City of Ottawa
Task Force on
Property Assessment and Property Tax Issues
November 27, 2001
TABLE OF CONTENTS
Property taxes are a function of property assessment, based on current market value as assessed by the Municipal Property Assessment Corporation (MPAC - an agency governed by provincial legislation), and the tax rate (formerly the mill rate) set for municipal purposes by the City of Ottawa and for education purposes by the Government of Ontario. Property re-assessment is now being conducted province-wide, and last year properties in Ottawa were re-assessed from 1996 values to 1999 values.
Last year’s re-assessment increased on average Ottawa’s residential property assessment by 4.6%. For non-residential properties the average increase varied from 20.5% to 31.3% depending on property tax class (however, tax increases as a result of assessment increases were capped at 5% by provincial legislation). Increases in property values varied by City ward and by neighbourhood, due to local housing market conditions. As a result of increased property assessments, however, an estimated 83,000 residential properties in Ottawa were facing higher property taxes despite no increase in the City’s tax rate – indeed, the City’s residential tax rate was adjusted downwards to avoid a windfall gain to the City as a result of the average increase in residential assessment. Nevertheless, over 38,000 homes were facing a property tax increase of over 5% from the provincial re-assessment process alone.
As a result, many homeowners are expressing concern over property tax increases that they cannot afford on their homes, and that they cannot hold elected representatives accountable for. The lack of accountability for property tax increases as a result of higher assessments comes from the reliance on property sales as a means of determining property values, not from a vote by a democratically-elected municipal representative. This is particularly problematic in areas of high housing demand, where property values have increased in some cases by over 40% (i.e. the Glebe, Carlingwood, Crystal Beach-Lakeview, etc.). This can pose particular hardship for seniors living on retirement incomes, some of whom find it difficult to cope with property tax increases of these magnitudes.
These concerns are expected to be further exacerbated in the 2002 re-assessment, based on year 2001 property values, as Ottawa’s hot housing market that year sent up house prices by a reported 16%.
The problem of higher property taxes is compounded by the increase in responsibilities being passed onto municipalities (and therefore their taxpayers) as a result of the provincial Local Services Realignment initiative (commonly referred to as ‘provincial downloading’), and the removal of previous provincial support for local infrastructure needs (i.e. roads, sewers, public transit, etc.).
There is concern that property taxes, originally designed to fund local property-related services such as fire and police protection, roads, sidewalks, parks, etc., are now funding provincially-mandated programs such as social assistance, social housing, and child care subsidy programs. These involve substantial income re-distribution to meet worthwhile social objectives, yet property taxes are not based on ability-to-pay principles. Currently such provincially-mandated programs take up over 20% of the municipal property tax load, rising to 45% of all the property tax bill when the provincial property tax for education is added in.
As a result of these concerns expressed by Ottawa residents, the Task Force on Property Assessment and Property Tax Issues was created in April 2001 by a motion of Ottawa City Council and mandated to examine property assessment issues, the appropriate role of property taxes in funding local services and provincially-mandated services, and the appropriate use of provincial tax revenues to better enable municipalities to provide public infrastructure necessary for economic activity.
The Council motion setting up the Task Force and outlining its mandate, is attached as Appendix 6.1. Also included in the Appendix is the text of Council motions referring other property tax-related matters to the Task Force. In Appendix 6.2 is the listing of the membership of the Task Force.
The Task Force began its work in September, 2001 with a series of briefings on property assessment and property tax issues, meeting weekly in order to adhere to its November deadline. It held 14 meetings, including three Town Hall sessions at which members of the public were invited to make presentations and express their views on the range of issues in the Task Force’s mandate (see Appendix 6.3 for a listing of delegations heard and communications received). As well, the Task Force reviewed a number of studies and heard from experts in the field (see Appendix 6.4).
As noted above, the context of the work of the Task Force is the concern among taxpayers about the ability of their municipality to provide the services which taxpayers expect on the basis of the current combination of municipal responsibilities for services, programs and infrastructure, and the ability of the municipality to raise revenues to meet these responsibilities. The report contains comments, therefore, both on assessment and taxation, and on the appropriate division of the responsibility (provincial or municipal) for funding services and programs.
The above chart illustrates the total of all property related taxes levied in Ottawa in 2001.
Note that education taxes, which are property based, are collected by the City on behalf of the Provincial Government and remitted to the Province. These are provincial taxes, not City taxes, although they are collected by the City.
The Province is responsible for setting the rates of property tax for education purposes and remits funds for education purposes to local School Boards. This provincial taxation amounts to roughly one third of the property based taxes paid by Ottawa taxpayers.
Over half of all property taxes in Ottawa are collected on the basis of residential property taxation. Commercial and industrial properties generate roughly 28% and 4%, respectively, of all property based taxes. The next chart gives the dollar values for these categories.
This chart shows the distribution of municipal property taxes (does not include property taxes levied by the province for education, or PILs). As this chart and the previous one illustrates, well over half of all property related taxes are raised on residential property taxation. The next chart illustrates how many properties are in each of these classes. In addition to these broad categories, the City of Ottawa also uses several subcategories for taxation purposes, which are illustrated in the following slides. These categories are determined by the Province, but the City is entitled to choose from among the subcategories and apply specific taxation ratios to them. The assessment on these properties, however, is determined by the Municipal Property Assessment Corporation, which assesses properties in Ontario based on rules determined by the Province under the authority of the Assessment Act.
(Note that in this chart, the ratio for residential properties is not listed. By convention, all tax ratios are listed in comparison with residential. In other words, the broad commercial tax rate for properties of the same assessed value, would be 1.98 times the tax rate for residential properties, which are, by definition, 1.00.)
Chart 9 – 2001 Tax Rates by Class
2001 Tax Rate * **
Ratio Compared to Residential
The table above reflects the rates of taxation on various classes of property. That is, the percentage of the assessed value of the property that is levied in taxes.
* Includes education tax
** For the commercial and industrial classes, these are the occupied tax rates.
The Task Force, as part of its activities, sought public input through advertising and attending three public Town Hall sessions in the community, and received further public input through letters, faxes and e-mails from taxpayers (see Appendix 6.3).
The Task Force heard many things. It heard from residential taxpayers who related their experiences with last year’s re-assessment process: their frustrations in trying to understand the complexity of the system and the basis of assessment; the difficulty to get the then-Ontario Municipal Assessment Corporation (recently re-named as the Municipal Property Assessment Corporation) to accept real market sales as indicators of current value assessment; the administrative frustrations of requesting re-considerations, and then having to file (and pay for filing) an appeal because the re-consideration request was not able to be done by the appeal deadline; the concern over tax increases from higher assessments despite no change in city services, no change in incomes, no increase in the property tax rate, no change in the property, but because some-one down the street sold at outrageously-high prices; the frustration in not finding anyone accountable for higher property taxes from higher assessments; the apparent arbitrariness of the assessment system; the property tax burden not being related to anyone’s ability to pay; the steady increase in property taxes despite no increases in services; the property tax penalty from improving one’s home; the fear of having to sell one’s home because the taxes are too high; paying taxes for services no longer received, like education …
are arbitrary. The sheer volume of doing the province every two years means
the job is haphazard at best. As a result there’s anger and resentment, and
endless appeals.” – speaker at town hall meeting “The value of any given piece of
real estate has no bearing whatsoever on the amount of services used by the owner of that real estate or its
inhabitants.” – e-mail “The
system has become so complex that even the people administering it have a
hard time understanding it.” – speaker at town hall meeting “My home is assessed at $30,000
less than my business, but my business pays 4 times the property taxes than my home. This is illogical!” – speaker
at town hall meeting “I
don’t know where they get these values. No-one’s been out to see my home.
They can’t explain it to me.” - speaker at town hall meeting “I appealed my
assessment and got it reduced, but then it went up again the next year. I
appealed it again and got it reduced, but it went up again the year after.
They won’t take ‘no’ for an answer; I’ve got to keep appealing to keep my
taxes down.” – speaker at town hall meeting “The
whole assessment system is too complicated, and the appeal process too
difficult for the average person.” – speaker at town hall meeting “I bought my home in 1972 and
taxes were $300 a year. Now they’re up to $3,000 a year. It’s not fair to penalize
us for market values. We should be grandfathered.”- speaker at town hall
on the basis of ability to pay is a good principle.” – speaker at town
“Assessments are arbitrary. The sheer volume of doing the province every two years means the job is haphazard at best. As a result there’s anger and resentment, and endless appeals.” – speaker at town hall meeting
“The value of any given piece of real estate has no bearing whatsoever on the amount
of services used by the owner of that real estate or its inhabitants.” – e-mail
“The system has become so complex that even the people administering it have a hard time understanding it.” – speaker at town hall meeting
“My home is assessed at $30,000 less than my business, but my business pays 4 times
the property taxes than my home. This is illogical!” – speaker at town hall meeting
“I don’t know where they get these values. No-one’s been out to see my home. They can’t explain it to me.” - speaker at town hall meeting
“I appealed my assessment and got it reduced, but then it went up again the next year. I appealed it again and got it reduced, but it went up again the year after. They won’t take ‘no’ for an answer; I’ve got to keep appealing to keep my taxes down.” – speaker at town hall meeting
“The whole assessment system is too complicated, and the appeal process too difficult for the average person.” – speaker at town hall meeting
“I bought my home in 1972 and taxes were $300 a year. Now
they’re up to $3,000 a year. It’s not fair to penalize us for market values. We should be grandfathered.”- speaker at town hall meeting
“Taxing on the basis of ability to pay is a good principle.” – speaker at town hall meeting
The Task Force also heard from landlords, tenants and non-profit housing agencies on the tax discrimination against multi-residential properties, having higher tax burdens buried in the rents compared to what their residential neighbours paid. The Task Force heard from commercial business properties about being over-taxed compared to residential properties for the municipal services they received. The Task Force heard from a heritage property owner looking for tax relief in recognition of the higher costs of maintaining his heritage property. The Task Force heard from small rural business owners who were struggling to keep rural businesses alive in a tax-hostile environment, where their city cousins were under-assessed and their border competition had lower taxes.
