January 20, 2020

Property Taxation: The Best of Intentions and the Worst of Outcomes

I do hope that those advocating tax relief for ‘small business’ understand that the proposal from the provincial government is a lot muddier than it looks.

The province says the interim legislation would allow municipalities to exempt a portion of the value of a subset of commercial properties from taxation, easing the tax burden for tenants responsible for property taxes through their commercial leases.

If I understand the intent, the City would be able to exempt or reduce the tax on that part of an assessed parcel which has not been developed – the so-called “unused airspace”.   If the zoning allowed a ten-storey building, but there was only a one-storey storefront on the site, presumably the City would reduce the assessment or forgive the amount valued on the ‘unused’ part.

A few things to keep in mind:

The exemption directly benefits the property owner, not the tenant, unless the latter also owns the property.  Presumably ‘small’ businesses (whatever they are) would see a drop in their ‘triple-net leases’ from the landlord which includes the property taxes, though in fact it’s the owner who pays the property tax directly to the City.  And it’s the owner who could well see the market price of the site increase as a result of this exemption of unused density.  (Also, listen to the “This is Vancolour” interview with Tom Davidoff, who explains how our low residential property tax rates have contributed to our unaffordability.)

It may also encourage further speculation since the holding costs will go down as the asset value (hopefully) goes up.  The lower those holding costs, like property tax, the longer the speculator has to appreciate the increase in capital gain, the less need to redevelop the underutilized land, and the more desirable the property for speculative purposes.

Secondly, there is a reason why the ‘unused’ part of a site is included in the assessment: it’s a very real part of the value.  ‘Density’ (or FSR) is not measured by current use but as potential development, whether realized or not.  No owner of a property is going to sell at a price lower than what the market would pay because the site hasn’t been built out to the maximum possible. Nor is a buyer going to get away with offering less since what is being bought and sold is that potential, not just current uses.

The Assessment Authority determines what the market will pay on a given date when it evaluates the property’s worth.  That’s the whole point of a market-based assessment system, which has very significant benefits with respect to objectivity, simplicity and transparency.

If the City accepts the Province’s offer, it’s going to be in the subjective (and probably not very transparent) business of deciding what is ‘small’, what is ‘legacy,’ what is ‘unused,’ not to mention who it will tax (or what services to cut) to make up the difference.  It will get ugly, and there will be unintended consequences.  (If a business has ten employees, does it become big when it has eleven?  If it has two outlets, does it becomes a chain at three, and hence just another Starbucks?)

At the moment, the City can pass off the subjectivity and complications of assessments because it doesn’t do that job.  It’s the reason why we have a separate provincial authority to set the value of each individual property, since it’s less subject to political pressure.  The City’s job is to set the overall tax rates, which vary by class of property (commercial, residential, industrial, etc.) but not to vary the tax rate within a class.

Now it looks like it is going to wade into this very messy territory, which will soon begin to feel more like quicksand than an attempt to drain the swamp.

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  1. On the flip side, if property taxes are levied to fund current operations conducted by the City, how does unused future density (which doesn’t use City services) factor into current operations?
    There’s the potential that taxing for the future looks like or is a cash grab.
    I suppose infrastructure improvements (capital costs) for sewer and water designed to accommodate future growth may be funded under current budgets, but should those be financed before the fact or afterwards?
    If doing so beforehand, then, arguably, the improvements may be paid for by those (third net tenants) who likely won’t see the benefit of their payments since they’ll be kicked out for redevelopment.
    You might say the owners would benefit from infrastructure improvements, but the practical result is that the cost of taxes is passed on to tenants.
    As for lower holding costs, I think that would only apply if the landlord is bearing the cost of the taxes – ie if the landlord is the occupier of the property or if the property is vacant.

    1. That should read “triple” not “third”.
      PS – and like any business, cost, expenses and input taxes are passed on to the consumer (which is why there are input tax credits available).
      I don’t now if an analogous property tax credit was examined (as an input tax equivalent in the course of running a business), but maybe the provincial sphere of property taxes wouldn’t mesh with the federal sphere of taxation.

      1. Not quite. In the age of online shopping the retailer goes out of business as often he canNOT pass the additional cost (be it higher utility costs due to CO2 taxes or higher property taxes or higher wages) onto his clients as they shop elsewhere, namely online.

        1. Yeah, that’s really the same.
          With poor sales (for whatever reason – more online shoppers, bad weather, etc.), the bricks and mortar retailer is not recouping costs of any kind and -boom – goes bankrupt.

    1. Municipalities don’t control that. It’s a BC Assessment decision to recognise the use as a community garden and assess it for tax it for that use.

  2. Many thanks for bringing us back to property taxes and their purpose, primarily these days to support the cost of municipal infrastructure and services. We also should not lose sight of the fact that property taxes remain one of the closest things we have to a wealth tax. However, we have also long seen a need to balance the intention of taxing wealth with the fact that current income is often stretched when it comes to paying property levies, and it is for that reasons that we in BC have historically developed any number of means to exempt those with low incomes from property taxes and to put off their payment ’til a later date, often even the point of sale. These include rebates/base exemptions for those of low income and delayed payment for the elderly and others unable to pay the levy from current income. To the extent required we should reserve these alternative mechanisms for small business owners/renters of modest income. There’s no need to alter the principles underlying property taxes and their assessment. BC has one of the best property tax assessment systems in Canada, and there’s no reason to give it up or to change the principles underlying the current system.

