Policy & Planning
January 20, 2020

Property Taxation: The Best of Intentions and the Worst of Outcomes

I do hope that those advocating tax relief for ‘small business’ understand that the proposal from the provincial government is a lot muddier than it looks.

The province says the interim legislation would allow municipalities to exempt a portion of the value of a subset of commercial properties from taxation, easing the tax burden for tenants responsible for property taxes through their commercial leases.

If I understand the intent, the City would be able to exempt or reduce the tax on that part of an assessed parcel which has not been developed – the so-called “unused airspace”.   If the zoning allowed a ten-storey building, but there was only a one-storey storefront on the site, presumably the City would reduce the assessment or forgive the amount valued on the ‘unused’ part.

A few things to keep in mind:

The exemption directly benefits the property owner, not the tenant, unless the latter also owns the property.  Presumably ‘small’ businesses (whatever they are) would see a drop in their ‘triple-net leases’ from the landlord which includes the property taxes, though in fact it’s the owner who pays the property tax directly to the City.  And it’s the owner who could well see the market price of the site increase as a result of this exemption of unused density.  (Also, listen to the “This is Vancolour” interview with Tom Davidoff, who explains how our low residential property tax rates have contributed to our unaffordability.)

It may also encourage further speculation since the holding costs will go down as the asset value (hopefully) goes up.  The lower those holding costs, like property tax, the longer the speculator has to appreciate the increase in capital gain, the less need to redevelop the underutilized land, and the more desirable the property for speculative purposes.

Secondly, there is a reason why the ‘unused’ part of a site is included in the assessment: it’s a very real part of the value.  ‘Density’ (or FSR) is not measured by current use but as potential development, whether realized or not.  No owner of a property is going to sell at a price lower than what the market would pay because the site hasn’t been built out to the maximum possible. Nor is a buyer going to get away with offering less since what is being bought and sold is that potential, not just current uses.

The Assessment Authority determines what the market will pay on a given date when it evaluates the property’s worth.  That’s the whole point of a market-based assessment system, which has very significant benefits with respect to objectivity, simplicity and transparency.

If the City accepts the Province’s offer, it’s going to be in the subjective (and probably not very transparent) business of deciding what is ‘small’, what is ‘legacy,’ what is ‘unused,’ not to mention who it will tax (or what services to cut) to make up the difference.  It will get ugly, and there will be unintended consequences.  (If a business has ten employees, does it become big when it has eleven?  If it has two outlets, does it becomes a chain at three, and hence just another Starbucks?)

At the moment, the City can pass off the subjectivity and complications of assessments because it doesn’t do that job.  It’s the reason why we have a separate provincial authority to set the value of each individual property, since it’s less subject to political pressure.  The City’s job is to set the overall tax rates, which vary by class of property (commercial, residential, industrial, etc.) but not to vary the tax rate within a class.

Now it looks like it is going to wade into this very messy territory, which will soon begin to feel more like quicksand than an attempt to drain the swamp.

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