July 19, 1999

To:Policy and Finance Committee

From:City Clerk, Assessment and Tax Policy Task Force

Subject:Impact of Taxes on New Construction - Capped Property Classes

Recommendations:

The Assessment and Tax Policy Task Force recommends that:

(1)the Province of Ontario be requested to amend the legislation so that taxes for new construction on vacant or excess land are calculated based on frozen assessments determined using the methodology used under Provincial assessment policy prior to CVA implementation;

(2)where new construction occurs, OPAC provide both the frozen realty assessment and current value assessment on the assessment roll returned to the municipality; and

(3)Council request the Province of Ontario to move quickly on its commitment, made in the 1999 provincial budget, to bring fairness to property taxes on new businesses, before property tax bills drive new businesses out of business.

Background:

The Assessment and Tax Policy Task Force, on June 28, 1999, had before it a supplementary report (June 14, 1999) from the Chief Financial Officer and Treasurer respecting Impact of Taxes on New Construction - Capped Property Classes, and recommending that:

"1.The Province of Ontario be requested to amend the legislation so that taxes for new construction on vacant or excess land are calculated based on frozen assessments determined using the methodology used under Provincial assessment policy prior to CVA implementation; and

2.Where new construction occurs, OPAC provide both the frozen realty assessment and current value assessment on the assessment roll returned to the municipality."

The Task Force also had before it the following report/communications:

-(April 26, 1999) from the Chief Financial Officer and Treasurer;

-(April 30, 1999) from Mr. Ian Cameron, Etobicoke Civic Centre, Economic Development Office addressed to Mr. Robert Mantella; and

-(June 28, 1999) from Councillor McConnell.

The Task Force's recommendations are noted above.

City Clerk,

Assessment and Task Policy Task Force

Frances M. Pritchard/fmp

990628.5

June 14, 1999

TO:Assessment and Tax Policy Task Force

ORIGIN:Chief Financial Officer and Treasurer

SUBJECT:Impact of Taxes on New Construction - Capped Property Classes

Supplementary Report

Purpose:

This report provides the additional information requested by the Assessment and Tax Policy Task Force regarding the impact of taxes on new construction for the commercial and industrial property classes.

Financial Implications:

The total tax increase due to new construction for the 50 properties identified in this category for 1999 is $19.22 million, of which the City's share is $8.60 million. It is estimated that the recommended change in the new construction methodology would result in a total tax savings for the 50 properties analyzed of $4.3 million in 1999, of which the City's share is $1.94 million.

Recommendations:

It is recommended that:

1.The Province of Ontario be requested to amend the legislation so that taxes for new construction on vacant or excess land are calculated based on frozen assessments determined using the methodology used under Provincial assessment policy prior to CVA implementation; and

2.Where new construction occurs, OPAC provide both the frozen realty assessment and current value assessment on the assessment roll returned to the municipality.

Background:

At its meeting on May 3, 1999, the Assessment and Tax Policy Task Force had before it the report entitled "Impact of Taxes on New Construction - Capped Properties (Commercial, Industrial and Multi-Residential)" dated April 26, 1999. The Task Force referred the matter back to the Chief Financial Officer and Treasurer and requested her to:

(1)analyse the (April 26, 1999) report again taking into account the different classes viz-a-viz industrial, commercial, multi-residential, and to report back to the next meeting of the Task Force, in consultation with the Commissioner of Economic Development, Culture and Tourism, specifically looking at whether there are any benefits to either the frozen assessment or to the non-frozen assessment depending on which of the classes they are in with a view to spurring development or redevelopment;

(2)analyse and recap the analysis which lead up to the request to the Province for capping provisions;

(3)clarify as to how the rules work with improvements and whether the City has any discretion under improvements.

Comments:

CVA Impact - Capped Property Classes:

The Task Force requested that a recap of the analysis which lead up to the request to the Province for capping provisions be provided. Table 1 below summarizes the CVA impact analysis for the capped property classes, which was undertaken during the summer of 1998. The analysis formed the basis upon which Council recommended that tax increases for the multi-residential, commercial and industrial property classes should be capped at 2.5% per year for 1998, 1999 and 2000.

