Maintenance of "Frozen Assessment Listing"

- Capped Property Classes

The Strategic Policies and Priorities Committee recommends the adoption of the Recommendation of the Assessment and Tax Policy Task Force, embodied in the following communication (April 1, 1999) from the City Clerk:

Recommendation:

The Assessment and Tax Policy Task Force recommends that the report (April 1, 1999) from the Chief Financial Officer and Treasurer be adopted.

The Assessment and Tax Policy Task Force reports, for the information of the Strategic Policies and Priorities Committee, having requested the Chief Financial Officer and Treasurer:

(1)to submit the report previously requested by Council on methods to ameliorate the impact of unfair taxes on new businesses in Toronto to the Task Force at its meeting to be held on May 3, 1999; and

(2)to brief Councillor Chong on this matter, and request him to attend the meeting of the Task Force to be held on May 3, 1999.

Background:

The Assessment and Tax Policy Task Force, on April 1, 1999, had before it a report (April 1, 1999) from the Chief Financial Officer and Treasurer regarding Maintenance of "Frozen Assessment Listing" - Capped Property Classes, and recommending that, if the Province/OPAC is not prepared to provide the City of Toronto with a "fresh" updated frozen assessment listing by May 15, 1999, that the Province commit to financial reimbursement to the City of all costs incurred in maintaining the listing.

The Task Force also had before it communications (March 26, 1999) from the Association of Municipalities of Ontario and (March 17, 1999) from J. Williams, Nesbitt Burns.

The Task Force's recommendations are noted above.

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(Report dated April 1, 1999, addressed to the

Assessment and Tax Policy Task Force, from the

Chief Financial Officer and Treasurer.)

Purpose:

This report provides information regarding the changes to be made to the frozen assessment listing as required by the Municipal Act. Changes in Current Value Assessment between 1998 and 1999 or between 1999 and 2000, will impact on how taxes will be calculated for some individual properties in the capped property classes.

Financial Implications:

There are no financial implications associated with this report.

Recommendation:

It is recommended that, if the Province/OPAC is not prepared to provide the City of Toronto with a "fresh" updated frozen assessment listing by May 15, 1999, that the Province commit to financial reimbursement to the City of all costs incurred in maintaining the listing.

Background:

At its meeting of July 21 and 23, 1998, City Council adopted a capping program for the multi-residential, commercial and industrial property classes. As a result, for 1998, 1999 and 2000, the City must maintain a Frozen Assessment Listing.

Section 447(5) of the Municipal Act requires any municipality that implemented a cap for the business property classes to maintain a Frozen Assessment Listing (the Listing). The Listing for 1998 was based on the "assessment roll as most recently revised" and was received from the Province in May 1998.

The 1998 Listing reflected assessment information as of December 1997 for each property in the business property classes. The information included on the Listing for each property was the total 1997 assessment, commercial assessment, business assessment, vacant commercial assessment and non-business assessment. For the 1999 and 2000 tax years, the Act requires that the Frozen Assessment Listing to be maintained and updated to reflect changes in CVA assessment as shown on the annual assessment roll.

In general, the Municipal Act requires changes to the frozen listing under four major categories: (1) new construction; (2) improvements; (3) property class changes; and (4) year end changes due to vacancies. The different methodologies and calculations that are required for the various scenarios noted above are set out in this report.

Key Terms:

There are four key factors used to calculate changes to the frozen assessment listing. They are:

(a)Municipal Factor: Prescribed by Provincial regulation, the municipal factor is used to determine the equivalent 1997 realty assessment for new construction on vacant land. The municipal factor is also used in the calculation for newly constructed buildings on previously improved land where the increase in CVA assessment attributable to the new building is greater than 50% of the total CVA assessment of the property prior to construction. The municipal factors for Toronto are:

The municipal factor represents the City-wide ratio of old realty assessment to Current Value Assessment for that property class.

(b)Property Factor: Where the CVA assessment has increased due to the alteration, enlargement or improvement of an existing building, the frozen assessment is increased using the property factor. The calculation is property-specific, with the factor being the ratio of old realty assessment for that property to its Current Value, which is calculated by dividing the frozen realty assessment by the property's CVA.

