Small business owners seek property tax relief amid hot real estate markets
Kyle Burton thought he had found a unicorn in Toronto – retail space with relatively affordable rent.
Mr. Burton, the owner of vintage shop Second Voyage, has been looking for some time to move to a location with better foot traffic. But after recently viewing a property in the working-class neighborhood of Leslieville, he discovered that the property taxes would be as high as the rent. It’s a common problem.
“The rent will often be reasonable, and then it’s the property tax that will discourage me,” he says.
In cities across the country, small businesses are clamoring for relief from their property tax bills, which are rising dramatically in the burning real estate markets. While cities like Toronto and Ottawa are cutting bills for small businesses and increasing them for big businesses, other municipalities say they’re unwilling to compromise or are being held back by provincial rules.
Entrepreneurs who own their own buildings pay property taxes directly. But commercial landlords often pass costs such as property taxes on to tenants, depending on the terms of the lease.
Business owners and advocates point out that high property taxes make starting and operating a small business in Canada more expensive than in other jurisdictions. This is especially true for high-street retailers, for whom location is key to winning customers. Even before the pandemic, Canadian municipalities had one of the highest commercial property tax rates in the developed world, according to data from the Organization for Economic Co-operation and Development.
Municipal and provincial leaders have tried to provide some relief, but are challenged by the complex, cross-jurisdictional nature of property assessment rules.
Take British Columbia, for example, where the pandemic has thrown oil on an already booming real estate market.
Chris Brayshaw, the owner of Pulpfiction Books, which has three locations in Vancouver, said year-to-year changes in his property tax bills have been a source of continued uncertainty.
“Sometimes it’s, ‘You still owe us $1,000.’ Okay, no problem,” Mr Brayshaw said. “A year was like, ‘You owe us almost $10,000.'”
In Ontario, the COVID-19 pandemic is creating property tax winners and losers
A property tax increase he received five or six years ago was so big he couldn’t sleep through the night for months, he said. Although the company was ultimately able to absorb the cost quite well, the stress was so great that it affected his health – a story he says is common among entrepreneurs.
And like many other business owners, he takes issue with the “highest and best use” approach that provincial agencies, like the one in British Columbia, use to assess property values. It rates commercial properties based on the maximum value development that could be put there — a condo tower, for example — instead of what’s actually there. Small business advocates have argued instead for a “split tax” system, which assesses values based on the buildings currently on the property.
British Columbia is one jurisdiction that has attempted to address these concerns. In March 2020, the provincial government launched the Interim Business Property Tax Relief Program to reduce the assessed value of commercial properties. But participation was optional for municipalities, and so far none have been.
Vancouver City Councilor Sarah Kirby-Yung says the main reason for the lack of uptake is that the program is too administratively complex for municipalities. She said BC’s provincial assessment agency should instead include the “tax splitting” approach as part of its regular assessments.
She added that the political will of BC municipalities is growing now that high real estate prices in Vancouver have spread across the province.
“I think with the recent assessments, you’re seeing huge increases across the province in some of these other municipalities,” Kirby-Yung said. “It might give the government an opportunity to look at this as something that is starting to have a more sustained impact province-wide.
The BC government and municipalities are currently working on a long-term property tax review to address high commercial tenant costs, but a provincial spokesperson could not say when it will be completed.
Similar municipal and provincial tensions have surfaced in Ontario over the past 18 months. In November 2020, the Ontario government announced that it would reduce the amount businesses had to contribute to education funding. And the province introduced legislation to allow cities to create preferential tax rates for small businesses.
Throughout 2021, city councils debated the tax measure – and most voted it down. Only Toronto and Ottawa have signed.
As in British Columbia, many Ontario municipalities were concerned about the administrative work involved. But a bigger concern was that, to keep overall revenues stable, a city that cut small business tax rates would have to offset the revenues by raising the rates for someone else.
“Frankly, there is no secret money to support small businesses, and all we would end up doing is shifting the tax burden from one group of taxpayers to another,” the mayor said. deputy from London, Ontario, Josh Morgan, at a committee meeting. met last summer.
For Toronto and Ottawa, this was not a problem: they reduced taxes for small commercial properties and increased them for larger ones.
In Toronto, small businesses saw their property taxes drop by 15%, while all other commercial properties saw their rates increase by 0.85%. City staff estimated that small businesses would collectively save $26.9 million.
One of the challenges in Ontario is defining a small business. In most contexts, it is defined by the number of employees or the amount of annual revenue. But when defining a small business through the property tax system – as Ottawa and Toronto do – you can only use categories such as land size, property value, or geographic area. , which means that some small businesses could fall through the cracks.
“Most of the beneficiaries will be small businesses, indirectly,” said Brian Kelcey, a municipal consultant who has worked in Winnipeg and Toronto. “But there will also be large companies that will benefit. And then, indirectly, there will be some small businesses that, because of the tax change, will be penalized and pay fairer to try to make the model work.
Mr Kelcey said the amount of work required by cities to deliver relatively low tax breaks for some properties – and hikes for others – speaks to the need for bigger reforms to property tax systems, which vary from one province to another. Changes could include greater cash transfers from other levels of government or more revenue from sales taxes, so municipalities are less reliant on property tax revenue.
“As long as the solution to a property tax problem is to shift the burden, you’re going to lose politically, you’re going to lose economically, and you’re going to lose administratively,” he said.
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