The issues the Task Force heard appeared to fall into two categories: issues of fairness in property assessment and taxation, and issues of frustration with the system. It appears to be déja vue all over again, as just 8 years earlier the message that the Ontario Fair Tax Commission heard, when examining property assessment and property tax issues, was much the same:
· “The system of local government finance is so complex and arcane that it is incomprehensible to most Ontario residents …
· The system of property assessment and local taxation is extremely confusing and perpetuates a number of obvious inequities …
The Task Force also heard from landlords, tenants and non-profit housing agencies on the tax discrimination against multi-residential properties, having higher tax burdens buried in the rents compared to what their residential neighbours paid. The Task Force heard from commercial business properties about being over-taxed compared residential properties for the municipal services they received. The Task Force heard from a heritage property owner looking for tax relief in recognition of the higher costs of maintaining his heritage property. The Task Force heard from small rural business owners who were struggling to keep rural businesses alive in a tax-hostile environment, where their city cousins were under-assessed and their border competition had lower taxes.
The issues the Task Force heard appeared to fall into two categories: issues of fairness in property assessment and taxation, and issues of frustration with the system. It appears to be déja vue all over again, as just 8 years earlier the message that the Ontario Fair Tax Commission heard, when examining property assessment and property tax issues, was much the same:
“The system of local government finance is so complex
and arcane that it is incomprehensible to most Ontario residents …
The system of property assessment and local taxation is
extremely confusing and perpetuates a number of obvious inequities …
· Many residents and most municipal leaders question the extent of Ontario’s reliance on property taxes for funding social services …”
The Task Force would like to thank all those who attended and spoke at Task Force meetings, or communicated their views and concerns to Task Force members.
In its work the Task Force attempted to determine what criteria might be most appropriate for evaluating the property assessment and tax matters before it. How do we measure a good tax system? All the goals compatible? Are some more important than others? And how do we balance competing goals?
To aid in answering these questions, the Task Force engaged the services of Professor Frances Woolley, from the Department of Economics at Carleton University, to develop a Primer on the Principles of Good Property Taxation, which is summarized below and which can be found in full detail in Appendix 6.5. In brief, among the principles against which the Task Force measured its work are the following:
· Simplicity and Transparency
In considering the characteristics of a tax system, the principle of neutrality means that taxes should not distort economic behaviour, including decisions about where to live and work, and, in the context of property, what improvements to make to one’s property. The principle of fairness means that the tax system should be fair, or equitable, in the way it treats different people.
Concepts of what is fair vary greatly, and not everyone agrees. However, generally there are at least two approaches to measuring fairness. The first is fairness based on ability-to-pay, which has two dimensions: vertical equity, that is, people who have a greater ability to pay taxes should pay more in taxes (commonly referred to as ‘progressive’ taxation); and horizontal equity, that is, people who are the same in all relevant respects should be treated equally (i.e. non-discrimination). The second is fairness based on the benefit principle, that is, people who benefit more from a service should pay more in taxes to support that service (or, people who receive more value from a service should pay more for it).
Other principles of good taxation include stability, in that taxes should not fluctuate dramatically from year to year. The principle of flexibility means that taxes should respond to changes in economic circumstances. The principle of accountability means that people know who to hold responsible on how their taxes are established, and have a means of appealing incorrect or unjust decisions, or changing the basis of tax policy. And the principles of simplicity and transparency means that the tax system is relatively easy and inexpensive to administer and easy to understand, which means, in order to understand it, it must be transparent to taxpayers.
It was the view of many members of the public that the Task Force heard (and was reflected in the research of the Task Force itself) that the current property tax system fails most, if not all, of these principles.
Nearly a decade ago now, the Property Tax Working Group of the Ontario Fair Tax Commission delivered its report to the Commission. Among the points made in that report were the following:
…Ontario’s system for financing local government is badly in need of renewal. The costs of fixing the system, both political and financial, will be substantial. … However, as substantial as these costs may be, they pale in comparison to the cost that we as a society will incur in the future if we continue to ignore today’s problems. The past 20 years have taught us that these problems do not go away with time; they get worse. Taxpayers are losing confidence in the ability of the local institutional system to effectively deliver the services they want and to share the costs fairly.
The Working Group went on to make some other preliminary observations:
First, there is only one taxpayer – there is no such thing as a municipal taxpayer as distinct for a school board taxpayer as distinct from a provincial taxpayer. Second, the idea of tax burden in the abstract is meaningless. Taxes are what we pay for the services which we collectively decide ought to be provided by our institutions of government. The role of these institutions is to provide those services in the most effective manner, and to raise the revenues required to pay for them in a manner that we collectively consider to be fair.
Sometime after the Fair Tax Working Group made its report, the Regional Municipality of Ottawa-Carleton set up its own committee (the Ottawa-Carleton Fair Tax Working Group) to examine issues related to property tax and assessment in Ottawa. The Working Group recommendations were considered by Regional Council in 1993, over eight years ago, and resulted in a series of recommendations to the Province with respect to property tax, assessment and the local administration of taxation related issues. Those still relevant today include:
· Recognizing the distinction between property assessment policy (a provincial responsibility) and property taxation (a municipal responsibility);
· Assessments should be consistent, and done annually;
· Land should be assessed separately from buildings;
· All residential property should be taxed at the same rate;
· Renters should be informed of the property tax component of their rent, and property tax reductions should be passed through to tenants;
· Tax increases from assessment changes should be averaged on a 5-year rolling average, and mitigation should be provided to residents facing excessive tax increases as a result of changes in assessment;
· The provincial government should assume full-funding for all mandated income maintenance programs;
· The greater part of education should be funded from ability-to-pay taxes; the provincial government should provide sufficient funding to achieve a provincial standard of education;
· Property tax exemption policies should be reviewed; exemptions should reflect the use of property, not the status of the owner;
· Federal and provincial payments-in-lieu (PILs) of property taxes should be equal to what would be paid if these properties were fully taxable;
· School boards should receive their share of the education portion of PILs;
· Property tax relief measures should be available to residential property taxpayers who qualify.
It is clear from the above that despite a number of significant changes in the property assessment and property taxation system in Ontario since 1993, as well as the shift in program responsibilities (e.g. the 1997 Local Service Realignment exercise), many of the issues identified by the Ontario Fair Tax Commission, the Ottawa-Carleton Fair Tax Working Group and others remain current today.
Indeed, the Task Force was told by several members of the public that the system of assessment and taxation used by Ontario and its municipalities is not well understood by many or most taxpayers, and that the level of confidence in the ability of local governments to raise revenues fairly and provide services and programs effectively is still in question for many. The Task Force was mindful of the fact that in a democracy governments depend on the approval of the governed to raise and spend funds, and indications that this approval is tentative at best is troubling and suggests that reforms are as necessary today as they were a decade ago.
In 2001 property taxation for municipal purposes accounted for $778.3 million in Ottawa. This does not include the provincially-imposed education property tax, which is collected along with municipal property taxes but remitted to the province, and which was in the order of $367.3 million in 2001. Nor does it include the $155.3 million collected from federal and provincial governments as payments-in-lieu (PILs), which are payments by these governments of an amount equivalent to what they would pay on their various properties in the City if they were taxable (under the Canadian constitution municipal governments are not entitled to levy taxes on ‘senior’ levels of government). Payments-in-lieu in the year 2000 equaled about 12% of municipal property taxes collected.
Of municipal property taxes collected the largest category is residential property tax. Property classified under the ‘residential’ property class (e.g. single family dwellings, dwellings of 2 to 6 units, etc.) accounted for 51% of all municipal property taxes collected, or $568 million in 2000. The residential property tax is based on the assessed value of property (based on estimated market values) and is paid directly by owner occupiers of residential property. Multi-residential property (i.e., apartment buildings larger than six units in size) paid $97 million in taxes, or 9% of all municipal property taxes in Ottawa. This tax is paid indirectly by tenants, through the rents charged to tenants of rented residential property, although it is not identified as such in rental statements received by tenants.