(c)Average Business Factor: The average business factor is used to calculate the equivalent 1997 business assessment that would be applicable to occupied commercial or industrial property. The average business factors for Toronto are 42.6654% for the commercial property class and 52.008% for the industrial property class. The average business factors represent the average ratio of business assessment to commercial realty assessment in that property class.

(d)Property Business Factor: The property business factor is to calculate the equivalent 1997 business assessment that should be removed from the frozen assessment listing where an increase in vacancies occurs. The property business factor represents the ratio of business assessment to commercial realty assessment for an individual property.

Changes in Assessment - Pre CVA:

The changes to the frozen assessment listing due to new construction, additions, and changes in vacancies are similar to the methodologies used to calculate assessment changes prior to the implementation of Current Value Assessment.

For example, where new construction occurred, or when an addition was added to a property, the value of the new construction or addition would be added to the assessment roll. The market value of the new construction or addition was determined by the Regional Assessment Office (now the Ontario Property Assessment Corporation, or "OPAC") using standard appraisal methodologies. Since Metro Toronto was not on a full market value base, the market value was then factored back to reflect an equivalent 1940's based assessment.

The calculation for changes in vacancy on the frozen listing is also similar to the calculation that would have occurred prior to CVA. In 1997 and prior years, the Regional Assessment Office would assess a new commercial tenant and returning the new occupancy on the following year's assessment roll. Where the unit was previously vacant, the realty assessment would be changed to commercial and the appropriate business assessment would be added.

Prior to 1998, the Regional Assessment Office would track business occupancy changes and issue supplementary assessments for new commercial occupancies, retroactive to the day they moved in. Municipalities would calculate the taxes based on the effective date of the supplementary assessment, and tax the new commercial tenant directly for business taxes. The property owner would also receive a supplementary tax bill, for the change in taxes due to the change in realty assessment, from commercial to residential.

There are three differences in the calculation for post CVA changes in vacancies. First, instead of using the applicable business percentages as previously set out in the Assessment Act, the equivalent business assessment is determined using the average business rate of 42.6654% for commercial and 52.008% for industrial.

Second, individual business occupancies are no longer tracked. Under Ontario Regulation No. 282/98 made under Section 22 of the Assessment Act, the property owner must apply to the Assessment Office by November 1st of each year to have their property, or a portion of their property, included in the vacant units/excess land subclass. If no application is received, the property is returned on the assessment roll as fully occupied for taxation in the following year.

Third, new commercial tenants that move in part way through the year are no longer assessed through the supplementary assessment process. A property is assessed as occupied or vacant for the entire tax year with no in-year changes due to supplementary assessments or tax adjustments relating to vacancies. This process provides a benefit to property owners that have tenants move in through the year to occupy previously vacant space. Conversely, property owners that have commercial tenants move out mid-way through the year are at a disadvantage as they will have been assessed and taxed as occupied for the full year.

Property Change Categories:

Changes to the frozen assessment listing are done in situations where a property's physical attributes, character or use has changed, and this change has resulted in a change in property's CVA assessment. These changes include construction of new buildings, or the addition or renovation to an existing building. The purpose of the changes to the frozen assessment listing are to create a "new" or notional 1997 assessment from which to calculate "new" 1997 taxes that reflect the changes made to the property. The "new" 1997 taxes are not the actual taxes levied, but are calculated to reflect what the taxes would have been if the new building or addition had been there in 1997.

A description of the frozen assessment calculations and the types of changes included in the four general categories are set out below. Examples of specific calculations are attached as Appendices 2 through 6 of this report.

Category 1:New Construction

(See Appendix 2 for sample calculation)

(a)New construction relates to the erection of a new separate structure on a property.

(b)For new construction on vacant land, the municipal factor is used to calculate the frozen realty assessment.

(c)If the new construction is on a property with an existing building and the CVA of new construction is less than 50% of the existing CVA, the property factor is used to calculate the frozen realty assessment.

(d)If the new construction is on a property with an existing building and the CVA of new construction greater than 50% of the existing CVA, the municipal factor is used and the frozen assessment for the entire property is recalculated.

(e)Under each new construction scenario, the average business factor is used to calculate the applicable frozen business assessment.

Category 2:Improvements/Additions/Renovations

(See Appendix 3 for sample calculation)

(a)Improvements or additions must be attached to an existing building on the property.

