair tax distribution.
With all of this in mind, the Ontario government needs to:
Immediately initiate a reassessment: The 2016 values for many property sectors were exceptionally high and are now nearly seven years out of date. Delaying any further will cause significant instability.
Shorten the length of time between assessments: Four-year assessments are too long, and we recommend closing the gap to one to two years between assessments to ensure greater accuracy and fairness.
Change the valuation date to start at the same time as the tax year date: To ensure assessments reflect current values, reducing the amount of time between the valuation dates and the tax year ensures greater fairness.
Implementing these changes would create a fair, clear, concise, and accurate taxation system. Improving the commercial property tax rate system will help make Ontario more appealing to businesses, which helps create job growth and leads to more sustainable revenue creation for cities.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Kyle Fletcher is the president of Property Tax Canada at Altus Group. He has 25 years of experience in consulting, management, and client services.
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