Impact of Taxes on New Construction -

Capped Property Classes

The Policy and Finance Committee recommends the adoption of the recommendations of the Assessment and Tax Policy Task Force embodied in the following communication (June 28, 1999) from the City Clerk:

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.

--------

(Report dated June 14, 1999, addressed to the

Assessment and Tax Policy Task Force from the

Chief Financial Officer and Treasurer)

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; and

(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 percent 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 percent 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 percent. Therefore, under the calculation for new construction using the municipal factor, 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 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 percent 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 percent. These include distilleries, heavy industrial properties and industrial malls. In total, there are 1,742 properties or 29.6 percent 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 percent of the existing CVA, or a new building is added to the property and the increase in CVA is less than 50 percent 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 percent, while the average tax rate for the industrial class is 10.29 percent. If Kodak undertakes a major addition or improvement to the property, and the improvement adds less than 50 percent 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 percent, 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 percent 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 percent of commercial properties and 30 percent 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

(Report dated April 26, 1999, addressed to the

Assessment and Tax Policy Task Force from the

Chief Financial Officer and Treasurer)

Purpose:

This report provides options to ameliorate the impact of tax increases due to new construction on businesses in Toronto.

Financial Implications:

The total tax increase due to new construction for the 54 properties identified is $19.45 million in 1999, of which the City's share is $8.70 million. Any change to the methodology used for the calculation of taxes for new construction will result in the City not realizing the full amount of this potential additional revenue. This potential revenue loss is included in the report "Non-Program Expenditures - Tax Deficiencies" (dated April 24, 1999) which recommends an increase to the tax deficiencies budget for 1999.

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 held on April 1, 1999, the Assessment and Tax Policy Task Force gave consideration to a report dated April 1, 1999 from the Chief Financial Officer and Treasurer (attached) regarding changes to be made to the frozen assessment listing, and how Current Value Assessment will impact on the calculation of taxes for properties in the capped property classes. The Task Force requested the Chief Financial Officer and Treasurer to submit a report on methods to ameliorate the impact of unfair taxes on new businesses in Toronto. This report also addresses the same request contained in a motion from Councillor McConnell and Councillor Adams adopted by Council at its meeting of March 4, 1999.

Comments:

Impact of New Construction under the "Old" Assessment System (i.e. Pre-CVA):

Prior to the implementation of Current Value Assessment, new construction and/or additions have always impacted a property's assessment and corresponding property taxes. 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. Partial assessments for large commercial and industrial construction projects which took several years to complete were provided at various stages of project completion through the supplementary assessment process and on year end assessment rolls. Supplementary assessments can be made for the current tax year, and the two preceding years. Municipalities normally issue supplementary tax bills payable in one instalment, upon receipt of a supplementary assessment roll. Due to the retroactivity of the supplementary assessment provisions in the Assessment Act, some taxpayers may have to pay up to three years worth of supplementary taxes at one time.

Impact of New Construction under Current Value Assessment:

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 these scenarios are set out in my report dated April 1, 1999 (attached). This report provides options for changes to the frozen listing for new construction only.

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 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%. Therefore, 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 CVA impact study showed that the existing effective tax rates for office buildings, medical/dental, department stores were higher than the 7.5% 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%, significantly less than the 7.5% average. Therefore, new construction on vacant land is heavily impacted by the municipal factor calculation.

It is important to note that, even without the implementation of CVA, the construction of a new building on previously on vacant land would, and should, result in a significant increase in tax burden. The difference is that using the municipal factor to calculate the taxes for new construction results in the taxes being almost equivalent to full CVA. In the City of Toronto, full CVA would have resulted in large increases for the majority of properties in the commercial and industrial property classes had capping not been adopted. However, there are some property types that would actually benefit from the new construction calculation. These properties include office buildings, which a group, would have experienced large tax decreases under full CVA.

Alternative Calculations for 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 legislated calculation for new construction requires municipalities to use the municipal factor to calculate the new frozen realty assessment, resulting in the new taxes being nearly equivalent to the full CVA. Any changes to the calculation for new construction would require a change in provincial legislation.