Commercial and industrial property tax together accounted for 40% of municipal property tax revenues in Ottawa in 2000, or $442 million. As with residential property, the tax is based on assessed value of property and, like residential property tax, is paid either directly by owner occupiers or indirectly by tenants through their rent or occupancy charges. Commercial and industrial assessment differs from residential assessment, though, in that the basis of the assessment is the value based on the rental income a property generates (office and commercial buildings and apartment building) or the replacement cost of the building (for industrial buildings), as opposed to a calculation based on the selling price of the property in the case of residential homes. Further, these property classes are taxed at higher rates than the residential property class, as determined by City Council. Recent provincial legislation, however, now determines that any adjustment in non-residential property tax class ratios can only move closer to the residential class (requiring more residential taxation as a consequence), not further away.
The property tax, then, is actually several different taxes, calculated on the basis of different ways of assessing the value of the property that is being taxed. Each of these taxes is borne by different taxpayers, has different fairness and effectiveness issues associated with it and has different impacts on economic activity.
Property tax, of course, is not the only source of municipal revenues. Other local sources of revenue – user fees and charges - amount to about $405 million (24% of revenues) and include such items as water and sewer charges, bus fares, recreation fees, development charges, etc. However, property taxes are, and are likely to remain, the most important source of revenue for the wide range of municipal programs and services that determine the quality of life for our community.
With respect to this property tax collected, a number of
important points should be noted:
In Ottawa about 66% of the property taxes collected goes to the City of Ottawa and about 33% goes to the Government of Ontario for education purposes. The education portion is collected by the City and shows up on tax bills, but it is set by the province and is remitted to the Province by the City.
Property Assessment (and therefore taxes) varies by class, and different tax rates are applied against properties in different classes.
As the Fair Tax Working Group on Property Tax noted some years ago:
Most people, when they think of tax fairness, think first of whether they are getting value for money. They think of taxes - particularly property -taxes as a kind of price that they pay for services. If they think they are receiving a quality service they will think the tax is fair. If they think their money is being wasted or spent inappropriately, they will think the tax is unfair. … In looking at revenue fairness for local government, the fairness of the property tax can only reasonably be assessed in the context of the services it is expected to support.
One way of examining this issue is to look at the appropriateness of the revenue source to the services being funded (the benefit principle), as well as the issue of equity among taxpayers (i.e. ability to pay).
A large number of studies of municipal finance have suggested that residential property taxes are regressive, in the sense that lower income families and property owners tend to pay a higher proportion of their income in property tax than do higher income families.
One area where this disparity is most evident is in the relative burden of property tax on multi-residential tenants and residential home owners. On the assumption that property taxes are passed on either wholly or substantially by landlords to tenants through their rents, tenants clearly pay a higher proportion of their income in property tax than do home owners. This fact has been noted by a large number of commentators in recent years.
The significance of this fact is that if property taxes are used to pay for goods and services that are used by everyone in Ottawa on an equal basis, then the burden on the taxpayers for these services and goods is not shared fairly among all the taxpayers. Some will be paying more than their share, and others will be paying less.
It has frequently been argued (by the Ontario Fair Tax Commission, the Ottawa-Carleton Fair Tax Working Group, among others) that education and general welfare assistance are programs that serve broad provincial public policy objectives and are not well suited to being funded from local property taxes. Other services which may fall into this category include public health services, home support and other services, and a range of social policy measures (child care subsidies, social housing) which involve income redistribution and equity-related goals.
It should be noted that this issue has already been responded to at least in part in the case of both education and general welfare assistance, since neither of these are now paid for totally out of local property taxes. While education is partly financed by a property tax (the balance from other provincial revenues), the education levy is province wide and is not allocated specifically to communities or school boards on the basis of revenues raised in that particular area.
Similarly, the bulk (80%) of welfare assistance is provided from provincial funds, on the grounds that welfare assistance is a broad provincial responsibility and should be paid for out of general, and not local, funds (i.e. from income taxation, either provincial income taxation or the use of federal funds provided through the Canada Health & Social Transfer (CHST) program). It should be noted here that Ontario is an anomaly in Canada in that most provinces actually cover 100% of these items.
As the Ontario Fair Tax Commission noted some years ago, the extent to which property tax can be viewed as fair on the basis of benefits received depends on what services are funded from the tax. For some of the programs provided at the municipal level, a case can be made that direct user charges would be better related to benefits received than property tax, on the principle that people should pay for what they get, in the proportion they get it. This may include a wide range of services and programs such as charges at recreational facilities, water and sewer services, waste disposal and recycling, transportation services (such as public transit and roads) and other services for which a choice can be made and benefits accrue to individuals from the use of these services. For these services, property taxes may not be the most appropriate way to finance delivery.
For other services, now funded through property taxes, though, spillover benefits to residents in other jurisdictions (the ‘border’ effect), difficulties in identifying the benefits to particular individuals as well as the income redistribution effect of the services make the benefit principle either difficult to apply or clearly inappropriate. An example of this is the use of municipal infrastructure by non-residents. Since non residents do not pay property taxes, they are not directly contributing for their use of roads, parks and other infrastructure.
It remains, however, that a significant number of municipal responsibilities are still paid for out of property taxes - including some responsibilities which have only recently been assigned to the municipalities by the Province (e.g. social housing). Therefore it appears that the beginning of the Task Force examination of property taxes and the financing of local responsibilities was to look at the question of whether the mix of revenue sources between property tax and other sources funding was right, and whether changes could be recommended to improve matters.
A third issue which arose was the issue of whether heavy reliance on property taxes as the major source of funding at the municipal level gives the City enough flexibility to handle changing circumstances and ride out economic upturns and downturns without having to make drastic changes either in the level of property taxation or in the level and quality of services provided.
This is an issue with which many Ottawa taxpayers will be familiar as a result of the last major economic downturn in Ontario, in the early 1990’s. At that time, as a result of that severe recession, Ottawa’s ability to handle its welfare assistance responsibilities taxed its fiscal resources to the limit, and forced the then Regional Government to cut back on a wide range of its other programs in order to finance its provincially-mandated contribution to welfare assistance. This was a period when services were cut back and capital spending was curtailed, when transit facilities were under severe stress and fares were increased. This was in spite of the fact that the province government stepped in to help the municipal authorities with the most pressing of its social policy needs, by increasing its contribution to welfare assistance from 80% to 90%. As another possible economic downturn appears, the issue of what fiscal flexibility the City has as a result of its heavy reliance on just one form of revenue becomes an important matter of public policy.
A recent comment by a noted observer of municipal finances puts this issue in perspective:
Current economic and political events suggest that the Ontario economy is about to experience a period of slow growth (perhaps negative growth) over the rest of this year and part of next year, at the very least. This is likely to have significant and severe impact on the ability of municipalities to meet their expenditure needs with their existing tax base. For example, social service expenditures, where they are a municipal responsibility, will rise; the current property tax base has little revenue elasticity and is unlikely to grow to meet increased expenditure needs; municipal politicians may be hesitant to raise property tax rates; provincial grants are unlikely to grow in relative importance. The combination of these likely occurrences suggest that many municipalities may have considerable difficulty meeting their expenditure commitments unless they resort to large property tax increases.
The Task Force’s concerns, then, fall into several
Therefore, in the Task Force’s view, services provided by local government are best looked at as falling into three general categories:
Moreover, as noted above, the Task Force is concerned that whatever the specific mix of services and revenue sources, they should be flexible and broad enough to allow the City to meet its responsibilities without imposing rapid and drastic changes on the local taxpayers.
The Task Force, in examining these issues, accepted as well that property taxes are a long-time form of taxation, strongly linked to municipal services, and that there was general public acceptance of it as a source of local tax revenue. The Task Force determined that, for some municipal services, there was a link between the method of taxation (a tax applied against the value of a property) and the benefits received by that property.
The Task Force recommends to the Province of Ontario that property taxes should continue to form the basis of funding those municipal programs that are justifiably and closely related to serving property (land and buildings), based on the benefit principle. This would include (but not be limited to) police, fire protection, and infrastructure (roads, sewers, community facilities, etc.).
The Task Force believes that the ability-to-pay principle should be applied to those services which redistribute income, have broad social policy objectives, or have spillover effects beyond the local area where the services are provided (i.e. education, welfare, social services such as child care subsidies, social housing, and other services which are not provided on a purely market basis but require some form of subsidization). Since there is substantial evidence that property taxes are regressive in that lower income families tend to pay a higher proportion of their income in property taxes than higher income families, it makes sense that the cost of these services should be wholly or substantially paid for out of a source that is more closely related to ability-to-pay. The most obvious candidate for this would be some form of income-related taxation rather than property-based taxation.
The Task Force recommends to the Province of Ontario that property taxes should not form the basis of funding such income-redistributive social programs as education, welfare assistance, childcare subsidies, social housing, and public health; these programs should be funded from ability-to-pay tax revenues.
