Navigating Canadian Real Estate Taxes

August 1, 2016
Written by: Emily Haggerty, CREW Washington DC

If you’re thinking of buying property in Canada, there are two things to get straight. First, 8/5/16 is May 8, not August 5, and second, hockey is the greatest game on earth. After that, you should know how your real estate will be taxed. While not that different from United States taxes, owners and investors should be aware of some subtle nuances.

Where?

Each of Canada’s 10 provinces has its own assessment legislation, and within the provinces, many of the larger cities administer their own property assessments and taxes. Because of this, it is important to consult with the property’s taxing jurisdiction directly.

What?

ASSESSED VALUE
Assessment values are calculated using one of the three standard valuation methods: income, cost, or sales. While there are no legislative requirements for the method to assess different property types, generally the income approach is used for income-generating assets such as hotels, office and apartment buildings; the cost approach is used for limited market or owner-occupied property such as manufacturing plants; and the sales approach is used for single family homes and vacant land.

Although each part of a mixed-use property (residential, retail, land, etc.) will receive a separate assessment, it is important to carefully analyze each when appealing. Any appeal opens up the entire property for reconsideration.

TAX RATES
Primary factors for determining property tax rates are location, property type and tax class. Municipalities establish tax rates by dividing their budgetary needs by the assessed value of property within their jurisdiction. Often municipalities set tax rates by property type and these rates can be adjusted in an attempt to promote the development of certain types of property within a municipality. Knowing the distinctions between property types and tax classes is important because an appeal can be filed based on errors in classification.

TAXABLE ASSETS
With very few exceptions, Canada doesn’t tax personal property, so there is no need to break apart the values of real and personal property. Instead, properties for which a portion of the income value is attributable directly to business value and not real estate, such as hotels or nursing homes, receive a deduction for the value of non-real estate items including intangibles to arrive at the value of land and buildings for property tax assessment purposes.

When improvements on a property are constructed or demolished, the assessed value should change accordingly. Effective the day of demolition, the entire value of the demo-ed improvements should be removed from the assessed value (this can be appealed if not accounted for correctly). The reverse is not true, and an unfinished allowance can be applied to the new building’s value until the property is stabilized. The onus of capturing construction value is on the assessor. If a delay occurs in adding the value of new construction to the assessment roll, the value may only be added back to the two prior years.

Every property in Canada has a unique roll number assigned by the municipality. If a property is divided, or if two properties are combined into one, this roll number is reassigned to account for the new property. This is notably different than in the U.S., where improvements can sit on many parcels.

Who?

Most assessors in Canada are quasi-government employees, meaning they don’t actually work for the government, but are employed by a not-for-profit assessing authority that is accountable to the government. Each province has an assessing authority. Other assessors are employed directly by municipal governments. In either case, it is the assessor’s job to establish property assessment values throughout their jurisdictions and to be on the front line working with property owners when those values are appealed.

Each assessing jurisdiction also has a quasi-judicial property assessment review board (called different things – Property Assessment Appeal Board, Assessment Review Board, Board of Revision etc.) which is comprised of government paid and appointed seats. The sole purpose of the Board is to hear appeals of valuation disputes that were not satisfactorily settled between the assessor and owner.

How?

TIMING OF REASSESSMENTS
While each jurisdiction has its own rules and procedures relating to property taxation, generally the property assessment system is established by provincial governments. Some reassess annually, while others reassess every two, three or four years. Ontario has a four-year cycle and phases in new values over that period. For example, if a property’s assessment increased from $30M to $42M for a four-year assessment cycle, the taxable value increases $3M per year. Other provinces with cycles consider the full value for all years. Quebec has a very important distinction in that it only allows appeals during the first year of its three-year cycle.

CALCULATING REASSESSMENTS
Many factors go into the calculation of a property assessment. Specific data, such as actual rents received and recent sales, influence the final value regardless of which valuation method is used. Assessors use both market data and financial performance data submitted by owners, which is typically required to be submitted annually. This is very important, because in some jurisdictions, property owners will lose their right to appeal for failure to submit financial information.
 


Emily Haggerty is a Sales & Marketing Specialist at Altus Group US Inc., a Canadian-based commercial real estate tax, data and software firm. She is responsible for overseeing Altus Group’s brand expansion into the Washington DC market, which includes building relationships with partner companies, organizations and local jurisdictions. Haggerty has been a member of CREW Washington DC since 2013 and currently serves on the CREW Network Communications & Editorial Committee and the CREW Washington DC Finance Committee.