** Impact of full CVA without the use of tax policy tools such as separate classes and graduated tax rates.

As can be seen, full implementation of CVA on the above-mentioned property classes would have negatively impacted a large proportion of properties in each of the classes. Due to the short time frame in which Council had to decide on all of the tax policy options available, and due to concerns regarding the valuation of commercial and industrial properties and for the need to provide protection to business tenants and to charities and similar organizations, and in order to limit the tax changes created by CVA, capping tax increases at 2.5% per year for three years was recommended. The capping period (i.e., 1998 to 2000) was viewed as an interim step so that comprehensive work could be undertaken to address all of the tax policy issues that need to be considered prior to the next reassessment scheduled for the 2001 taxation year.

Additional Analysis re New Construction:

The Municipal Act sets out how the frozen assessment is to be recalculated where the CVA of a property increases due to new construction. The calculation involves the use of the municipal factor, which is prescribed by Provincial regulation and represents the City-wide ratio of old realty assessment to Current Value Assessment for that property class.

The municipal factor calculation moves the effective tax rate for new construction to the municipal average for that property class. The average effective tax rate for all property in the commercial property class is 7.5%. Therefore, under the calculation for new construction using the municipal factor, properties where the existing effective tax rate is less than 7.5% are severely impacted while those with effective tax rates of more than 7.5% benefit from the municipal factor calculation for new construction. The current legislated new construction calculation mirrors the impact of full CVA as it results in the new taxes being nearly equivalent to full CVA in most cases.

In the report dated April 26, 1999, it was recommended that the Province be requested to amend the legislation so that taxes for new construction on vacant land or excess land are calculated based on frozen assessments determined using the methodology used under the Provincial assessment policy prior to CVA implementation. This calculation would involve having the frozen assessment determined based on similar properties in the vicinity. Frozen assessments determined in this manner would re-create what the realty taxes would have been on the property under the old assessment system and would extend capping protection to newly constructed properties where CVA results in large tax increases. However, existing inequities between neighbourhoods would be maintained and little movement would be made toward full CVA taxes. In addition, the report noted that any change in the new construction calculation would not encourage the construction of certain property types (office buildings, department stores) that would have benefitted under full CVA.

During discussion of the report at the May 3, 1999 Task Force meeting, concerns were raised regarding whether a change to the new construction calculation would be detrimental for certain property owners in certain parts of the City that would have received tax decreases if CVA had been fully implemented. The Task Force requested further analysis of the impact of a legislated change to the new construction calculation, taking into account the different classes viz-a-viz industrial, commercial, multi-residential, and specifically looking at whether there are any benefits to either the frozen assessment or to the non-frozen assessment depending on which of the classes they are in with a view to spurring development or redevelopment.

As noted in the April 23, 1999 report, the recommended change to the new construction calculation would negatively affect the new construction of office buildings and department stores, which under full CVA would have received tax decreases.

Appendices 1 and 2 show, by ward, the existing effective tax rates for certain commercial and industrial property types, respectively. Ward boundaries provide clear geographic distinctions but a comparison of "similar properties in the vicinity" in practice, would be obtained from a narrower geographic area. However, the appendices do provide a comparative analysis of the effective tax rates based on ward averages for various commercial and industrial property types.

From Appendix 1, it can be seen that there are certain areas in the City where the construction of a certain type of new commercial property would result in a tax benefit from the legislated calculation for new construction. These areas are highlighted in the appendix. For example, a new auto dealership constructed in Ward 11 (Don Parkway), where the average effective tax rate for this type of commercial property is higher than the class average, would benefit from the new construction calculation. However, a new auto dealership in Ward 20 (Trinity-Niagara) would likely face a significant tax increase due to the legislated new construction calculation.

Overall, there are a limited number of commercial property types City-wide that would benefit from the new construction calculation as currently set out in the legislation. In general, these property types include office buildings, department stores and commercial condominiums. There are, in total, 10,082 properties or 24.9% in the commercial property class which have existing effective tax rates lower than the class average.

