The rebalancing of a historic property tax disparity comes in tandem with some other uncertainties for Ontario’s commercial ratepayers. As announced in the provincial budget, released late last week, the Ontario government plans to equalize the business education tax (BET) rate at 0.88 per cent for 2021, equating to a $450-million tax cut province-wide. Meanwhile, the benefits of a promised optional tax subclass for small business are expected to be more select.

“The BET has been extremely inequitable across Ontario. To finally have that remedied is a good news story,” says Brooks Barnett, director of government relations and policy with REALPAC, which has long called for a single harmonized rate in place of a disputed patchwork dating back to the pre-1998 era when municipalities levied taxes to support school boards within their own jurisdictions.

Since then, the provincial government has assumed responsibility for funding education, but continued to rely on uneven tax allocation. The BET currently delivers nearly $4 billion to support elementary and secondary schools, and accounts for about 40 per cent of the property taxes Ontario’s businesses pay, the budget document reports.

With the new measure, commercial and industrial ratepayers in most of Ontario’s larger urban municipalities can expect savings of 10 to 30 per cent on the education portion of their property tax bill next year. The budget document affirms the new 0.88 per cent BET rate slips below the 2020 threshold in 94 per cent of Ontario’s municipalities.

“Ontario has heard loud and clear from municipalities and employers that, as the province recovers from COVID-19, addressing this variation in BET rates would reduce regional tax unfairness and make the entire province more competitive,” it states.

In Toronto, a 10 per cent discount for commercial ratepayers will lift nearly $117 million of the BET burden from the tax base, while industrial ratepayers are in line for an 18 per cent drop in the BET rate, collectively saving them $16.2 million. Among some of the significant beneficiaries, commercial and industrial ratepayers alike in Waterloo Region, London, Windsor, Kingston and Belleville will see a 30 per cent decrease in the BET rate. The BET declines by 17 per cent for Ottawa’s commercial ratepayers, taking nearly $28 million of owed taxes with it. Durham and Niagara Region’s industrial ratepayers will enjoy a 30 per cent cut, while Hamilton’s industrial BET rate drops by 25 per cent.

“It was the right move and it’s going to bring considerable savings for a lot of businesses,” Barnett observes.

Optional small business subclass to be introduced

He’s less enthusiastic about the proposed amendment to the Assessment Act to give municipalities the flexibility to invoke a new subclass for small businesses, allowing for a more targeted tax rate that could be as much as 35 per cent lower than the prescribed range for the tax class. Barnett speculates the proposal stems from active municipal lobbying, but further government buy-in is strongly hinted.

“The Province will also consider matching these municipal property tax reductions in order to provide further support to small businesses,” the budget document states. “This means that small businesses could benefit from both municipal and provincial property tax relief of as much as $385 million by 2022–23, depending on municipal adoption of this new tool.”

However, other members of the commercial class are wary of potentially taking on a larger share of the tax burden when they’ve got pandemic-related challenges of their own. Barnett favours the budget’s other somewhat less defined pledge to address how redevelopment momentum can spur dramatic jumps in value when assessors look to the “highest and best use” or what could theoretically be built on the property.

Mitigating development pressure on assessed values

“Amendments to the Assessment Act are being introduced to support the potential creation of optional new assessment tools to address concerns regarding redevelopment and speculative sales,” the budget document states. It also references Bill 179, a private member’s bill introduced in March 2020, which seeks to amend the Assessment Act to exclude speculative sales in the vicinity when determining the current value of land in an identified “area of transition.” Thus far, that bill has only completed the first reading stage.

“We don’t support the notion of a small business tax subclass. It would shift the burden within the commercial tax class, but not really get at the root problem, which is that all businesses are taxed exorbitantly” Barnett submits. “With other policy mechanisms that do address the underlying issues of business property taxation, you get a better answer. Fixing the assessment problem and taking the speculative values out of the mix is going address a problem that everybody faces, versus keeping taxes artificially low for a small business subclass and making other taxpayers in the commercial class offset that.”

As proposed, it would be left to municipalities to establish the qualifying characteristics for their small business subclasses. Both Barnett and David Gibson, a property tax consultant and director with Yeoman & Company Paralegal Professional Corporation, suggest that’s a far from straightforward exercise.

“How do you determine what is small business? Is it based on revenue? Is it based on the number of employees? There are so many questions and there has been no discussion yet around any real component of it” Gibson says.

He acknowledges that many businesses that might qualify for a new optional subclass are reeling from the double whammy of COVID-19-related losses and soaring assessed values. In particular, he highlights the plight of those that are place-holders for an indefinite period, arguing that highest and best use can’t be realized and shouldn’t flow through to a property’s assessed value until approvals and permits for its next phase are actually in place.

“The argument we always make is that the interim use is the highest and best use until we get approvals. Otherwise, that translates into taxes per square foot that buries any restaurateur or office user or anybody,” he asserts.

“I think it’s safe to say that retail properties are the most dramatically affected by COVID-19, with restaurants and gyms at the top of that,” Gibson reflects. “And those retail properties can be located on streets and in corridors where there is speculation by developers and purchasers pursuing a higher and better use at some point. How can that be taken into consideration so that we don’t put that restaurant or hardware store or pharmacy or drycleaners out of business between now and when the planning of that future development is complete?”

Barbara Carss is editor-in-chief of Canadian Property Management.