(b)The property factor is used to calculate the frozen realty assessment. The applicable business assessment is calculated using the average business factor for the class.

Category 3:Property Class Changes

(See Appendix 4 for sample calculation)

(a)The municipal factor is used to calculate frozen assessment for a change from an uncapped property class to a capped property class (i.e., property class changed from residential to multi-residentil, commercial or industrial). The applicable business assessment is calculated using the average business factor for the class.

(b)If a property changes from the commercial to the industrial class, no adjustment is made to the assessment on the frozen listing. However, the CVA tax change, and resulting cap or clawback must be recalculated based on the tax rate in the new class.

(c)Changes in property class, from a capped class to an uncapped class (i.e., commercial to residential) results in the property being taxed at full CVA with no phase-in.

Category 4:Vacancy Changes

(See Appendix 5 and 6 for sample calculation)

(a)Section 447.12 of the Municipal Act directs the recalculation of vacancy changes.

(b)For a decrease in vacancies, change frozen realty assessment from residential to commercial. The applicable frozen business assessment is added using the average business factor.

(c)For an increase in vacancies, change frozen realty assessment from commercial to residential. Delete business assessment using property business factor.

Number of Properties Affected:

Based on preliminary analysis of the 1999 assessment tape, the estimated the number of properties in the four categories of assessment changes noted above are:

As noted under "Issues", there is currently insufficient information on the assessment roll to accurately identify why an assessment has changed from the previous year.

Impact of New Construction Calculation:

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 legislated calculation for new construction, using the municipal factor to calculate the new frozen realty assessment, results in the new taxes being nearly equivalent to the full CVA.

Using the municipal factor to calculate the new frozen assessment moves the effective tax rate for new construction to the municipal average for that property class. The average effective tax rate for the all properties in the commercial property class is 7.5 percent. Therefore, properties where the existing effective tax rate is less than 7.5 percent are severely impacted, while those with effective tax rates of more than 7.5 percent benefit from the municipal factor calculation for new construction. The CVA impact study showed that the existing effective tax rates for office buildings, medical/dental, department stores were higher than the 7.5 percent commercial average. These properties would benefit from the new construction calculation. However, the impact study also showed that the effective tax rate on vacant land was 1.58 percent, significantly less than the 7.5 percent average. Therefore, new construction on vacant land is severely impacted by the municipal factor calculation. Preliminary analysis of the 1999 assessment tape shows there are 54 properties City-wide that can be identified as new construction. The average existing effective tax rate for these properties is 1.596 percent.

As noted above, prior to the reassessment, the market value of the new construction or addition was determined by the Regional Assessment Office and then factored back to reflect an equivalent 1940's based assessment before it was added to the assessment roll. Set out below are the estimated taxes that would have resulted from new construction for a sample property. The table shows the estimated taxes that would have been levied if there had been no reassessment, compared to the estimated taxes due to new construction using the legislated calculation.

The table shows for the sample property, that the calculation for new construction under the capping legislation results in a higher tax burden than may have occurred under the old assessment system. However, a significant tax increase would have been experienced due to the new construction, whether there had been a reassessment or not. It demonstrates that under the "old" system, taxes would have increased by $31,696 while CVA causes the increase to be $43,528, a difference of $11, 832 or 33.12 percent.

Issues:

The information contained on the year-end assessment tape is not sufficient for municipalities to identify the reasons why a CVA assessment has changed for a property. In particular, where a CVA assessment has increased, no data is available on the tape to identify whether the CVA increase is due to new construction, or due to an addition or alteration. The calculations as set out in the Municipal Act require different factors to be used in calculating the equivalent frozen assessment. The use of municipal factor versus the property factor can dramatically affect the resulting tax impact for an individual property.

It should be noted that changes to the frozen assessment listing are only done in situations where a property's physical attributes, character or use has changed, and this change has resulted in a change in CVA assessment. However, in some circumstances, the CVA assessment may also be changed by OPAC to correct an error in the CVA value shown on the previous year's assessment roll. In these circumstances, where no physical change has occurred to the property, no change is to be made to the frozen assessment. However, as noted above, municipalities do not currently have sufficient information on the assessment roll to identify these properties, and must rely on OPAC for information on which properties should have their frozen assessment changed, and which should not.