Appendix 2 shows similar information for the industrial property class. As can be seen, there are three types of industrial properties which currently have existing effective tax rates lower than the class average of 10.29%. These include distilleries, heavy industrial properties and industrial malls. In total, there are 1,742 properties or 29.6% in the industrial property class which have existing effective tax rates lower than the class average.

Appendix 3 shows the 50 properties in Toronto that are currently impacted by the legislated calculation. The report dated April 26, 1999 identified 54 properties based on preliminary analysis. However, four of the properties originally identified as new construction have been subsequently classified as improvements. The appendix shows that, in total, the 50 newly constructed properties will generate an additional $19.22 million, of which the City's share is $8.6 million.

Appendix 3 also shows the estimated tax changes that may occur if the methodology for calculating the frozen assessment for new construction is changed so that the frozen assessment is based on similar properties in the vicinity. Using the average effective tax rate for each property type constructed in its respective ward, the recommended change in the new construction methodology would result in a total tax savings for the 50 properties analyzed of $4.3 million in 1999, of which the City's share is $1.94 million. However, two of the newly constructed properties would likely be negatively impacted by a change to the legislated calculation due to the fact that the property types constructed (an office building and a department store) would have benefited under full CVA as the current existing effective tax rates are higher than the class average.

There was discussion at the Task Force meeting on May 3, 1999 that the Province should be requested to ensure that both methodologies (either the legislated calculation using the municipal factor or a reversion to the pre-CVA methodology) could be used by municipalities to calculate new CVA taxes for new construction. This would result in a "win-win" situation for every new development completed during the capping period, where taxes would be calculated using both methodologies, and the calculation that results in a lower tax impact for the taxpayer would be the method used.

While the objective of this approach would be to encourage new development, there would seem to be an issue with respect to equity for other existing properties and a change from an established policy of applying the same taxation rules to all properties in the same property class. For example, using the sample auto dealerships, if both methodologies were used to calculate the taxes for new construction, the auto dealership in Ward 11 would have taxes calculated using the current legislated municipal factor. A similar auto dealership in Ward 20 would have taxes calculated based on similar properties in the vicinity. An inequity is created between similar new properties in the same property class, due to the different tax calculations that would be used under a "win-win" scenario.

The best alternative to the legislated new construction calculation would be to calculate taxes in the same manner as that used prior to the reassessment and apply capping protection to that value. This method maintains historical levels of assessment while extending capping protection to the majority of commercial and industrial property types. In the short term, taxpayers considering new construction in the City will be able to estimate what the taxes will be on a new building, based on the historical tax levels in that area. From an economic development perspective, a "win-win" scenario would be the optimum result, but the Commissioner of Economic Development, Culture and Tourism advises that a change as is recommended in this report to pre-CVA methodologies is better than the current legislated situation.

As noted above, capping protection was recommended for 1998 through 2000 for the business property classes as an interim measure until full analysis of all the tax policy tools could be undertaken prior to the next reassessment. In addition, there were concerns regarding the valuation of commercial and industrial properties using 1996 as a base year for CVA.

The Province is currently in the process of updating the 1996 CVA values to a 1999 base. Prior to the 2001 taxation year, City Council will be considering various tax policy options with respect to the business property classes, and the decisions made on the use of these tools could dramatically affect the property taxes of all commercial and industrial properties in the City. It is therefore recommended that a "win-win" scenario not be used, as certain properties that may have benefited from a CVA on a 1996 base, may not see the same benefit when assessments are updated to a 1999 base.

In order to provide protection to most newly constructed properties for the time period remaining to the next reassessment, it is therefore recommended that the Province be requested to amend the legislation so that taxes for new construction on vacant or excess land are calculated based on frozen assessments determined using the methodology used under Provincial assessment policy prior to CVA implementation. This methodology is most defensible in that it maintains existing assessment levels for and results in the same tax treatment for all properties within the same class, regardless of when they were constructed.