It is important to note that this analysis is about the distribution of the taxes paid, not their amount. There is only one taxpayer, and only one source of funds. The issue is fairness and appropriateness, not the size of the revenue flows. If the recommendations the Task Force is making above were to be accepted, then reductions in revenue from property-based taxes, all other things being equal, would be matched by some increase in the rate of provincial income taxes to cover these reductions. While amounts collected would be the same in total, the burden of collecting revenues sufficient to cover these services would shift to a system more closely related to ability-to-pay.
For some services user fees may be more fair and more appropriate than property taxation for providing local services, based on the benefit principle. In these cases their use should be expanded, subject to certain design issues (administrative efficiency, avoidance of abuse, consideration of ensuring access to services by low income residents).
This suggests, as well, that some services which are now provided by the municipality and paid for out of property taxes might be more appropriately funded out of a specific-use tax in order to make them more closely related to that use than to property. The most obvious candidate for this would involve associating fuel taxes with the costs of providing road infrastructure at the local level.
It makes good sense to recognize such costs in the form of returning to the municipalities of some portion of the fuel tax collected in that community sufficient to cover some portion of the local cost associated with providing roads and infrastructure.
It should be made clear that the Task Force is not arguing for more revenue to flow to the municipal level as much as it is arguing for some restructuring of the source of these funds. All other things being equal, the Task Force assumes that if these recommendations about the City having access to some share of the fuel tax were to be accepted, taxes would be adjusted to take the same amount in total but through a different mix of tax sources. The result would be a system in which taxpayers of Ottawa paid the same amount of taxes for the same amount of services and programs, but property taxes played a less significant role than they now do in paying for these services and programs, while road users would contribute more through the fuel taxes they pay.
User fees are already a significant source of revenue in Ottawa. For 2001 user fees will amount to $405 million or 24% of the City’s total revenues. These include water charges, sewer surcharges, transit fees, development charges, charges for recreational services, day care charges; and others.
User fees as a source of general revenue raise a series of issues:
The Task Force examined the issues connected with user fees for some services at the municipal level and agreed that, in general terms, user fees should be more closely examined as a revenue source.
This interest in
user fees is less motivated by the idea that user fees could be used to
increase the revenues available to the City, but more on the consequences of
raising money more equitably through
The Task Force
believes that user fees are particularly appropriate when:
The Task Force recommends that the City of Ottawa should move to the fullest use of user fees based on the benefit principle - where possible, where meterable, where it promotes efficient use of resources, and taking into account issues of access to these services by low income residents. Further, the City of Ottawa should review the extent to which the benefit principle is being applied to City services through user fees and on any changes which could be made to more fully reflect the benefit principle in funding local services and programs.
In principle, garbage collection could be one of those services where a user fee would be appropriate, but there are some issues around potential fee evasion that require careful design. There are some jurisdictions where user fees for garbage are used, and the City should study their experiences closely before moving to user fees in this area.
As well, some municipalities (the former Nepean, for instance) adopted the principle that user fees on services such as recreational services be set by absorbing the cost of providing infrastructure and other associated fixed costs into the general tax base and charging user fees to recover all variable or operating costs associated with providing such services.
Several municipalities have adopted fee-subsidy programs directed at low income users, to ensure that low income users are not denied access to City services.
The Task Force recommends that the City of Ottawa develop or extend programs to ensure access for low-income residents for all existing and future City services funded by user fees.
Hotel occupancy taxes have, from time to time, been suggested as another source of revenue for municipalities. In fact, the Task Force’s research uncovered the fact that hotel occupancy taxes are quite common in municipalities in Canada and the United States and are used to finance a variety of activities, many of them related to tourism promotion as well as to local infrastructure.
A hotel occupancy tax, in general, can be thought of as a charge which recovers some of the costs of local services provided to tourists and visitors, based on the benefit principle (i.e. fire, police, road and transit facilities, etc). However, there are two schools of thought regarding the revenue from this tax: it could go to general revenue to increase the ability of the City to finance its infrastructure: sidewalks, roads, police and fire services, etc.; or it could be allocated to fund tourism initiatives to attract business. Other cities, however, have directed these revenues to other activities.
The City of San Francisco, for example, uses its hotel tax to finance arts and culture programs, which are seen as a major factor in the city’s attractiveness as a tourist and convention destination. Since 1961, San Francisco’s 14% room tax on hotel bills has been used to distribute $145 million (U.S.) to a variety of cultural organizations. According to the City of San Francisco website, groups supported include “the nation's oldest international film festival, the oldest continuously performing ballet company in the country, one of the premier African American theatre groups on the West Coast, an internationally acclaimed symphony, the foremost North American museum devoted solely to the exhibition of Mexican and Mexican American art, a gay and lesbian theatre with a national presence, the leading presenters and performers in the Bay Area of contemporary performance arts, and an array of cultural festivals”.
Francisco’s hotel tax of 14% is close to the average across North America for
such taxes. According to information
collected by the Government of Alberta, most jurisdictions in North
America impose a similar tax with a similar impact, and the average combined
federal/state or provincial/local rate on hotel accommodation in North America
is in the range of 12%. The City of Seattle has a hotel tax of a roughly similar size. It consists of a 7% city tax on hotel bills
in addition to a state tax on hotel bills, for a total of 15.6% on hotel bills
(the hotel bill also includes a tax of .4% earmarked for the regional
transportation authority and a .2% municipal transit tax; the tax is collected by the state and
remitted to the city). Massachusetts also has a local option provision which
allows cities to levy up to 4% in hotel taxes, in addition to state taxes. Last year this tax, collected by the state,
returned $85 million ($US) to Massachusetts cities.
While not all provinces have similar provisions for hotel taxes, they are not uncommon in Canada: British Columbia has a provincial level hotel tax of 8%, and allows cities to request that the government add up to an additional 2 percentage points for a local tax. Vancouver has had such a hotel tax for some years. As well, in Quebec a similar tax currently exists in Montreal.
On November 14, 2001 Ottawa City Council adopted the following motion:
“That the City of Ottawa request that the proposed Municipal Act 2001 be amended to include a provision for the City to impose a visitor room tax on hotel, motels and similar establishments with all monies raised to be made available for reinvestment in the Tourism and Convention business.”
The Task Force believes that the allocation of these monies should reflect local priorities.
The Task Force recommends that the Province of Ontario amend the Municipal Act to permit municipalities to impose a visitor room tax on hotels, motels and similar establishments.
It has been noted above that Ontario municipalities have become increasingly dependent on property tax in recent years, and that this imposes a series of issues on the City relating to appropriateness of the revenue source for some services and programs, a number of fairness issues, issues of whether property taxes are the most efficient way to encourage some forms of socially useful behaviour, and issues related to fiscal flexibility. These issues are compounded by the virtual elimination of transfers from the provincial government to municipalities in Ontario in recent years, with corresponding negative impacts at the municipal level.
As noted municipal finances expert Enid Slack has said recently:
In terms of trends, the downloading of expenditure responsibilities from
provincial to municipal governments, combined with decreasing provincial grants
and stable user fee revenues, has meant increased reliance has been placed on
the property tax. Compared to a decade ago, property taxes have increased
significantly as a proportion of local
A similar point was made by Professor Harry
The past decade’s combination of provincial downloading of funding responsibilities, decreases in the relative importance of grants, and corresponding increases in reliance on own-source revenues has changed the fiscal environment in which municipalities must operate. This shift has brought to the forefront issues about the funding responsibilities of municipal governments, concerns about the role and structure of property taxes and user fees, and questions of giving municipalities access to new tax sources… Recent provincial downloading and reduced provincial funding have, … placed considerable pressure on the property tax base, raising the importance of introducing provincial legislation that would permit municipalities to implement one or more new local taxes. One can defend such enlargement on benefits-based grounds. Of the alternatives that are generally viewed as possible supplements to — not substitutes for — property taxes, access to a municipal fuel tax would make considerable economic and political sense, especially in large urbanized areas with severe traffic congestion. Such a tax could be administered easily if piggybacked onto the provincial fuel tax, would be relatively efficient and fair, and would likely be politically acceptable if the revenues were used to fund local transit and transportation expenditures…
Given past political resistance, why should one believe that these reforms would receive political acceptance in the future? While the answer is uncertain, the probability of securing these changes may now be greater than ever. Given the increasing role that cities and regions play in the global economy and the recent trend toward greater reliance on own-source revenues, improving the efficiency of municipal taxes and enhancing their accountability is becoming more urgent. 
The use of fuel taxes as supplementary sources of municipal revenues as mentioned by Kitchen is used in other jurisdictions in Canada, and could therefore be used in the City of Ottawa. It would need provincial concurrence, of course. The job of persuading provincial politicians that the City of Ottawa and other municipalities need a modern, rethought approach to municipal finance, should begin with Ottawa City Council.
Some portion of the fuel taxes levied by other levels of government would make sense as a municipal revenue source, since purchase of fuel is closely related to use of roads at the local level, and fuel tax rebates to local government would correspond to the benefit principle for financing local infrastructure.
