The arrival of new purpose-built rental housing onto Toronto’s market has pumped up the City’s tax assessment base by an average of $1.12 billion in each of the past five years, translating into an average annual influx of $6.28 million in additional property tax revenue. A new report to City Council’s executive committee projects that discounts flowing from a recently authorized optional tax subclass for new multi-residential developments could have a fairly modest impact on revenue growth with relatively negligible initial tax shifts between property classes.
Earlier this year, the Ontario government filed a regulation giving municipal governments the flexibility to convey discounts of as much as 35 per cent below the residential tax rate for up to 35 years to encourage construction of new rental housing buildings with at least seven units. Under those rules, municipalities will first have to pass a bylaw to establish the subclass and properties will qualify only if a building permit is issued after the bylaw is in place.
Purpose-built rental projects now under construction, or in the development pipeline with a building permit already secured, will continue to fall into the existing new multi-residential tax class, which is taxed equivalently to the residential tax rate for a 35-year period from first occupancy. After that time, all properties revert to the multi-residential tax class, which is taxed at a higher rate than residential properties in most Ontario municipalities.
Based on the recent five-year average of about 24 new rental multi-residential properties per year, Toronto financial staff estimate that each new year of entrants into the optional subclass would garner a collective annual tax reduction of $940,000 to $2.2 million, depending on the discount rate Council might choose. Initially, it’s calculated that a 35 per cent discount would shift roughly $2 of extra taxes onto a home with a current value assessment of $694,000 (the average CVA for Toronto residential properties).
However — particularly given that the subclass is upheld as an incentive for new construction — it’s assumed that other property classes will be subsidizing a growing number of new multi-residential ratepayers into the future. That would include the two other multi-residential tax classes.
“Over time, the financial impact from the rate reduction is expected to gradually increase, as new buildings are developed and added to the assessment roll,” the finance department report states. “Introducing a new multi-residential (municipal reduction) subclass would result in three distinct multi-residential classifications, each assigned its own specific tax rate primarily based on timing of the development. These varying classifications may result in different tax rates for similar properties, potentially creating financial inequity for multi-residential property owners.”
Meanwhile, Toronto staff’s consultation with the Building Industry and Land Development Association (BILD) of the Greater Toronto Area indicates that the potential property tax discount is viewed as a weak incentive. Developers and property managers generally maintained that even the maximum 35 per cent discount would not alter debt service ratios significantly enough to have an impact on financing.
“BILD Toronto has advised that they would need a full tax exemption for 20 years and a waiver of all development charges to make the projects viable for the required investment yields,” the report states.
For now, considerations related to enacting the new subclass are scheduled to occur later this year when the 2025 budget process begins, and the finance department report is simply for the executive committee’s information. Still, the report recommends that Council cap any contemplated tax discount at 15 per cent, which would be on par with rate for the City’s small business property tax subclass. “In considering a new subclass for new multi-residential properties, it is important to consider a fair and consistent approach,” it states.
The Ontario government offers matching discounts on the provincial education levy portion of property tax bills for municipalities that have adopted the optional small business subclass, but has not yet made that promise for the new multi-residential class. To date, few Ontario municipalities have moved on the option, which was introduced after most of them had set their 2024 budgets.
