Kyle Burton thought he had found a Toronto unicorn – a retail space with relatively affordable rent.
Mr. Burton, the owner of vintage shop Second Voyage, has been looking to move to a location with better foot traffic for some time. But after recently touring a property in the popular Leslieville neighbourhood, he discovered that the property taxes would be as high as the rent. It’s a common problem.
“The rent will often be reasonable, and then it’s the property tax that will discourage me,” he said.
In cities across the country, small businesses are urging relief on their property-tax bills, which are growing substantially in red-hot real estate markets. While cities such as Toronto and Ottawa are lowering bills for small businesses and raising them for bigger enterprises, other municipalities say they are unwilling to engage in tradeoffs or are being stymied by provincial rules.
Entrepreneurs who own their own buildings pay property taxes directly. But commercial landlords often pass on costs such as property taxes to tenants, depending on the terms of the lease.
Business owners and advocates stress that high property taxes make launching and running a small business in Canada more costly than in other jurisdictions. That’s especially true for street-front retailers, for whom location is key to gaining customers. Even before the pandemic, Canadian municipalities had one of the highest commercial property tax rates in the developed world, according to data from the Organization for Economic Co-operation and Development.
Municipal and provincial leaders have tried to provide some relief but are challenged by the complicated, cross-jurisdictional nature of property-assessment rules.
Take British Columbia, for example, where the pandemic threw fuel on an already blazing real estate market.
Chris Brayshaw, the owner of Pulpfiction Books, which has three locations in Vancouver, said the year-to-year changes in his property-tax bills have been a source of continuing uncertainty.
“Sometimes it’s, ‘You owe us another $1,000.’ Okay, not a problem,” Mr. Brayshaw said. “One year it was, like, ‘You owe us almost $10,000.’”
One property-tax increase he received five or six years ago was so large he was unable to sleep through the night for months, he said. While the business ultimately did well enough to absorb the cost, the stress was so great it affected his health – a story he said is common among entrepreneurs.
And like many other business owners, he takes issue with the “highest and best use” approach that provincial agencies, such as the one in B.C., use to assess property values. It assesses commercial properties based on what development of maximum value could be put there – a condo tower, for example – instead of what is actually there. Small-business advocates have instead argued for a “split tax” system, which assesses values based on the buildings currently on the property.
B.C. is one jurisdiction that has been trying to address those concerns. In March, 2020, the provincial government introduced the Interim Business Property Tax Relief program to lower the assessed values of commercial properties. But taking part was optional for municipalities, and so far none have.
Sarah Kirby-Yung, a Vancouver city councillor, says the main reason for the lack of uptake is that the program is too administratively complex for municipalities. She said B.C.’s provincial assessment agency should instead include the “split tax” approach as part of its regular assessments.
She added that political will among B.C. municipalities is gathering steam now that Vancouver’s high real estate prices have spread across the province.
“I think with the recent assessments coming out, you’re seeing huge increases across the province in some of those other municipalities,” Ms. Kirby-Yung said. “That perhaps might provide an opportunity for the government to look at this as something that’s starting to have a more sustained impact provincewide.”
The B.C. government and municipalities are now working on a long-term property-tax review to address the high costs of commercial tenants, but a provincial spokesman could not say when it will be completed.
Similar municipal-provincial tension has played out in Ontario over the past 18 months. In November, 2020, the Ontario government announced it would lower how much businesses had to contribute to education funding. And the province introduced legislation to allow cities to create preferential tax rates for small businesses.
Over the course of 2021, city councils debated the tax measure – and most rejected it. Only Toronto and Ottawa signed on.
As in B.C., many Ontario municipalities were concerned about the administrative work involved. But a larger concern was that, in order to keep overall revenue stable, a city that reduced tax rates for small businesses would have to make up the revenue by hiking rates for someone else.
“Frankly, there is no secret pot of money to support small businesses with, and all we would end up doing is shifting the tax burden from one group of taxpayers to another,” London, Ont., deputy mayor Josh Morgan said at a committee meeting last summer.
For Toronto and Ottawa, that wasn’t a problem: They lowered taxes for small commercial properties and raised them for larger ones.
In Toronto, small businesses saw their property taxes drop 15 per cent, while all other commercial properties had their rate increased 0.85 per cent. City staff estimated small businesses would collectively save $26.9-million.
One challenge in Ontario is how to define a small business. In most settings, it is defined by the number of employees or the amount of annual revenue. But when defining a small business through the property-tax system – as Ottawa and Toronto do – you can only use categories such as lot size, property value or geographical area, which means some small enterprises could slip through the cracks.
“Most of the beneficiaries will be small businesses, indirectly,” said Brian Kelcey, a municipal consultant who has worked in Winnipeg and Toronto. “But there will be some large businesses that benefit, too. And then, indirectly, there will be some small businesses that, because of the tax shift, are penalized and pay more just to try to make the model work.”
Mr. Kelcey said the amount of work required by cities to deliver relatively small tax breaks for some properties – and hikes for others – speaks to the need for larger reforms in property tax systems, which vary from province to province. Changes could include larger transfers of funds from other levels of government or more revenue from sales taxes, so municipalities are less reliant on property-tax revenue.
“As long as the solution to a property tax problem is about shifting the burden around, you’re going to lose politically, you’re going to lose economically and you’re going to lose administratively,” he said.
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