The research conducted by the Task Force indicates that this is already done in other jurisdictions, both in municipalities in Canada and the United States. As noted in a presentation given to a recent national conference on municipal finances:
· A tax of 8 cents per litre is levied for capital and operating costs of transit services and major roads within the Greater Vancouver Regional District (GVRD);
· A tax of 2.5 cents per litre is levied for operating and capital expenses for transit and major roads in Victoria, B.C.;
· Calgary and Edmonton now receive provincial grants for transportation infrastructure that are set at the equivalent of 5 cents for every litre of fuel sold in these two cities;
· Montreal also receives revenue from a fuel tax.
The Task Force recommends that the Province of Ontario provide some portion of the fuel tax to municipalities, to be used to fund the provision of local transportation services (roads, sidewalks, public transit, etc.)
The City of Ottawa should, in its submission to the provincial government, recommend what portion of the provincial fuel tax would be appropriate as a municipal share. It should show what the impact would be on residential and non-residential property taxes in Ottawa if some portion of the property tax were to be replaced by access to this tax, including discussion of the overall economic impact of this change in tax mix at the municipal level. As well, the City should seek support from other municipalities in Ontario for this initiative.
A similar proposition can be made regarding vehicle registration fees, as this, too, would be a form of user pay by those who benefit from the road infrastructure that municipalities provide. Again, this is not a new idea, but is in force in some jurisdictions in Canada and the United States – most notably in Vancouver, B.C..
The Task Force recommends that the Province of Ontario provide some portion of the vehicle registration fee to municipalities, to be used to fund the provision of local transportation services (roads, sidewalks, public transit, etc..
At Task Force public meetings, from time to time the question of replacing in whole or in part property taxes by income taxes would arise. Members of the public were invariably astounded to learn that once in Canada municipalities levied such taxes as local income and sales taxes, as well as local property taxes. Municipal income taxes were levied 80 years before the federal government introduced personal income taxes as a “temporary” measure nationally in 1917.
This, for a time, was an important local revenue source for municipalities, exceeding provincial income tax revenues until 1930. However, in 1941, as a result of the Wartime Tax Rental Agreement entered into by provincial and federal governments, municipalities surrendered their right to levy personal income tax. Today municipalities in Ontario are expressly forbidden to levy income and sales taxes by the Municipal Act.
Yet in many other jurisdictions municipalities still levy personal income taxes, both in parts of the United States (e.g. Akron, Baltimore, Cincinnati, Cleveland, Detroit, Kansas City, Louisville, Newark, New York City, Philadelphia, Pittsburgh, Portland, St. Louis, San Francisco), in Europe (e.g. Austria, Belgium, Czech Republic, Denmark, Finland, Germany, Luxembourg, Norway, Poland, Sweden, and Switzerland), and in Japan. Other countries and parts of the United States also permit municipal sales taxes (e.g. Austria, France, Hungary, Italy, Korea, the Netherlands, Portugal, Spain, and Turkey).
It is easy to see, given the limits of property tax, the attraction of having access to more progressive (i.e. based on ability-to-pay) tax sources. Indeed, prior to the 1997 Local Services Realignment initiative by the Ontario Government, a host of provincial subsidies for municipal responsibilities existed in Ontario, in part to achieve provincial policy objectives, and in part to reduce the burden of property taxes. The stated purpose of the 1997 Local Service Realignment was to reduce education property taxes by half – the Government of Ontario took over taxing properties for education from the school boards, reduced education property taxes in half, and made up for the loss in education taxes by down-loading onto municipalities responsibility for funding the provincial share of social housing and ambulances, while eliminating previous provincial subsidies for roads, water and sewer infrastructure, and public transit.
In the end, however, the property tax room vacated by the provincial government through cutting education property taxes in half was made up by the municipalities in order to fund their new responsibilities and loss of subsidies, and the residential property taxpayer was no further ahead.
Indeed, Ontario is unique among provinces in its requirement for a 20% contribution from property taxpayers for welfare assistance and childcare subsidies, as well as 100% funding of the former provincial contribution towards social housing (the federal government continues to fund its share). While the rationale for municipal participation in these income redistribution programs is to provide a stake in these programs, municipalities are already sharing 50-50 the administrative costs of welfare assistance and child care with the province, as well as funding 100% of the administration costs of social welfare – they already have a vested interest in these programs. But municipalities are ill-suited to respond from their property tax base the increases in welfare caseloads when the economy suffers a downturn. Indeed, during the Great Depression of the 1930’s, when relief programs were a municipal responsibility, there were municipalities that went bankrupt attempting to meet this responsibility.
While Ontario no longer re-directs some of its revenues from income and sales taxes to support its municipalities, other provinces do, largely through subsidy programs. The Province of Manitoba goes even one step further, by allocating 2.2% of its personal income tax revenues and 1% of its corporate taxable income collected to its municipalities. As can be imagined, this reduces the burden of property taxes in Manitoba relative to Ontario. For example, the City of Winnipeg received $47.5 million from these provincial revenues in 2000.
In addition to these recommendations, it is possible that some portion of municipal spending could be shifted from the property tax base and replaced by project-related funding from the Provincial or Federal governments. Such project-related grants such as those through federal-provincial-municipal infrastructure programs have been an important source of revenue to municipalities in the past. The Task Force would like to encourage the City of Ottawa to explore whether there could be established an ongoing relationship in this area which could be used to supplement municipal funds, achieve mutual objectives, and reduce the burden on property taxpayers.
The Federation of Canadian Municipalities has recently suggested that it might be appropriate for federal and provincial governments to allocate funds out of general revenue for specific kinds of projects. Local infrastructure would be the most obvious, although both levels of government have historically had a role in financing local public transit until recent years.
The Task Force believes, however, that the future of municipal finance does not lie with tied or conditional grants, but with regular and unconditional access to some forms of taxation or tax revenues that are currently not available to municipalities. This is why the Task Force has suggested exploring access to fuel taxes, hotel taxes, and income tax revenues.
Indeed, there is increasing attention being paid to cities as economic generators, as creators of employment and wealth. Today over 80% of Canadians live in cities, and cities are the providers of important infrastructure to support economic activity. However, it must be recognized that with the increasing reliance of cities in property taxes, there is an increasing fiscal imbalance between the ability of cities to meet their obligations and their revenue capacities.
In Ottawa, for example, according to a recent KPMG study entitled Towards a Partnership to Invest in Economic Growth: Ontario and Federal Government Tax Revenues from the City of Ottawa (February 2001), residents in Ottawa contributed some $746 million in municipal property taxes, but paid the provincial government some $2.7 billion in provincial taxes (all sources), and $4.2 billion to the federal government in federal taxes (all sources). Given that the ability to generate these federal and provincial tax revenues depends in part on the ability of the City of Ottawa to provide the infrastructure – roads, sewers, water, public transit, police, fire protection – that supports the jobs and wealth creation that funds these tax revenues, then it is good provincial policy and good federal policy to support that infrastructure.
The Task Force believes that, in principle, some form of flow-back to the municipal level should be established, that it should be unconditional rather than tied to specific projects, but that mechanisms need to be worked out with the federal and provincial governments. A conference at which such principles were worked out could amount to a historic breakthrough in Canada, and a recognition that cities are the engine of economic progress in Canada and should have the resources to do their job properly.
As Professor Harry Kitchen put it recently:
Cities and large urban centres are the major drivers of economic prosperity and the quality of urban life has become a prime determinant of locational decisions. Growing and expanding businesses engaged in national and international activities locate in cities and urban centred regions where they have access to a highly qualified workforce (knowledge workers) as well as access to business services, transportation and communications networks. Local governments, in providing goods and services and in financing these services, have an important role to play in attracting and retaining businesses. The provisions of local public goods and services affects the quality of life and influences where people live and invest and where businesses locate.
The quality of the school system, cultural and recreational facilities, infrastructure, social services and the range of housing choices are important factors.
The Task Force recommends that the City of Ottawa, directly through its own provincial and federal representatives, as well as through the Association of Municipalities in Ontario (AMO) and the Federation of Canadian Municipalities (FCM), press for an ongoing funding program from both federal and provincial governments to support municipal infrastructure, based on joint priorities.
The assessment base – the valuation of properties for taxation purposes - is a critical component of the taxation system at the local level.
In 1970 the provincial government took over control of assessment from municipalities in order to implement consistent valuation practices, centralize administration, ensure quality control and to make the measurement of the tax burden comparable across Ontario, with the goal of enhancing accountability, understandability and fairness. In 1998 assessment functions were centralized in the Ontario Property Assessment Corporation, recently re-named as the Municipal Property Assessment Corporation (MPAC), although the rules governing assessment remain determined by provincial legislation (e.g. the Assessment Act).
The Assessment Act says that properties should be assessed on their current market value, which is defined as the price for a property that is agreed upon in an arm’s length transaction between a willing buyer and a willing seller.
