Josef Filipowicz is an analyst at the Fraser Institute.
The Ford government wants to project its “open for business” ethos in 2020 and beyond. Indeed, Queen’s Park recently focused heavily on business competitiveness in its fall economic statement, announcing a reduction in the corporate income tax rate for 2020, among other measures.
But what about another significant tax expense faced by Ontario businesses – property taxes, which represent about half the total tax burden on business investment in major Canadian cities? How fair and efficient are these taxes?
In the fall economic statement, the government said it would seek input on how to improve business property taxation, with an eye to boosting competitiveness. Thankfully, it doesn’t have to look very far for answers.
Before discussing solutions, it helps to recap the problem. In Ontario, as elsewhere, property tax rates are typically higher for businesses than for residents. For example, according to recent research, in Toronto in 2017 (the latest year of comparable data), property tax rates for commercial properties were almost four times higher than for residential properties.
Unfortunately, city hall does not provide a rationale for this tax disparity – with businesses paying relatively high rates for what they receive in local services. But it’s likely bowing to political pressure by shifting a higher share of the tax burden away from homeowners (who vote in local elections) and toward businesses (which don’t – or more accurately can’t).
Which brings us back to potential solutions.
In the 1990s, the Harris government, aware of the imbalance between residential and non-residential property tax rates, instituted “ranges of fairness,” which bound municipalities to reduce this imbalance over time. Fast forward two decades and Ontario municipalities are indeed more balanced in the way they levy property taxes on residents and businesses (especially when compared with cities in other provinces). Across the Greater Toronto and Hamilton Area’s 29 municipalities, municipal rates for businesses are typically less than 1.5 times residential rates.
However, the province levies its own property tax to fund public education. Across the same 29 municipalities, the ratio of commercial-to-residential property tax rates levied by the province was almost 6 to 1 (on average) in 2017. In other words, decisions made at Queen’s Park – not city hall – largely drive the relatively high property tax rates on Ontario businesses.
Consequently, property taxation in Ontario remains unfavourably tilted against businesses (again, largely because of Queen’s Park), which hurts the province’s competitiveness, its ability to attract and retain entrepreneurs and business owners, the ability of business owners to prosper, expand and hire Ontarians and the ability of existing businesses to remain open and serve their communities.
The good news, however, is that the Ford government can learn from the past. The “ranges of fairness” appear to have been relatively successful at reducing the tax imbalance at the municipal level, so Queen’s Park could institute a similar set of guidelines for the province’s slice of the property tax pie to further reduce this tax imbalance.
The Ford government has repeatedly said it wants to make Ontario a friendlier place for entrepreneurs and businesses large and small, old and new. But this is unlikely to happen without some relief on the property tax front.
The sooner the Ford government addresses this issue, the sooner Ontario can become a friendlier, fairer place for businesses and job creators.
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