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A Toronto tax revolt pays off for downtown tenants

Placards in storefront windows communicate dissatisfaction about tax increases for businesses on Yonge Street in Toronto.

Christopher Katsarov/The Globe and Mail

Back in August, Toronto furniture store owner John Anderson was shocked to learn that his taxes, maintenance and insurance costs were set to jump by $35,000 over the coming year. As with many other small businesses along Yonge Street, the property housing Mr. Anderson's store, Morningstar Trading, had seen its assessed value skyrocket, with nearby condo development driving up land prices.

Over the next several months, a self-styled "tax revolt" by Yonge Street businesses convinced the Municipal Property Assessment Corp. to reassess 84 properties along the downtown strip in light of the area's heritage designation. The $23-million assessment for the building that houses Morningstar was scaled back to $10-million (still up from a $5-million assessment in 2012), and Mr. Anderson now expects his costs for taxes, maintenance and insurance to increase by a more manageable $15,000. Still, he worries that the reassessment victory is only temporary fix.

"It's like a big cloud over your head," said Mr. Anderson, who is also the president of the Yonge Street Small Business Association. "The major problem is the sudden big increase. With a slow increase, everyone can adjust."

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He's throwing his support behind a new effort at city hall to find more permanent solutions for small businesses facing sticker shocks in rapidly developing neighbourhoods.

On Tuesday, city councillor Kristyn Wong-Tam, who helped lead the push for Yonge Street reassessment, is expected to introduce a motion asking city Hall to take a hard look at its property tax policies. The motion asks city staff to investigate four potential tax policy tools: a small business tax class, a capping system that would target properties with reassessments far higher than average, new tax bands within different property classes based on assessment value, and more frequent assessments by MPAC.

If the motion passes, city staff will have until February to come up with a cost benefit analysis for each proposal, and report their findings to city hall's executive committee.

Discussions about tax policy changes have been happening behind the scenes at city hall since the summer, said Ms. Wong-Tam. City staff have already indicated they're willing to look into revamping Toronto's outdated tax-increase capping program for commercial and industrial properties.

"My motion is asking staff to be far more creative than they were intending to be," Ms. Wong-Tam said. "Don't even think outside the box. Smash the box." Even with city staff willing to re-examine tax policy, however, it won't be smooth sailing for any of Ms. Wong-Tam's proposals.

The idea of developing a small business tax class has been explored before, said Enid Slack, director of the Institute on Municipal Finance and Governance at the University of Toronto.

"Back in 1996, prior to the 1998 property tax reform, we looked at this question of small business, and we all had a sense of who it was we were trying to help, but we could never define it in a very objective way," Prof. Slack said. "Is [a small business] measured by the size of the property, square footage? Is it measured by the property's assessment value? Is it measured by income?"

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Ms. Wong-Tam suggests defining small businesses as independently owned, non-franchise businesses operating in low-rise buildings. But even with this more specific wording, it could be difficult to figure out who should benefit, said Brian Kelcey, founder of the public policy firm State of the City Inc., and former budget adviser to the mayor of Winnipeg.

"The more targeted it is, the more bickering there will be over definitions," Mr. Kelcey said. Furthermore, not all small businesses in Toronto are seeing property assessment spikes, he said. It's mainly an issue for businesses in areas facing condo development pressures.

"Let's say malls suddenly recover in value; all that value is shifting to them even though you've invested all this time to create a new tax class around the previous target," Mr. Kelcey said. "It's like dealing with a big blob of Jell-O. If you push some Jell-O out of the way, it always goes somewhere else. And it does so in a totally unpredictable way because values are shifting across the board."

Mr. Kelcey is more optimistic about the potential for capping. The city already has the power to cap tax increases for commercial and industrial buildings, and has experience doing so. In 1998, when Ontario shifted to the current value assessment (CVA) system, the province allowed municipalities to cap tax increases for commercial and industrial properties at 5 per cent annually, allowing businesses a number of years to adjust to their new, far higher assessments.

Most of the businesses who benefited from the tax capping system have since left the program, after eventually reaching a tax level in line with their CVA. The program could, however, be revamped to readmit properties hardest hit by the recent assessment.

"The joy of capping in a property tax system like ours, relative to creating new classes, is you're managing the shifts in value rather than trying to wipe them out," Mr. Kelcey said. He did warn, however, that revenue lost from capped properties tends to be made up by "clawing-back" money from properties that have seen their valuations drop. In other words, properties that should be paying less tax after a reassessment end up paying the same as before in order to fund the caps.

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"It's a zero sum game. You're collecting the same amount of tax revenue, if somebody is getting a benefit, somebody is paying for it," Prof. Slack said.

Ms. Wong-Tam suggests limiting the need for clawbacks by focusing the caps only on properties experiencing CVA-related spikes "substantially higher than average." If her motion passes on Tuesday, details such as this will form the core of a highly technical debate, and one that will likely tread familiar territory: the relative fairness of lower residential versus higher commercial tax rates, the accuracy of MPAC's current value assessment model and the role of the province versus Toronto.

"Most of the tenants on Yonge Street don't care how they do it, they just want it done," Mr. Anderson said.

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