The Ontario Fair Tax Commission noted in 1993 that it makes sense for there to be one consistent, equitable province-wide assessment system. However, in Ontario achieving this transition to a single system combined with shifting market trends has been fraught with difficulties. Since 1995 there have been a number of changes to the assessment system in Ontario in an attempt (many attempts) to ensure that there is one consistent province-wide system. But critics have described the ensuing result as opaque, complicated and confusing to property taxpayers, and have questioned its fairness.
As with taxation in general, a good assessment system should ideally have several characteristics. Among them are the following:
Current (2001 tax year ) assessment has increased property value for all classes:
· Residential: 4.6%
· Commercial: 31.3%) (Tax increases as a result of assessment
· Multi-residential: 20.5%) increases are capped at 5% by provincial
· Industrial: 34.4%) legislation for these tax classes)
Property assessments can be reviewed by MPAC upon a homeowner filing a Request for Reconsideration anytime in the tax year. Property assessments can be appealed to the Assessment Review Board (a Provincial Government agency) – deadline is March 31 for the current tax year.
Assessment authorities in different jurisdictions use a variety of assessment methods, but the four most common methods of assessment are:
Section 1 of the Assessment Act defines current value as follows:
... in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer.
Subsection 19(1) goes on to say:
The assessment of land shall be based on its current value …
In addition to this, subsection 44(2) of the Assessment Act states that:
In determining the value at which land shall be assessed, reference shall be had to the value at which similar lands in the vicinity are assessed.
(note that in the definitions above, ‘land’ includes both land and any buildings or other structures on the land)
The Task Force spent some considerable time discussing each
of these assessment methods, and examining evidence and literature on the
impact of each of these methods.
As well, there was a great deal of discussion about assessment at the three public Town Hall meetings. Much of that discussion related to how well (or not) the assessment process is carried out and the nature of the appeals process, but a number of presenters made suggestions about ways to modify the assessment process.
After some discussion, the Task Force members concluded that each of the assessment methods in use or suggested by presenters had some weaknesses in establishing an assessment base for local property taxation. The Task Force believes that on the basis of the criteria outlined above, the market value system in place in Ontario today does not perform any worse than any other potential methods in establishing an assessment base. The Task Force further believes that some of the issues with respect to market value assessment as it is done in Ontario can be mitigated through reforms. Therefore, the Task Force eventually agreed that, on balance, the preferable course of action is to retain, but reform, the current market value system.
This does not mean, however, that the members of the Task Force are satisfied with the way assessments are actually carried out in Ontario. The Task Force is making a series of suggestions on how assessment practice can be improved in Ontario, in order to improve the actual impact of property assessment according to the criteria outlined above.
How does MPAC establish the assessed value of my property?
The real estate market determines the value of properties. MPAC analyzes market information from similar types of property in your area to establish your property's value. Any one of three methods may be used for this analysis: the selling price of a property (residential), the rental income a property generates (e.g. office building, apartment building), or the cost to replace a property (industrial). Each method takes into consideration the location of a property, the size and quality of any buildings, and features which might add to or take away from a property's value.
I recently purchased my property. Shouldn't my assessed value be the same as the purchase price?
The sale of real property is affected by many factors, such as a buyer's desire to acquire a particular property and a seller's willingness to reduce the sale price in order to achieve a sale. Another reason the assessed value and price might not be the same is that the market may have changed between the valuation date of June 30, 1999 and the date you purchased your property. MPAC establishes an (estimated) assessed value that is in the middle range of selling prices for similar properties as of a specific valuation date which, for the taxation years 2001 and 2002, is June 30, 1999. This ensures that the tax burden is equitably shared among similar properties.
Source: Municipal Property Assessment Corporation (MPAC) website
There was, in the end, a grudging consensus in the Task Force that some form of market value assessment should be retained. To paraphrase what Winston Churchill said about democracy; “Market value assessment is the worst system of property assessment, except all others”. There are, however, a number of problems with this method, and there needs to be some changes in procedure and practice to address some of the issues that arise from using market value assessment as the basis of property taxation.
If the Task Force recommendations on changing the tax mix and moving toward more reliance on user fees and more access to other forms of taxation or tax revenues such as fuel tax and some portion of income tax are accepted, then the identified issues associated with using market value assessment may become less of a problem than they currently are.
But both taxpayers who addressed the Task Force and the Task Force itself are not satisfied with how the assessment system currently operates in Ontario. The Task Force heard from taxpayers that MPAC was difficult to deal with, and that MPAC did not (or could not) clearly explain to taxpayers how their assessments were arrived at. Indeed it is a significant problem to the taxpaying public that MPAC's method of calculating market value assessment is not transparent.
MPAC appeared before the Task Force on two occasions. At the first session the Task Force could not get clear explanations on the mechanics of deriving individual assessments. At the second session MPAC refused to disclose specifics (values and parameters) regarding their multiple regression model upon which assessment is calculated, on the basis that such information was proprietary.
The Task Force believes that, as a matter of public policy, more information about MPAC's methodology should be made available to the general public. MPAC should be prepared to describe in some detail how they go about assessing specific classes of property and be prepared to provide virtually full information to all those who ask for it. This is, after all, public policy.
The Task Force recommends that the Municipal Property Assessment Corporation, as a public agency, make the methods, parameters and technology upon which it calculates property assessment open, accessible and transparent to property taxpayers.
The Task Force recommends that the Municipal Property Assessment Corporation, as a public agency, provide all relevant information (e.g. the subject property profile, etc.) used to calculate the assessed value of a property in its Notice of Assessment sent to the property owner.
The Task Force believes that there is a potential conflict between MPAC's role as an agent of public policy and its treatment of its assessment model as proprietary. It is the Task Force’s view that the public policy function which MPAC was created to address – providing the best and most accurate assessment services possible to support the property tax function on which municipalities rely – should not be compromised by confusing its public policy function with issues of funding its activities. The assessment function is so vital to the fiscal health of our cities that it should be the only function of MPAC. If this imposes financial burdens, then the Province should be prepared to cover these burdens.
MPAC, therefore, should not be seeking to sell its services on the open market. It could lead to the incongruous circumstance of MPAC selling its assessment services based on its model to the highest bidder while refusing taxpayers access to that very same model that calculates their assessments.
As a public agency, MPAC should not be putting up barriers which prevent taxpayers from understanding how their assessments were derived. MPAC should be able to disclose its analysis, in full detail, so that all the analysis can be reviewed and improved in order to obtain the most accurate and fairest assessments possible.
Democracy requires that agencies doing public work be transparent, and that their information be freely available in a form that lets ordinary taxpayers satisfy themselves that their interests are being taken care of. The Task Force strongly believes that MPAC should be more open and transparent, and that this openness would do a great deal to dispel the concerns and mistrust raised with the Task Force by many Ottawa taxpayers.
One issue that confounds taxpayers and erodes public trust in the assessment system is that the method of assessing property values by MPAC is based on estimating putative sales prices, as opposed to accepting the validity of an actual sale of a property between a willing seller and a willing buyer. Unless there are clear and justifiable reasons to do otherwise, the assessment of a normal residential property should be based on the most recent sale price for a property (reflected in public land registry records), and indexed to the average change in sales prices for that community.
With respect to non-residential properties, the Task Force did not feel it appropriate to recommend any specific changes in the valuation approaches to these properties.
An example will best show how the proposed Updated Sales System would work.
In 1995, a house sold for $185,000 and since then, in the neighbourhood, prices have changed in the following manner:
Percent Change from Previous Year
Purchased at $185,000
$203,062 is the assessed property value for 2000.
This approach to value uses two things that are simple for the taxpayer to understand: what they paid for the property and how the prices changed.
It is a fair value because it is based on two simple realities: that much was paid, and average prices changed that much.
There will be some variation from true market prices (a bungalow might change more or less than a two story house, etc.) but, on the other hand, those would presumably create relatively small changes in relative price, given that there are often 5-15% variations in assessments from what the market dictates in any event.
MPAC’s standard is to have a coefficient of dispersion of 10%, i.e. the mean average absolute difference between their assessed value and the sales that they have is 10%. The view of the Task Force is that our system will produce a result which is at least equal to that in quality, as well as being much more understandable to the taxpayer (that much was paid, and average prices changed that much).
Where the system becomes a little more complex is where a homeowner makes changes to the property that increase its value to any significant extent, or if there are negative changes that decrease its value. The Task Force recommends that such changes in the property value be dealt with by whatever is considered to be the appropriate market valuation approach. Two approaches are currently used by MPAC for various properties.
The direct comparison approach would deal with the issue of renovations as follows. Take, for example, a homeowner who has added to their second floor by building out on the top of the garage. The original condition would be 1,000 feet on the main floor and 1,000 feet on the second floor. The modified condition would be 1,000 feet on the main floor and 1,400 feet on the second floor. At that point, MPAC could fairly easily do a comparison of the selling prices of houses with the original condition, as opposed to houses with the modified condition, and then that differential would be what would be added to the value of the subject property.
The cost approach assumes that someone would not, in theory, add the addition unless it would increase the value of the property by as much as the cost of the work. MPAC would then use that cost to estimate the increase in value. MPAC and all assessors are knowledgeable about the cost approach and can easily use it.