Alternative calculations for the frozen realty and business assessment for new construction could include:

(1)New Frozen Realty Assessment:

(a)Neighbourhood Factor: An alternative to the current legislated calculation would be to use the "neighbourhood factor" to calculate the new frozen realty assessment. The neighbourhood factor would represent the average ratio of old assessment to Current Value for all commercial or industrial properties in the area. Neighbourhoods would need to be defined by OPAC.

(b)Property Type Factor: Another factor that could be used to calculate the new frozen realty assessment for new construction is the "property type factor". The property type factor would represent the average ratio of old assessment to Current Value for similar commercial or industrial properties across the municipality. Property types would be defined based on the predominant categories of commercial/industrial uses and could include property types such as office buildings, hotels, retail with residential, etc.

(c)Maintain Existing Cap on Vacant Land: The majority of the tax increase for new construction relates to the minimal assessed value previously assigned to vacant land. Another alternative to recalculating the frozen realty assessment for the entire property would be to maintain the capped taxes relating to the vacant land value and use the municipal factor to calculate the new frozen realty assessment on the new building/construction.

(d)Pre-CVA Method: This calculation blends the use of both the neighbourhood factor and property type factor described above. The frozen realty assessment for new construction would be based on similar properties in the vicinity and parallels how the realty assessment would have been calculated on the property if reassessment had not occurred.

The pros and cons of using the above alternatives to calculate the new frozen realty assessment for new construction are summarized below:

Alternative Calculation	Pros	Cons
Neighbourhood Factor	May result in less severe impact if current neighbourhood factor is less than municipal factor	Neighbourhood needs to be defined by OPAC May result in more severe impact for some properties Maintains existing inequities between neighbourhoods post-amalgamation Limits additional tax revenues resulting from assessment growth due to new construction
Property Type Factor	May result in less severe impact if property type factor is less than municipal factor	Property types not currently defined May result in more severe impact if located in neighbourhood where similar properties were previously under-assessed. May result in inequities between similar properties in the same neighbourhood as frozen assessment would be calculated based on municipal average for that property type. Limits additional tax revenues resulting from assessment growth due to new construction
Maintain existing cap on vacant land (i.e. pre-construction CVA) and use "Municipal Factor" to calculate the new frozen realty assessment due to new construction	Maintains cap originally started in 1998 on vacant land Results in partial CVA taxation on new construction (less vacant land portion)	Separate entries required for land and building (not currently available) New CVA attributable to new structure would have to include increase to the land value due to improvement May result in minor savings for taxpayer
Pre-CVA method - Calculate revised frozen assessment based on similar properties in the vicinity	Re-creates what the realty taxes would have been on the property under the old (pre-CVA) assessment system May result in less severe impact if vicinity factor used is less than municipal factor Tax burden of pre-CVA value retained Extends capping protection to newly constructed properties where CVA results in large tax increases (most commercial properties other than office, medical/dental and dept. stores)	Maintains existing inequities between neighbourhoods Limits additional tax revenues resulting from assessment growth due to new construction Detrimental to new construction of properties that benefit from CVA (office buildings, medical/dental offices, department stores) No movement toward CVA

(2)New Frozen Business Assessment:

The legislated calculation for the new construction includes, where the property is occupied, a calculation of an equivalent frozen business assessment using the average business rate factor. For the City of Toronto, the average business rate factors are 42.6654% for the commercial property class and 56.008% for the industrial property class. These factors represent the average ratio of business assessment to commercial realty assessment in that property class.

An alternative to using the average business rate factor, would be to create a new frozen business assessment based on the historical business percentages that existed prior to reassessment. These business percentages ranged from 25% (for parking lots) to 30% for most small retailers to 75% for banks. These business percentages were established in the early 1900's and over time, became arbitrary and not directly related to the income potential or ability to pay by an individual business. In addition, reference to these percentages has been deleted from the Assessment Act, and re-use of these percentages would require amendments to the legislation as well as business occupancy tracking to be done by OPAC.

It is recommended that the equivalent frozen business assessment for newly constructed commercial and industrial properties be calculated using the average business rate factor for that property class. This calculation is consistent with the calculation used for other new commercial/industrial occupancies. One drawback to using the average business rate factor is that some retailers who prior to the reassessment may have had their business assessment calculated using the 30% business percentage, are negatively impacted by use of an average business rate factor of 42.6654%.

