In Ontario, the COVID-19 pandemic creates property tax winners and losers

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The COVID-19 pandemic has reshaped the real estate market in Ontario, as elsewhere in Canada, with the counties girding the Greater Toronto Area experiencing an unprecedented run-up in prices.

The economic cross-currents of the past two years have transformed demand for commercial properties, too, with hotels, restaurants and other kinds of retail, for example, facing starkly different environments.

But those seismic shifts aren’t showing up in property assessments and tax bills – and won’t for at least another two years. That’s because the Ontario government has, again, delayed the provincewide assessment originally slated for 2020, leaving property valuations moored in the market conditions of Jan. 1, 2016.

The result is that property owners that have seen the biggest growth in values are getting a temporary break, at the expense of their peers with decreases or below-average increases, who are paying more than their fair share.

“It builds in inequities,” says Terry Bishop, president of the Canadian property tax practice at Altus Group Ltd., which provides data, software and professional services for the commercial real estate sector. Commercial properties, in particular, are faced with paying taxes based on property values from a prepandemic economy that, for many firms, will never return.

Ontario has a revenue-neutral tax rule for rising property values. A rising real estate market doesn’t, by itself, generate an extra dollar in revenue for a municipality. A higher tax base generally means that the tax rate for a property category declines, leaving the total revenue constant.

But changing property values do determine how that tax burden is divided: The tax bill increases for properties with values that rise by more than the average, while falling for properties with decreasing values or below-average increases.

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Homeowners, on average, in and around the cottage country town of Bancroft are winners in the assessment freeze, since property values in the area have nearly tripled since December, 2015, according to the Canadian Real Estate Association’s composite price index. The same is true in the markets of London and Brantford, southwest of Toronto, where property values have also surged much more than in other parts of the province.

Meanwhile, average increases in Greater Toronto and Mississauga has been much lower, on a percentage basis, with those regions recording the smallest gains of the 26 major markets tracked by CREA. (For the purposes of property tax calculations, it’s the relative percentage change in property value that matters, not the dollar amount.)

The result: Residential property owners, on average, in Toronto and Mississauga are paying more in provincial education taxes than they would have had there been a fresh provincewide assessment. And residential property owners in Bancroft, London and Brantford are getting a temporary reprieve.

The same is true within a municipality, too. The owner of a property that has increased in value more than the average as part of the assessment would see their municipal tax bill rise; a property owner with property appreciation below that average would enjoy lower municipal taxes.

But that won’t happen until the 2024 tax year, at the earliest. A lag in property tax adjustments would happen even during normal economic times, since Ontario only issues a provincewide assessment every four years. Even then, higher assessments are phased in over four years, slowing down the shift in the tax burden.

The Municipal Property Assessment Corporation (MPAC), which conducts the provincewide valuation exercise, noted that property values do increase outside of provincewide assessments if improvements are made on a property, such as the construction of an addition.

With the assessment scheduled for 2020 delayed at least twice, most recently as part of the province’s economic and fiscal update in November, that four-year gap will stretch to six years. The province has yet to say when that assessment will take place. MPAC said it can begin that exercise on relatively short notice.

The distortions resulting from the additional delay of two years highlight the need for annual reassessments, as is the case in other provinces, Mr. Bishop said.

Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business, wrote in an e-mail that his organization has heard from members who stand to benefit from the delay in a provincewide assessment, and those who are stuck with higher tax bills. Either way, he noted, it will be a “messy reset.”

In an e-mail, Ontario’s Finance Ministry said the provincial government’s priority is “maintaining stability” for taxpayers and municipalities, following public consultations. The ministry also noted there was support for the four-year assessment cycle during those consultations, but the government is willing to listen to further feedback.

The Ontario government has pointed to the pandemic as the reason for the delay in a provincewide assessment. But Mr. Bishop questioned whether the pandemic was to blame, since other provinces have managed to continue their annual assessments.

Rather, he noted, the original schedule for a 2020 assessment would have resulted in rising 2021 tax bills for some property owners, ahead of an expected provincial election later this year.

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