It is the view of the Task Force that the issues and concerns around changing the values to correspond with changes in the property condition should not stand in the way of the reform of the system. With any of these methods/approaches to value, the value of the change will still be a relatively small part of the total value. In the example given, it might increase the value of the house by 10-20%, i.e. $10,000-$20,000.
This Updated Sales System would still have its integrity in that it would have originally started with a purchase price that would have been updated for market conditions, and then only be a small part of the value would come into issue . The Task Force presumes that taxpayers would not appeal their assessments because they think that the value of the addition should be $18,000 instead of $20,000. But if they wish to do that, or say the value is $10,000 instead of $20,000, then they should be able to do that.
On the basis of common experience, it is expected that these kinds of value changes through renovations to properties would amount to only 1-2% of the total properties assessed in each year. Even for these properties, the value changes might be between 5-40% of the value. It would not be dramatic changes in the value. This ends up being a very small part of the assessment system.
Changes in properties are problematic under the current system because MPAC does not learn about them unless the owner takes out a building permit. Many owners perform renovations that have some impact to the extent of $5,000-$15,000 without taking out a building permit.
The Updated Sales System will in fact be superior to the current system because when the property is sold after the renovations have been performed, the increase in value due to the renovations will be captured, whereas under the current system, a property with these “hidden” renovations can continue to be under-assessed for years because MPAC is not aware of the additional finishes or additional changes to the property, and has no way of capturing them.
Again, in the view of the Task Force, this shows that the Updated Sales System would be superior to the current system.
Objectivity - the Updated Sales System is more objective than the cost approach to value, because there is no classification question. MPAC has indicated that they are reluctant to tell taxpayers about how their house is classified as to quality. The Task Force has received MPAC’s material and found it difficult and quite subjective to determine what class a house falls in. The Updated Sales System, using sale prices, lets the market deal with those quality issues.
Impartiality - the Updated Sales System is more impartial than the other systems because it relates to a specific reality, which is the amount of money paid for the property at a particular date. Even with respect to updating the sales, the issues are relatively impartial. There are again some issues at the margin, in terms of whether one will update by property types differently (i.e. bungalows as opposed to two-stories) but those are problems of detail in the system which exist in the current system in terms of how to do these classifications, and whether to bring into account these various issues that arguably affect value.
Simplicity - the Updated Sales System is simple from the point of view of both taxpayers and the assessors and tax authorities.
Transparency - the Updated Sales System is transparent in the sense that taxpayers can understand how the assessments are done and the impact of the assessment on them
Certainty - the Updated Sales System is more certain for the taxpayer because the taxpayer knows what the assessed value will be in subsequent years, subject to market changes, as opposed to a process that no one understands coming out with a value that no one understands.
Stability - the Updated Sales System is as stable as the market is. The Task Force is not sure that the Updated Sales System would be more stable than the cost or MRA approaches to value, (MRA = multiple regression analysis, a statistical technique used in the analysis of data) but we have a reasonable degree of certainty that it would not be less stable than they are now.
Understandability - the Updated Sales System is understandable because taxpayers understand what they paid for their property. They also understand that market prices change.
The Task Force recommends that the Municipal Property Assessment Corporation base its assessment of a residential property on the most recent sale price for a property (reflected in public land registry records), and indexed to average sales prices for that community, and adjusted for significant positive and negative changes to the property.
Other assessment matters were raised with the Task Force by professionals in the appraisal business who are familiar with the issues faced by business and commercial taxpayers. It was suggested, for instance, that pre-consultations on valuing commercial and industrial property, similar to those used in British Columbia and Quebec, should be adopted in Ontario as well.
The Task Force recommends that the Municipal Property Assessment Corporation investigate and consider adopting the pre-consultation process used for non-residential property in British Columbia and in Quebec, in order reduce disputes in valuations.
A number of other administrative reforms should also be applied. For instance, if there is a successful appeal on a property assessment and it has general application then it should generally be applied to relevant properties in the area, instead of relying on the taxpayers taking the initiative.
The Task Force recommends that in cases where a successful property assessment appeal has general application, then the Municipal Property Assessment Corporation adopt as a policy that it will re-assess the relevant properties based on that general application for that tax year.
Taxpayers who spoke, e-mailed or otherwise communicated with the Task Force said that making the assessment appeal process more accessible and transparent is an important issue. The Assessment Review Board (ARB), set up in 1970 when the province took over property assessment, evolved from the previous Court of Revision where citizens were entitled to take complaints with respect to assessments. While its informality and the lack of formal qualifications to sit as an ARB commissioner has some positive aspects, the Task Force believes it has some negative consequences as well.
As the Ontario Fair Tax Working Group noted nearly a decade ago:
As a first level complaints body, the Assessment Review Board must strike a delicate balance between the need for a technical capacity to deal with complex issues and the need to maintain an atmosphere in which non expert complainants can present their cases fairly and effectively. The current system does not reflect an appropriate balance.
The Task Force’s experience in hearing taxpayers suggests that the ARB often has problems resolving assessment related issues in a way that all participants find satisfactory. Appointment from the local area where they are hearing cases also makes sense, together with some minimum retainer to increase professionalism.
The Task Force recommends that Assessment Review Board members should be given more training on assessment practices and administrative procedures, should be appointed to longer terms to increase their independence, and should be familiar with the area under their jurisdiction.
There are a number of reforms to the appeal process itself that should be considered. One deals with allowing taxpayers to appeal their assessments once they understand their full implications, which is usually after the property tax bill arrives.
The Task Force recommends to the Province of Ontario that the Assessment Act be amended to permit property assessment appeals up to 30 days after the due date of final property tax bills in a tax year.
Further, costs of an appeal should be reimbursed when an appellant wins. The cost of a successful appeal should be borne by MPAC. This would encourage MPAC to resolve issues before the appeals process. However, there should be a means to inhibit clearly vexatious appeals, perhaps by using the method employed by the Ontario Municipal Board.
The recent Beaubien Report to the Ontario Government also dealt with the issue of ARB appeals, and suggested that the ARB filing fee for appeals should be refunded in situations where MPAC Requests for Consideration of an assessment undertaken in advance of the ARB appeal deadline are resolved prior to an ARB hearing. The Task Force endorses this recommendation, and the further Beaubien recommendation that the ARB be given discretion to award costs to taxpayer appellants where appropriate. The Task Force recommendation that costs in an appeal should be borne by MPAC when an appellant is successful is consistent with Beaubien in the sense that they would further encourage MPAC to resolve issues in an expeditious manner, thus relieving one of the major irritants in the current system.
The Task Force recommends that the Assessment Review Board establish a policy to have the costs of a successful appeal by a property taxpayer be re-imbursed by the Municipal Property Assessment Corporation; further, filing fees for appeals should be refunded in situations where disputes have been successfully resolved prior to the ARB hearing.
The Ontario Fair Tax Commission in 1993 recommended that all residential property should be assessed on the same basis whether the property is occupied by an owner or a tenant:
There is no justification for a distinction in tax rate policy on the basis of the type of tenure enjoyed by the occupant of the dwelling unit under consideration.
As well, Ottawa City Council, during its 2001 budget deliberations, considered a motion to reduce the multi-residential tax class to parity with residential over seven years. It decided to accept the year one change (as well as create a new multi-residential tax class for newly-constructed apartment buildings, at parity with residential properties), and referred the matter to the Task Force for its consideration (see Appendix 6.1).
Part of the issue
here is fairness: according to the most recent census (1996) the average
household income in Ontario was a little over $66,000 for homeowners and
$35,500 for renters. As well, according
to the same census, there are about 119,000 rental units in the City of Ottawa,
about 43% of all dwellings, and some 41% of these (nearly 49,000 households)
pay more than 30% of their gross income in rent (the generally-accepted
standard concerning affordability of shelter). Given these figures, and the
fact that property taxes on multi-residential properties are passed on to
tenants in their rent, the combination of lower average income and higher
average property taxes for properties valued at the same amount, the result is
a significantly higher tax burden per dollar of income on low income taxpayers
than on higher income taxpayers. The Task Force agrees with the conclusion of
the Ontario Fair Tax Commission that this is unjustifiable.
It is likely that lowering multi-residential taxes to equivalent residential taxes would stimulate the creation of affordable housing – not through the creation of new multi-residential properties, since the tax rate on new multi-residential property was recently set at parity with residential rates, but through the conversion of existing rental property which may be able to accommodate additional rental units but for which conversion has been discouraged by the higher taxation rates that apply on rental units of seven units or more. While there are no definitive estimates on the amount of new housing which might come on to the market as a result of this change, the Eastern Ontario Landlords Organization (EOLO) estimates that it could generate roughly 1,000 additional rental units in the City within a few years or so of this change. In a community where affordable housing is scarce and vacancy rates at historic lows, this is not insignificant.
The Task Force thinks that there are three issues with respect to multi-residential tax ratios: the principle that they should be set to create equivalent taxes with similar residential properties; the issue of how to implement this, which is mostly associated with the length of the phase-in period; and what needs to be done to ensure that the benefit of any tax reduction gets passed along to the tenants and not captured by the landlord.