The Province would be required to change the legislation to allow municipalities to change the calculation used for new construction. In addition, in every case, the alternative factor would extend inequities that existed within the commercial and/or industrial property class to the properties post CVA implementation and may result in a more severe impact for these properties when the capping provisions expire. While the long term goal of the Province is full implementation of CVA, it is our understanding the Province is contemplating changes to the new construction calculation.

Set out below are the estimated taxes that would result from using any of the alternative calculations described above for a sample property where new construction has occurred. The example is based on a newly constructed property valued at $600,000.

*Factor used to calculate taxes prior to reassessment based on similar properties in the vicinity (estimated).**Post CVA calculations assume new frozen business assessment calculated using average business rate of 42.6654%.

The above table shows that new construction results in higher taxation under the current legislated requirements. The alternatives presented show that, if the intent is to try to reduce the tax burden on new construction to a level comparable to pre-CVA, the best alternative would be to calculate the taxes in a manner similar to that used prior to 1998 and apply the cap to that value. This method may be the most defensible in that it relates the tax calculation to historical assessment levels and extends capping protection to most newly constructed properties based on that value. It could also be defended in that tax burden increases for the taxpayer would be similar to those resulting under the old assessment system. It would therefore not be CVA that is causing the tax increase. However, under this calculation, constuction of certain properties, such as office buildings or other properties that benefit under CVA, would be negatively impacted. In addition, there would be little movement towards full CVA and potential new tax revenue resulting from new assessment growth would be limited.

Conclusion:

The amendments to the Municpal Act legislation relating to the maintenance of the Frozen Listing and capped property classes has resulted in a significant tax impact for new construction on vacant land. Although other changes such as improvements, property class changes and year end changes are impacted under the new CVA tax calculations, none are impacted to the degree of new construction.

If the intent is to assist taxpayers who have or are building new construction during the capping period, an alternative to the existing legislated tax calculation for new construction is needed.

The best alternative would be to calculate the taxes in a manner similar to that used prior to 1998 and apply the cap to that value. This method may be the most defensible in that it relates the tax calculation to historical assessed levels while extending capping protection to most newly constructed properties. However, construction of certain property types, such as office buildings that would benefit under CVA, would be negatively impacted by a change in the new construction calculation.

The Province should be requested to amend legislation to base the tax calculation for new construction on vacant land on the methodology that existed prior to January 1, 1998 (i.e., the date CVA was implemented).

Contact Names:

Lynne Ashton, 397-4203

Paul Wealleans, 397-4208

Giuliana Carbone, 392-8025

--------

(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:

(1)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.

(2)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.

(3)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 56.008% for the industrial property class. The average business factors represent the average ratio of business assessment to commercial realty assessment in that property class.

(4)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 56.008% 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)

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

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

(3)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.

(4)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.

(5)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)

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

(2)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)

(1)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.

(2)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.

(3)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)

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

(2)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.

(3)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%. Therefore, 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 CVA impact study showed that the existing effective tax rates for office buildings, medical/dental, department stores were higher than the 7.5% 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%, significantly less than the 7.5% 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%.

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%.

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%, 5% and 5% 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.

--------

Copies of the following Appendices and a Sample Calculation Table were forwarded to all Members of Council with the July 20, 1999, agenda of the Policy and Finance Committee and copies thereof are also on file in the office of the City Clerk:

-Appendix 1 - Summary of Year-End Changes by Type;

-Appendix 2 - Sample Calculation - New Construction on Vacant Land (CVA for new construction is greater than 50% of existing CVA);

-Appendix 3 - Sample Calculation - New Construction on Excess Land (CVA for new construction is less than 50% of existing CVA);

-Appendix 4 - Sample Calculation - Change in Property Class from Commercial to Industrial

-Appendix 5 - Sample Calculation - Vacancy Increase;

-Appendix 6 - Sample Calculation - Vacancy Decrease; and

-Table titled Sample Calculation: Taxes for New Construction - Recommended Method.

(Copies of the written submissions appended to the foregoing report were forwarded to all Members of Council with the July 20, 1999 of the Policy and Finance Committee and copies thereof are also on file in the office of the City Clerk.)