Ontario’s overdue property reassessment is on hold until at least 2024, leaving many commercial ratepayers with a further wait to realize tax reductions from pandemic-related value erosion. As announced last week in the provincial economic statement, market values from January 2016 will remain the benchmark for apportioning the municipal property tax burden for the 2022 and 2023 tax years — a decision that is projected to produce significant tax shifts when new assessments are finally in place and to prompt more appeals to Ontario’s Assessment Review Board in the interim.
“It’s not a market based system anymore because we’re too far removed,” asserts David Gibson, a property tax consultant and director with Yeoman & Company Paralegal Professional Corporation. “The four-year assessment cycle is already too long. At best, it should be one; at worst, it should be two years. Now, the 2016 base year is going to be seven years old before it’s replaced.”
The Ontario government maintains this third postponement of a new assessment cycle, which was initially set to begin in 2021, arises from input received through its ongoing review of property assessment and taxation, involving consultations with municipalities, residential and commercial taxpayers, and industry associations. The start-date was first pushed to 2022 and then to an unspecified date — which was nevertheless widely believed to be 2023 because the provincial Assessment Act has been amended to establish January 2021 as the base date for the market valuations — in response to the COVID-19 pandemic. That’s also the given rationale for the further delay.
“During these consultations, the government heard a wide range of views expressed by municipal and taxpayer representatives. The government has considered the advice that was received and has concluded that the priority is maintaining stability for taxpayers and municipalities at this time,” the economic statement confirms.
Alternatively, Gibson speculates that neither the provincial government nor municipal councils are keen to have updated property assessment notices arrive in voters’ mailboxes in the election year of 2022. He recalls the upheaval in the late 1990s when market value assessment was first introduced province-wide to adjust valuations that often had not been scrutinized in dozens of years. At the time, many homeowners feared that significant increases in assessed values would translate into directly corresponding increases in taxes.
“Elected officials don’t want a scenario where residential ratepayers get new assessment notices saying that in 2016 the market value was $1 million and now the market value is $2 million. They don’t want the ‘Does that mean my taxes are doubling?’ narrative during an election,” Gibson hypothesizes.
Assessments look back to 2016 market conditions
On the non-residential side of the ledger where assessment is tied to income-producing capacity, locking in 2016 market values for at least one extra year is a financial blow for many hotels, office buildings and retail centres. With the switch to a 2021 base year, 2020 income statements will be factored into the Municipal Property Assessment Corporation’s (MPAC) modelling, better reflecting the pandemic’s affect on value.
“Long delays in updating assessments are known to create inequities in taxation. It’s bad news particularly for those businesses most impacted by declining revenues and property values as a result of the economic fallout of the pandemic,” says Terry Bishop, president, property tax, for Altus Group in Canada. “While the Province’s stated priority is to maintain stability for taxpayers and municipalities, the last thing businesses need is stability of their tax levies when revenues have fallen dramatically.”
“With much industry devastation and depressed revenues since March of 2020, it is not acceptable to see the 2023 tax year assessments being based on pre-COVID values, and values that will be seven years old by that timeframe,” concurs Tony Elenis, president and chief executive officer of the Ontario Restaurant, Hotel and Motel Association (ORHMA). “ORHMA is disappointed in the Ontario government further postponing property tax reassessment until 2024.”
On the flipside, the delayed reassessment will provide more lead time before expected property tax increases for warehouse/distribution and logistics facilities and multifamily rental buildings. In other Canadian jurisdictions where annual reassessment exercises occurred this year — including Alberta, British Columbia, Nova Scotia and New Brunswick — the booming light industrial sector has been on the receiving end of tax shifts within the commercial property class. Meanwhile, the multifamily sector has experienced an influx of investment capital in recent years, driving up values.
“From that perspective, looking back in the rearview mirror six or seven years doesn’t hurt them,” Gibson notes. “But, as values go up, tax rates come down. It’s not an all sum game.”
The 1990s provide a cautionary reminder
Christopher Jobe, Toronto manager for the commercial real estate advisory firm, Turner Drake & Partners, projects a major change in the status quo when the reassessment finally occurs.
“Compression in capitalization rates over the seven-year span separating the valuation dates would see values increase by as much as 30 to 60 per cent in some property classes — industrial, multi-residential and some retail, in particular — even before consideration of improvements in operating performance,” he says. “Increases on a number of sectors — hospitality, power centres, and some enclosed and neighborhood retail — are expected to be much more temperate and, in some instances, assessed values could potentially decrease.”
However, the shifts won’t necessarily fully favour the latter group of properties immediately. When recalibration of outdated assessments created extreme tax shifts within property tax classes in the late 1990s, it also spawned an elaborate cap and clawback apparatus that some municipalities, such as Toronto, still employ today. This places a ceiling on annual assessment-related tax increases for designated hard-hit properties but, to balance out revenue collection, reduces decreases that should be assigned to other properties.
“The complicated systems of capping, clawbacks and phase-ins were necessary in order to protect both properties from large increases and municipalities from lost revenues. These measures, while welcome by many, have the concomitant impact of decreasing the simplicity and transparency of the taxation system,” observes Giselle Kakamousias, vice president, property tax, with Turner Drake & Partners. “In my opinion, the gold standard is annual reassessment with a current base date, as is revenue neutrality — i.e. any increase in the assessment base sees a corresponding decrease in tax rates.”
Similarly, the newly released Altus 2021 property tax rate benchmark report for 11 major Canadian cities links many of the peculiarities of Ottawa’s and Toronto’s property tax culture to this late ’90s era, and to the preceding long-delayed reassessment at the source of the manoeuvrings. “The hangover from this unprecedented delay in updating assessments remains in Toronto and Ottawa to this date, having the greatest inequities in taxation and the least transparent tax system of all the cities covered in this survey,” it states.
Beyond waiting for a new assessment, property owners can appeal to Ontario’s Assessment Review Board (ARB) for an adjustment to the assessed value, and both Bishop and Gibson foresee more commercial landlords will make those efforts in 2022 and 2023. That avenue of appeal is based on equity — a stipulation in the Assessment Act that directs the ARB to reduce the assessed value, even if it is proved to be accurate, if it can be shown that similar properties in the area have lower assessed values.
Notably, the Act does not allow assessed values to be adjusted upward on properties found to have inequitable below-market assessments so appellants face only the costs of the process itself. That could prove increasingly worthwhile if the resulting discount is in place for an extended period .
“It’s going back to being like the ‘80s and ‘90s where it’s just chasing to save tax dollars, not looking at market value,” Gibson submits. “If we continue on this path, we’re going to end up in an environment where it’s 1998 all over again.”
Barbara Carss is editor-in-chief of Canadian Property Management.