New Construction - Multi-Residential Property Class:

It should be noted a municipal factor has also been prescribed for the multi-residential property class, and that the new construction calculation noted above for commercial and industrial properties would have also applied to newly constructed multi-residential properties had Council not opted for the new multi-residential property class. However, in October 1998, City Council passed a by-law opting to have the new multi-residential property class apply in the City of Toronto and in March 1999, established the tax ratio for the new multi-residential property class at 1.00 (i.e., properties in the new class would be taxed at the residential tax rate). Any newly constructed multi-residential properties will be included in the new multi-residential class. The new multi-residential property class is not subject to capping (or phase-in), and properties in this class are taxed at full CVA and benefit from being taxed at the residential tax rate. Therefore, the new construction calculation as it relates to the frozen assessment listing does not apply to newly construction multi-residential properties in Toronto.

Clarification re Tax Changes due to Improvements:

Section 447.10 of the Municipal Act also sets out how the frozen assessment is to be calculated where an increase in the CVA has occurred due to improvements, additions or renovations. Under this section, where the increase in CVA due to an improvement is less than 50% of the existing CVA, or a new building is added to the property and the increase in CVA is less than 50% of the existing CVA, the corresponding increase in the frozen realty assessment is calculated based on the existing ratio of old assessment to CVA for the property (i.e., using the property factor). Business assessment, if applicable, is calculated using the average business factor for the class.

The calculation of the frozen assessment using the property factor maintains the existing effective tax rate for the property. Where the existing effective tax rate for the property is higher than the class average, the property owner must pay higher taxes on the improvement than would have otherwise been the case under full CVA. Alternatively, where the existing effective tax rate for the property is lower than the class average, which is the case with the majority of properties in the commercial and industrial property classes, the calculation of the frozen assessment using the property factor continues the capping protection extended to the existing portion of the property.

As noted above, the property factor calculation does not benefit a property where the existing effective tax rate is higher than the class average. For example, the industrial portion of the Kodak plant on Eglinton Avenue West has a CVA of $28.73 million and an existing effective tax rate of 12.09%, while the average tax rate for the industrial class is 10.29%. If Kodak undertakes a major addition or improvement to the property, and the improvement adds less than 50% to the existing CVA, the legislated calculation would result in the improvement being be taxed at the existing effective tax rate for the property. However, if Kodak were to add a new building to the property, resulting in a CVA increase of more than $14.4 million or 50%, the entire property would subject to the new construction calculation using the municipal factor. From a property tax perspective, for this particular property, it would be more advantageous when contemplating expansion of existing facilities, that the construction of an additional structure be undertaken as opposed to adding to or improving the existing buildings on the site.

As noted above, the calculation for improvements is also legislated under the Municipal Act. Therefore, any change to the calculation of the frozen assessment with respect to improvements would require a change to the legislation. However, as 75% of the properties in the commercial and industrial property classes benefit from the current legislated calculation for improvements, no change to the calculation is recommended.

The Commissioner of Economic Development, Culture and Tourism has been consulted in the preparation of this report.

Conclusion:

The best alternative to the legislated new construction calculation would be to calculate taxes in the same manner as that used prior to the reassessment and apply capping protection to that value. This method maintains historical levels of assessment while extending capping protection to the majority of commercial and industrial property types, and in the short term, taxpayers considering new construction in the City will more easily be able to estimate what the taxes will be on a new building, based on the historical tax levels in that area.

Capping protection was recommended in 1998 for the business property classes as a short-term, interim measure due to concerns regarding the valuation of commercial and industrial properties and to provide time for comprehensive analysis of all the tax policy tools available. Prior to 2001, City Council will be making decisions on the use of these tools. These decisions, as well as the updating of CVA values to a 1999 base, could dramatically affect the property taxes for commercial and industrial properties in the City. It is therefore recommended that, for the short term, the Province be requested to amend the legislation so that taxes for new construction on vacant or excess land are calculated based on frozen assessments determined using the methodology used under Provincial assessment policy prior to CVA implementation.

The calculation of the frozen assessment for improvements uses the property factor and maintains the existing effective tax rate for the property. For the majority of properties in the commercial and industrial property classes, this calculation extends the capping protection to the improvement as is applied to the existing portion of the property. However, for 25% of commercial properties and 30% of industrial properties where the existing effective tax rate for the property is higher than the class average, the property owner will pay higher taxes on the improvement than would have otherwise been the case under full CVA. As a result, no change is recommended to the methodology for calculating improvements as the majority of the properties in the commercial and industrial property classes benefit from the current legislated calculation. The entire issue of taxation of commercial and industrial properties will be included as part of the Business Reference Group's comprehensive review.

