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Toronto is in danger of becoming "a bedroom community for the 905 region," as higher taxes and growing traffic congestion drive businesses out of the downtown core, a new report warns.

The report, scheduled to be released today by the Canadian Urban Institute, a Toronto-based think tank, says that between 1998 and 2005 just seven new "Class A" top-of-the-line office buildings were built in downtown Toronto, even as condominium construction boomed. Meanwhile, 102 new Class A buildings went up in the suburban 905 belt.

"Is Toronto's destiny to become a bedroom community for the 905 region?" the report's asks. "This is surely not the intention of any level of government, although it may be the unintended consequence of years of neglect."

Largely to blame for the imbalance, says the CUI's Glenn Miller, are property-tax bills for downtown businesses that are much higher than the rates paid elsewhere.

For instance, commercial property taxes on top-of-the-line Class A office space in west Toronto averages $6.61 a square foot, compared to just $4.62 across the border in Mississauga's airport corporate centre area.

The tax difference, passed on to tenant businesses by landlords, has a large impact on a building with hundreds of thousands of square feet in office space.

The higher tax burden also means Toronto landlords feel the squeeze, as they are forced to charge lower rents in order to keep their tenants from fleeing, Mr. Miller said.

Factor in rent and other added costs and some downtown offices cost more than $40 a square foot -- approaching twice the going rate in the suburbs, he said.

A large chunk of the higher tax bill is due to the province's education tax, which is set at a higher rate for businesses in Toronto than it is for those elsewhere. The report calls on the province to level the playing field across the GTA.

But the study, which was funded by the Toronto Office Coalition, an association of owners and tenants in high-end offices in the city, also cites other factors. It says traffic congestion, and the lengthy process required to get a new building approved, are also driving away new development in Toronto.

"That combination of things drives people to say, 'These are our corporate needs -- maybe we should locate out by the airport'," Mr. Miller said yesterday.

Some businesses, such as several major banks, maintain downtown office space but have moved call centres or other functions outside the city in recent years. And grocery giant Loblaw Cos. Ltd. recently moved its headquarters from midtown Toronto to Mississauga.

Despite the worrying signs, Toronto still has the largest concentration of office space in Canada, generating $500-million in taxes for city hall and employing more than 500,000 people, says the report, which surveyed 30 major GTA businesses.

Toronto Mayor David Miller says he is happy to see the report highlight the need for the province to even out the disproportionate amount of education tax that Toronto businesses pay. But he said businesses cannot expect a tax cut from city hall any time soon, since the city is stuck with a $1.1-billion budget shortfall.

"Toronto is Canada's pre-eminent business address," the mayor said. "By North American standards, our costs are low, including taxes."

He pledged to take the report into consideration as the city comes up with a new strategy to attract businesses. He said the disproportionate property tax burden shouldered by business evolved over 60 years, and said the city will try to even it out -- but not with tax cuts.

Toronto, under his leadership, is investing in public transit, arts and culture and cleaning up the city's streets and parks -- all of which attract businesses, too, he said.

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