Gap Between Commercial Property Tax Rates and Residential Growing

Property taxes are a primary source of revenue for local governments. These taxes are used to pay for a wide array of public services, such as schools, roads, police, fire protection, and waste protection. All property owners, whether residential, commercial, or industrial, have to pay taxes.

Theoretically speaking, taxes paid by property owners should ideally reflect the costs that they impose on municipal services. However, the high tax rates imposed on commercial property owners across Canada do not seem fair compared to those imposed on residential property owners.

The Gap Between Commercial and Residential Tax Rates

Residential property tax rates are wide-ranging. In Vancouver, it is $2.60 per $1,000 assessment. In Winnipeg, it is $11.95 per $1,000.

But what about commercial property tax rates? The tax rates on commercial properties range from $9.31 in Vancouver to $35.30 in Halifax. In the country’s largest real estate markets – Toronto, Montreal, and Vancouver – commercial properties are taxed nearly three times more than residential properties, the report found. The gap also continues to widen in other major urban centres as well.

In an anemic economic landscape – the country recently slipped into a technical recession – it can be challenging for businesses – large and small – to compete with added costs.

“The post-pandemic market is incredibly volatile, and governments need to be proactive to address the value shifts without increasing inequities between commercial and residential taxpayers,” Kyle Fletcher, president of property tax for Canada at Altus Group, told the Financial Post.

Indeed, it is evident that commercial property owners carry a much heavier burden of tax compared to residential property owners. This is further complicated by the fact that commercial property owners tend to use fewer services that are typically paid by property taxes compared to residential property owners.

Some industry experts would also purport they do not have the same voting clout as homeowners.

Could a reassessment potentially adjust the chasm in commercial and residential property tax ratios? This is what a chorus of market observers and policy experts argue.

That said, these reassessments keep getting postponed in Ontario, causing increasing problems for commercial property owners. Experts believe that property tax reassessments are urgently needed as current values are outdated and causing substantial losses to office and retail property owners. It should be pointed out that commercial properties are being taxed on 2016 values.

“In Ontario, 2023 property taxes are based on assessments as of January 1, 2016, and the province has not yet specified a timeline for an update. Unfortunately, this continued delay in updating assessments has resulted in some properties paying up to 50% more property tax than they should,” Altus Group noted.

This is why commercial real estate owners believe the property tax system in Canada is tilted against them and their properties.

In order to achieve equitable taxation, experts assert that it is vital for provincial governments to employ more frequent reassessments so that tax rates align with market changes.

Meanwhile, it has been contended that municipalities must also change their mindset that commercial properties should bear a more significant portion of the tax burden. It is widely believed that the lower rates on residential property owners are mainly because local governments want to minimize taxation on homeowners as they are most likely to vote in local elections.

After debt payments, property taxes are the highest operating cost for most commercial property owners. With above-trend inflation and high interest rates, it is becoming more and more challenging for commercial property owners to control their costs.

Proposed Solutions from Industry Experts

Let’s be honest: Residential property values in Canada have skyrocketed since the early days of the coronavirus pandemic. According to the Canadian Real Estate Association (CREA), the average price for a home in Canada is above $600,000. By comparison, before the coronavirus pandemic, it was slightly below $500,000. Of course, there are some massive outliers, like Toronto and Vancouver, where prices are north of $1 million.

Experts allude to this trend as a reason that this should ideally result in lower commercial property tax rates because municipalities can still collect the same tax revenue due to higher property values. This will help commercial property owners as it would make them more competitive, provide them with more stable revenues, and promote job growth.

Several measures can be taken to address this issue.

First, it is essential to reduce the gap between commercial and residential tax ratios to enable non-residential property owners to become more competitive and to encourage businesses to invest and grow.

Second, municipalities need to identify alternative methods of revenue generation and reduce the high tax burden currently imposed on commercial property owners.

Finally, there is also a need to increase transparency and accountability in the property tax system. The critical point is that a more equitable property tax system can go a long way in keeping costs low for property owners – both commercial and residential.

This continued disparity between property tax rates for commercial and residential owners can have long-term consequences. Higher taxes on businesses can negatively affect their level of competitiveness. These companies may reduce their investment, leading to less hiring and fewer job opportunities. Some may have to shut down their businesses altogether. Investors will take property tax rates into account when evaluating an investment decision. If the tax rate is too high, they can always choose to relocate or close down. A more equitable property tax system would encourage investors to buy more than less, but if the gap continues to increase, investors will start looking elsewhere.

These are all factors that could be factored into conversations surrounding the determination of property tax rates for commercial properties.