Contact Names:

Lynne Ashton, 397-4203

Paul Wealleans, 397-4208

Wanda Liczyk,

Chief Financial Officer and Treasurer

APPENDIX 1

EFFECTIVE TAX RATES BY WARD - COMMERCIAL PROPERTY TYPES

WARD	EFFECTIVE TAX RATES BY PROPERTY TYPE - WARDS 1-14														CITY AVG. FOR TYPE	# OF PORT-IONS
	1	2	3	4	5	6	7	8	9	10	11	12	13	14
PROPERTY TYPE	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.	AVG.
AUTO DEALER	5.75	3.53	3.52	3.48	3.92	4.09		4.91	3.39	3.22	7.99	7.07	3.74	2.96	4.61	162
AUTO REPAIR	4.12	4.70	4.71	2.52	4.21	3.50	4.72	3.98	3.12	2.14	4.78	3.30	3.97	2.54	4.25	1,181
BANK	7.62	6.13	6.86	4.84	5.75	5.96	7.00	7.74	5.24	2.30	6.05		6.84	4.00	5.71	293
COMM. SHOP CENTRE	5.38	4.83	4.31	4.56	5.18	3.67	3.57	4.45	3.95	2.75	4.39	3.65	5.16	4.51	4.67	2,690
COMM. CONDO	5.73	2.40			11.03	6.74	6.68	6.53	3.94	4.74	11.36	8.78			8.31	1,561
DEPARTMENT STORE		4.17		3.90	3.64										8.29	58
HOTEL			12.84	10.07	6.10	7.43	6.96	5.46		5.43	5.54	7.13	6.80	5.81	5.96	327
MEDICAL/DENTAL	6.12	9.37	9.93	10.64	9.59	5.10	9.09	5.16	4.18	3.40	6.63	4.99	7.40	6.33	6.65	285
MOTEL/TAVERN		7.06											8.80		4.97	56
MULTI-TYPE	9.12					2.67		11.44		2.88	7.81				6.36	311
OFFICE	7.84	9.80	11.62	12.49	13.58	30.76	6.43	10.65	10.82	9.55	17.78	18.69	10.52	10.08	14.16	3,704
OFFICE CONV. RES	2.85	3.28	2.09	2.04		2.29	1.47	1.68	2.06	1.76			2.65	2.42	2.33	660
OTHER COMMERCIAL	8.00	7.92	6.77	6.49	7.62	7.92	8.03	7.82	4.22	3.56	9.91	7.86	7.31	7.83	7.19	10,733
PARKING					0.66				0.27	0.94	3.18	12.69		1.01	2.27	377
REG. SHOP CENTRE		3.33			3.97			3.36				3.28			3.62	28
RESTAURANT	4.06	4.42	5.17	2.94	4.13	4.59	6.81	4.18	3.03	1.57	4.00		3.22	3.17	4.07	366
RETAIL CONV. RES			2.96	2.53		2.41		1.22	3.36	1.32	2.91				1.79	156
RETAIL PROPS	4.15	4.19	2.92	3.55	4.59	4.71	3.54	3.82	2.73	1.81	4.34	3.08	3.70	2.25	3.32	3,663
RETAIL WITH OFFICE	3.86	4.59	3.72		2.88	4.20	4.09	3.45	3.64	2.31			3.82	4.62	3.80	1,044
RETAIL W/ RESIDENCE	3.90	3.84	3.04	2.77	3.19	3.41	3.49	3.30	2.87	1.83	3.12		3.80	2.76	2.99	11,404
THEATRE	2.39	3.46	3.16		4.09										3.97	37
VACANT LAND	2.95	1.65	1.86	1.25	1.42	1.95	1.36	1.68	1.23	0.65	1.61	1.09	1.44	5.21	1.91	1,193

For each property type, bolded/shaded wards have effective tax rates that are greater than the average effective tax rate for the whole commercial property class of 7.51%.

EFFECTIVE TAX RATES BY WARD - COMMERCIAL PROPERTY TYPES