One solution to this problem would be for OPAC to identify on the assessment tape, the reason for the change to the property's CVA. Better coding on the assessment tape is needed to identify the application of specific section of the capping legislation (improvement, new construction, etc) and how the frozen assessment should be calculated. While this data is not available on the assessment roll for 1999, staff have had discussions with OPAC in Toronto and have requested that these codes be defined in conjunction with municipal staff, for inclusion on the assessment tape for taxation in 2000.

As noted above, O. Reg 282/98 requires landlords to apply annually to OPAC to ensure their property, or a portion of their property, is included in the vacant units/excess land subclass. If no application is received, the property is returned on the assessment roll as fully occupied for taxation in the following year.

The original deadline for vacancy applications was November 1, 1998 for changes relating to the 1999 tax year. However, on January 14, 1999, the Minister of Finance extended the deadline for vacancy applications to February 28, 1999. As a result, municipalities do not currently have accurate CVA totals that reflect the results of these applications. For 1999, the amount of decreases that will be allowed in the commercial and industrial property classes cannot be calculated without having these changes reflected. Initial discussions with OPAC have indicated that they will treat vacancy changes as "one offs" under the appeal process, which may delay the claw back calculation and/or cause individual property owners a delay in obtaining correct records and a correct tax bill.

The lack of business occupancy updates presents another problem for municipalities when it comes to maintaining an accurate frozen assessment listing. Any changes due to successful assessment or tax appeals that affect the 1997 tax year, must also be reflected on the frozen listing and all taxes levied subsequent to 1997 must be recalculated. Situations will occur where a tax appeal reduces the 1997 taxes due to a business vacancy and an omitted assessment adds a new business tenant. For many properties, it will be difficult, without the assistance of OPAC, to determine whether the tax adjustment (vacancy) or the omitted assessment (new occupancy) should be reflected on the Listing. A similar situation arises when an assessment appeal reduces the 1997 business percentage and/or business assessment.

Due to the issues noted above, it is clear that significant input is required from OPAC records to accurately reflect assessment changes and maintain the Frozen Assessment Listing. It is therefore recommended that the Province/OPAC be requested to provide the City of Toronto with a "new" updated frozen assessment listing for 1999 and 2000. Since the City of Toronto currently pays almost $25 million for assessment services provided by OPAC, if the Province/OPAC is not prepared to provide the City with an updated frozen listing in time to issue the 1999 final tax bills (i.e., by May 15th), the Province should reimburse all of the costs incurred by the City in maintaining the listing.

Conclusion:

Since Bill 79 requires all other Ontario municipalities to implement some sort of tax relief mechanism (capping at 10 percent, 5 percent and 5 percent for 1998 - 2000), the ability for most municipalities to maintain a Frozen Assessment Listing, except for the very large ones, is limited and requires Provincial assistance in the form of either the Province or OPAC maintaining the Listing.

Since the frozen listing maintenance requires access to the reasons why a CVA assessment has changed or updated, OPAC is in a better position to maintain the Listing as they have the individual property data necessary to ensure an accurate Listing. This transfer of responsibility is particularly important in light of the fact that all other Ontario municipalities are required to maintain the Listing, likely without proper resourcing and access to information regarding assessment updates.

In his letter of March 23, 1999, to all municipalities, the Minister of Finance indicated that the Province will support the centralized management of the frozen assessment listing for 1998, 1999 and 2000. Due to serious concerns of municipalities across Ontario regarding the issues surrounding the maintenance of the frozen listing, a municipal liaison group has been established, with representation from the Ministry of Finance, Municipal Affairs and Housing, AMO, MFOA, AMCTO, AMTCO, OPAC, as well as staff from the City of Toronto. An initial meeting took place on March 29, 1999, and additional meetings are scheduled over the next two weeks in order to clarify the Province's plans to assist municipalities in the frozen listing maintenance.

A further report will be submitted to the next meeting of the Task Force, to update the Task Force on any further developments with respect to the centralized management of the frozen listing.

Contact Names:

Lynne Ashton, 397-4203

Paul Wealleans, 397-4208

Bill Wong, 392-9148

(Copies of the appendices and attachments to the foregoing report were forwarded to all Members of Council with the April 7, 1999, agenda of the Strategic Policies and Priorities Committee; and copies thereof are also on file in the office of the City Clerk.)