Kyle Burton thought he’d found a unicorn in Toronto – retail space with relatively affordable rent.
Mr. Burton, the owner of vintage store Second Voyage, has been looking for a move to a more footfall location for some time. But after recently touring a property in the popular Leslieville neighborhood, he found that the property taxes would be as high as the rent. It’s a common problem.
“The rent is often reasonable, and then it’s the property tax that puts me off,” he said.
In cities across the country, small businesses are pushing for relief on their property tax bills, which are increasing significantly in red-hot real estate markets. While cities like Toronto and Ottawa are cutting bills for small businesses and raising bills for larger ones, other communities say they are unwilling to compromise or are hampered by provincial regulations.
Entrepreneurs who own their own buildings pay property tax directly. Depending on the rental agreement, commercial landlords also often pass on costs such as property tax to the tenants.
Business owners and advocates emphasize that high property taxes make it more expensive to start and run a small business in Canada than in other jurisdictions. This is especially true for street vendors, for whom location is key to attracting customers. Even before the pandemic, Canadian municipalities had one of the highest business 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 remedy the situation but are challenged by the complicated, multi-jurisdictional nature of property valuation rules.
Take British Columbia, for example, where the pandemic fueled an already blazing real estate market.
Chris Brayshaw, owner of Pulpfiction Books, which has three locations in Vancouver, said annual changes to his property tax bills have been a source of continued uncertainty.
“Sometimes it’s like, ‘You still owe us $1,000.’ Okay, no problem,’ said Mr Brayshaw. “One year it was like, ‘You owe us almost $10,000.'”
In Ontario, the COVID-19 pandemic is creating property tax winners and losers
A property tax hike he got five or six years ago was so high he couldn’t sleep through it for months, he said. While business ended up doing well enough to pay the expenses, the stress was so great it was affecting his health — a story he says is common among entrepreneurs.
And like many other business owners, he objects to the “highest and best use” approach that provincial authorities, like those in BC, use to value real estate. She evaluates commercial real estate according to which development there could be of maximum value – for example a condominium high-rise – instead of what actually exists. Small business advocates have instead advocated a “split tax” system that assesses values based on the buildings currently on the property.
BC is one jurisdiction that has attempted to address these concerns. In March 2020, the provincial government introduced the interim commercial real estate tax break program to lower the appraised values of commercial real estate. But participation was optional for municipalities, and so far none have done so.
Vancouver City Councilwoman Sarah Kirby-Yung says the main reason for the lack of acceptance is that the program is too administratively complex for municipalities. She said the BC provincial assessment agency should instead include the “split tax” approach in its regular assessments.
She added that political will is gaining momentum among BC communities after Vancouver’s high real estate prices spread across the province.
“I think you’re seeing tremendous increases in some of these other communities across the province given the recently released assessments,” Ms. Kirby-Yung said. “Perhaps that could be an opportunity for the government to look at this as something that is starting to have a more lasting impact across the province.”
BC’s government and municipalities are currently working on a long-term property tax review to address the high cost of commercial renters, but a provincial spokesman couldn’t say when it will be complete.
Similar urban-provincial tensions have been playing out in Ontario for the past 18 months. In November 2020, the Ontario government announced that it would reduce corporate contributions to education funding. And the province introduced legislation allowing cities to introduce preferential tax rates for small businesses.
Over the course of 2021, city councilors discussed the tax measure – and a majority rejected it. Only Toronto and Ottawa have signed up.
As in BC, many Ontario communities were concerned about the administrative work involved. A bigger concern, however, was that a city that lowered small business tax rates to keep overall revenue stable would have to offset the revenue by raising someone else’s tax rates.
“Honestly, there is no secret pot of money to support small businesses and all we would end up doing is shifting the tax burden from one group of taxpayers to another,” said Josh Morgan, Deputy Mayor of London. Ontario, before a committee meeting last summer.
That wasn’t a problem for Toronto and Ottawa: They lowered taxes on small commercial properties and raised them on larger ones.
In Toronto, small business property taxes fell 15 percent, while all other commercial real estate saw the tax rate rise 0.85 percent. City officials estimated small businesses would save a total of $26.9 million.
A challenge in Ontario is defining a small business. In most settings, it is defined by the number of employees or the level of annual sales. But if you define a small business by the property tax system — like Ottawa and Toronto do — you can only use categories like lot size, property value, or geographic area, meaning some small businesses could fall through the cracks.
“Most beneficiaries will indirectly be small businesses,” said Brian Kelcey, a community consultant who has worked in Winnipeg and Toronto. “But there will also be some large companies that will benefit. And then indirectly there will be some small businesses that will be penalized because of the tax shift and pay more just to try to make the model work.”
Mr Kelcey said the workload of cities to provide relatively small tax breaks for some properties – and increases for others – speaks to the need for major reforms of property tax systems, which vary from province to province. Changes could include larger cash transfers from other levels of government or more revenue from sales taxes, making municipalities less dependent on property tax revenues.
“As long as the solution to a property tax problem is to shift the burden, you will lose politically, economically and administratively,” he said.
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