    1. Good point.
      I recall arguments against the City shifting tax burden away from commercial properties to residential properties along the lines of: large corporate office tenants who are also under triple net leases are well able to bear the commercial rate property tax burden.
      So there would need to be some threshold that would trigger relief.

    2. BC may wish to learn from booming US states like WA or TX.

      No state income taxes, but very high property taxes, PLUS the ability for income earners to deduct mortgage interest and property taxes (up to certain caps) from their taxable income.

      This benefits cities in that they collect reliable and high property taxes regardless of who owns it, be it a Russian oligarch, a Asian property tycoon, a local family or a local merchant. The advantage is that both the locals can deduct their expenses from taxable income, while the non-tax paying non-resident cannot.

      It also benefits renters as they have higher net earnings.

      High property taxes thus act as high consumption taxes as real estate use is a form of consumption. You chose to live in a big home or a small condo. You chose to live large (because of your inherited wealth or high income) you pay very high property taxes regardless of citizenship or declared (or often undeclared) income.

      Road use fees, mobility procing or congestion fees have to be discussed in this context, too, of course, as online shopping is here to stay & will get more prevalent, and we may have too much retail already and it is certainly too highly taxed because residential property taxes are far too low in BC, as are road use fees. As Amazon, Fedex. DHL or UPS shift their smaller delivery trucks to electric they pay no more CO2 or gasoline taxes thus a per km fee needs to be instituted ASAP, not just discussed as per this high level MetroVan proposal. https://www.translink.ca/Plans-and-Projects/Mobility-Pricing.aspx Where is that shift from debate to action ?

      1. worth noting that while mortgage interest is deductible in the us, at least in my families experience owning properties both sides of the border, the us interest rate on mortgages is approx 1% higher than here. So that deduction is mostly a bank benefit….

        1. The issue is this truly benefits local workers as opposed to foreign investors. Yes rates are about 1% higher in US, so?

          But given BC’s many seniors it’ll likely not fly here as a concept but the issue is that BC has ever rising healthcare costs, much of it to seniors that pay low property taxes AND few / low income taxes. BC needs to rethink its taxation model in lieu of ever more baby boomers (from other provinces mainly) retiring in temperate BC, ever more immigrants and ever more foreign investors wishing to park their cash here in real estate.

  3. The issue is free road use for delivery trucks as an instrumental part of ONLINE SHOPPING. Where is this debate in this context as now ~50% of shopping is done online? With more and more e-trucks upon us the gasoline tax is not cutting it anymore !

    Retail stores’ property taxes have to reflect that new reality as do road use fees. MetroVan has a draft of a congestion fee scheme but does not implement it. Why not ? If every Amazon/UPS/DHL/Fedex truck paid $1 per km in Vancouver we could lower retail taxes and even the playing field.

    Less talk please, MetroVan Mayors Council, MORE ACTION !!

  4. the province should end triple net I C I leasing ( as in residential) —- landlord pays—- they could ask for downzoning if they think property taxes are to high

    1. No one regulates trade between commercial tenants and commercial landlords expect the overall contract law. No one is forced to sign a triple net lease.

      The issue is an outdated property tax model in light on more international people & money mobility and online shopping !! Why not have the same tax rate for residential properties (far higher than today) and businesses for the same unit. Does it matter if the condo is used by a dentist, hairdresser, an international property owner or family of 3?

      1. Because politicians like to “stick it” to big business
        – which occupy the majority of the commercial space in any large city.

        Should Telus, CIBC, Royal Bank, BMO, TD, etc. pay the same in property taxes for 200,000 sq ft of office space as a 200 unit condo tower?

        1. Yes they should. Property taxes should be by sq ft or value which is related ie a 10,000 sq ft condo space (say 10 condos at 1000 sq ft each) should be taxed the same as a 10,000 sq ft office assuming equal value, say $1000/sq ft !

  5. Are people forgetting that the City is the one who brings the tax burden upon the shop owners with their choice to jam density down the old streetcar arterials to avoid the fight with the neighbours to densify the streets behind. They created C-2, C-3, etc. not the Province.

    The City could leave the storefronts as single story and up zone density around the arterials like in Kerrisdale with RM-3 just off 41st Ave.

    What is the appeal to live along our Stroads anyways? Beyond the traffic noise a UBC study just released says it’s toxic to our health:


    1. The main three issues are

      a) excessive commercial taxation (vs residential of same value) AND
      b) the onset of online shopping ie reduced retail space demand (roughly now 50%, depending on goods purchased) AND
      c) the undertaxation of road use ie free parcel delivery because the UPS/DHL/Fedex/Amazon truck pays no road use fee at all. Once they go electric, and they all will over the next decade, they don’t even pay gasoline surcharges anymore or CO2 taxes.

      As such, a major RETHINK re commercial taxation is required ASAP !