Time for Ontario to allow municipalities to defend their tax base

August 5, 2015

3-minute read

An important article in the Globe and Mail highlights a significant issue facing local governments across Ontario.

As major commercial and industrial property owners win tax assessment appeals, wriggling out of the responsibility of paying municipal taxes, it is reaping devastating impacts on local finances.

The details themselves are telling enough: a pulp mill getting its taxes reduced by 80% because the pulp and paper industry has slumped; a major steel mill getting its property taxed as “vacant” because it had locked out its employees.

But they tell only part of the story.

Many of the examples cited involve either company towns or corporations whose operations have historically accounted for a large share of the local economy.

And that’s where the rest of the story comes in. Ontario no longer permits municipalities to levy taxes on business activity. Taxes are based solely on the assessed value of the property and the general tax rates.

Under the Assessment Act, the value of a property for tax purposes is based on the value of the land and the building, not the value of the equipment inside the building or what goes on inside it.

That value is based on what is on the surface of the land, not on what is underground. So, for example, in a mining operation, nothing below the surface counts—not the minerals, not the structures underground, and of course, not the equipment underground.

Even on the surface, the value for assessment purposes is limited. Unless a piece of equipment is part of the physical structure, it doesn’t count. So, for example, in a steel mill the continuous casting machines and the rolling machines don’t count.

That means that, in the normal run of things, virtually none of the industrial base of Ontario’s single-industry or industry-dominated towns counts as part of the tax base.

When municipalities controlled their own assessments, they were able to create a kind of rough justice framework—with the agreement of the companies—in which these major industries paid higher effective rates of tax as a kind of social contract with the towns that they dominated and that might not even exist if they weren’t there.

When the province took over assessment, those higher effective tax rates were grandparented. And to ease the pain somewhat further, the provincial assessors recognize the reality that there is no “market” as such for purpose-built structures like pulp mills, mines and smelters, and value these properties based on replacement cost.

So the very fact that these major employers are now appealing the taxes they pay towards the support of the towns they dominate is a big deal. It signals the end of the informal social contract that delivered a rough justice level of financial support to single-industry and industry-dominated towns.

And the fact that these employers are winning their appeals—massively, and with significant impact on the viability of the affected municipalities—points to something seriously wrong with the legislation in Ontario that governs how the Municipal Property Assessment Corporation (MPAC) does its work.

Corporate property owners are finding gaps, weaknesses and loopholes to exploit in Ontario’s property tax and assessment system, just as they have in the corporate income tax system.

And just as federal and provincial governments have acted to strengthen and plug loopholes in the corporate tax system, so must Ontario strengthen its property tax and assessment system to defend the municipal tax base.

The loophole that allowed a steel plant to be reassessed as vacant land because the corporation had locked out its employees must be closed.

The legislation should be changed to make it clear that a property cannot qualify as vacant land for property tax purposes unless it actually is vacant land.

The choices of different approaches to the measurement of assessed value should be established in legislation. For example, the use of the replacement cost method of valuation for unique industrial properties should be set out in the Assessment Act, rather than being left to the judgment of assessors.

The legislation should make it clear that owners of commercial and industrial property cannot have it both ways. They cannot benefit from an assessment system that does not include the value of the business in the value of the property and then argue that a weakness in the business justifies a reduction in assessment.

The legislation should explicitly exclude the economic circumstances of the business—which is not part of the tax base—from consideration in establishing its assessed value.

The legislation should either: (1) explicitly prohibit the use of proxy measures of business activity as the basis for determination of the value of real property; or (2) be changed to provide that all fixed machinery and equipment employed in the business of the property owner or occupant is included in its assessed value.

In other words, property is either assessed as real property or as a business, but not as some combination of the two.

The old days, in which major employers in single or dominant industry towns reached an accommodation with the municipality as to a fair contribution from the employer to the community, are gone. Property taxes are just one more cost to be minimized, regardless of the impact on the community.

Ontario must wake up and modernize its property assessment legislation to protect this critical source of revenue for local government.

Economist Hugh Mackenzie is a CCPA Research Associate. Follow him on Twitter @mackhugh

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