On the first part, the Task Force agrees with the principle that the multi-residential rate should move to a level that creates equivalent taxes for equivalent residential properties. It is not as simple as moving to class ratio parity, as multi-residential is assessed on a different basis (the income approach) compared to residential (the comparative sales approach). Indeed, by using the equivalent tax burden, the result would be that a two-bedroom rental apartment (in a multi-residential building) would end up paying the same property taxes as a two-bedroom condominium across the street. This would be fair as both units consume the same amount of municipal services (the benefit principle).
The sample calculation shown in the box below is based on preliminary research, using two pairs of buildings at one valuation date. The Task Force was told that the difference in the tax burden between multi-residential rental buildings and similar condominium buildings, based on different methods of assessment, may be in the range of 40%. If this is so, the final tax ratio needed for multi-residential buildings to carry the same tax burden as residential properties may be slightly different than that in the sample used in the box. The Task Force recommendation is that these adjustments would be made only after City staff have had an opportunity to do more extensive research than was possible for the Task Force, given our time and resources.
Based on these examples, and the different ways in which residential and multi-residential properties are assessed, preliminary calculations suggest that a multi-residential tax ratio of roughly 1.9 would equalize the tax burden on like properties and establish the principle that people should be paying the same level of taxes, whether they own or rent.
Such a reduction in the multi-residential rate (it is currently 2.178) would see the average residential taxpayer’s bill go up by roughly $30 a year for the 2 year period of the phase-in.
As for the second part – phasing-in – as the above example shows, this can be accomplished relatively quickly with modest impact on residential home owners in two years.
The Task Force recommends that the City of Ottawa, on the basis of fairness and the benefit principle, adopt a strategy to reduce the multi-residential tax ratio, beginning in 2002, to reach an equivalent tax burden for similar residential properties within two years.
In the Task Force’s view, the impact on residential tax bills will be noticeable, but not large – roughly $30 a year for each year of the two-year phase-in. The Task Force expects the move to make all residential tax burdens equal will be acceptable to most taxpayers because it is the right thing to do.
It should be noted that Ottawa would not be alone in correcting this anomaly, as a number of other cities have already moved to equalize the tax burden on residential and multi-residential properties (or abolished the multi-residential class altogether). The City of Calgary did this over three years; Winnipeg and Vancouver have already corrected this anomaly, and other municipalities in Ontario such as York and Niagara are moving to do the same thing.
Since property taxes on multi-residential properties are passed on to tenants in their rent, the Tenant Protection Act mandates that tax savings be passed through to tenants.
Approximately 20% of rent collected by landlords is used to pay the property tax, so where the taxes decrease, rents are reduced by 20% of the percentage of the tax reduction. As an example (for one unit):
The Act and its regulations require that if the property tax for a rental complex falls by 2.5% or more, the rent is automatically reduced (2.5% is the threshold). Where the tax reduction is less than 2.5%, the rent reductions would be less than 0.5% of the rent. It was determined that where the rent reduction is less than 0.5% of the rent, it would be too costly to implement rent reductions for the value which would be received (for example, if the taxes are reduced by 1%, without the threshold, the monthly rent would fall be 0.2%; if the rent was $1,000 per month, without the threshold, there would only be a reduction of $2 per month).
If the recommendation above is adopted, the taxes on the majority of multi-residential properties will be reduced by approximately 10%. For the vast majority of these properties, the tax reduction will pass through to the tenants. Furthermore, with a phase-in period of two years, the vast majority of multi-residential properties in the City of Ottawa will see tax decreases above the threshold. However, the longer the phase-in period before equivalency is reached, the more likely that the tax decrease for a multi-residential property will be below the threshold.
Furthermore, with the action taken under this recommendation, any buildings that do not experience decreases greater than 2.5% would have otherwise seen significant tax increases. Landlords could apply to pass those tax increases onto the tenants over and above any normal annual rent increases. Thus, the Task Force recommendation will benefit tenants even if assessment increases reduce the average tax decrease below 10%.
For rental complexes of 7 rental units or more, municipalities are required to notify both the landlord and the tenants that the rents are to be reduced.
The Task Force is pleased to acknowledge the support and co-operation of the Eastern Ontario Landlords Organization (EOLO), which represents 15 of the largest landlords in Ottawa, covering approximately 80% of rental units in the multi-residential property class. The EOLO has assured the Task Force that they will take the necessary steps to both inform and pass on to their tenants any property tax savings as a result of the move to equivalency with the residential property tax class, in accordance with the Tenant Protection Act (e.g. where decreases exceed the threshold).
If the tax savings are not passed onto tenants, for example by small landlords, tenants can apply to the Ontario Rental Housing Tribunal for rent reductions. However, the City will need to provide some support to those tenants who may need to launch an appeal under the Tenant Protection Act if they have not received the benefit of this tax reduction. This could be in the form of a fund to support tenant appeals, perhaps funneled through one of Ottawa’s legal aid clinics or housing agencies.
The Task Force recommends that the City of Ottawa provide sufficient resources to enable those tenants who qualify for a rent reduction as a result of the adjustment in the multi-residential tax ratio, to be able to receive such a rent decrease.
If this recommendation is accepted, an information campaign should be directed at landlords as well as tenants, especially small landlords whose business practices may be less formal than those of larger landlords. Since this issue has been raised by a variety of taxpayers, and since the major landlords association in the area, (the Eastern Ontario Landlords Association - EOLO) already provides such information to its members, an appropriate way to conduct such an information campaign may be to use EOLO as the distribution agent for information packages, in consultation with City staff.
The Task Force received a number of submissions on the problems faced by small rural business operators. In particular, the issues raised by the Rideau Assessment Tax Evaluation Committee (RATEC) with respect to the disadvantages of small rural business operators convinced us that these issues need to be addressed. These issues are connected with the fact that small rural business operators are currently taxed in the same class as urban commercial properties, in spite of the fact that their costs of doing business and the size of their potential clientele are markedly different from urban business operators.
The Task Force was told that people in rural areas feel that rural commercial property is systematically over-assessed in comparison to similar sized urban properties. If this is so, it represents a significant disadvantage to rural small business. As well, due to the difficulty in obtaining market sales data, it is not clear if these disadvantages are being capitalized through property sales.
The Task Force heard about the difficulties that small rural businesses have in competing with businesses in the urban/suburban core of Ottawa and with businesses in neighbouring municipalities with lower tax burdens. This creates a number of social problems in rural communities, in particular their ability to access local business services, and some means of addressing this issue should be developed.
The Task Force has noted, as well, the recent motion adopted by Ottawa City Council requesting that the Government of Ontario amend its legislation to permit the creation of a small rural commercial tax class (see Appendix 6.1). This is a decision which will be taken by the Province, not the City, and until this happens, it is not possible for the City to classify small rural business properties differently for tax purposes than businesses in other parts of the City.
However, the Task Force is not able to support this proposal, due in part to its inability to determine satisfactorily the impact on other taxpayers of lowering the tax burden on this particular group of businesses. Further, the Task Force is concerned that property tax policy is a blunt policy tool, and may not be appropriate to deal with the issues raised by RATEC and others. The Task Force believes that the more appropriate policy tool could be a subsidy program, based on transparency and accountability principles.
Therefore the Task Force believes that the City should attempt to address these issues through the development of a strategy, possibly encompassing the use of property tax rebates or subsidies, in order to sustain a viable commercial sector in the rural areas.
The Task Force recommends that the City of Ottawa review the issue of the viability of small rural businesses and develop a strategy to meet their special circumstances.
Marcel Beaubien, M.P.P., in his second report to the Provincial Government on assessment and tax-related matters, has suggested that the Province consider creating a new heritage property tax class. His view is that this would encourage the restoration and preservation of heritage buildings, and allow municipalities to implement a reduced tax rate to offset the high costs associated with the maintenance of these buildings, and would encourage the designation and restoration of additional heritage structures by municipalities. Mr. Beaubien’s recommendation is that the Province create optional subclasses in each of the commercial, industrial, multi-residential and residential classes. The Province has recently introduced legislation to put into effect Mr. Beaubien’s recommendations.
The Task Force did receive presentations on the problems of local business people in maintaining heritage properties for business purposes. Given the Province’s initiative to implement Mr. Beaubien’s recommendations, the City may wish to consider adopting some or all of the optional subclasses he is suggesting.
However, the Task Force’s view on this issue is consistent with its treatment of the small rural commercial property tax class discussed earlier, in that it believes that the property tax system is a very blunt instrument in achieving desirable policy objectives, and that other means should be found. The Task Force recognizes that the difficulties and extra expense associated with renovating and maintaining commercial heritage properties represents a significant disincentive and that it may result in some heritage properties falling into the danger of disrepair. Therefore the Task Force believes that the City should attempt to address these issues through the development of a strategy, possibly encompassing the use of property tax rebates or subsidies, in order to sustain viable heritage properties in our community.
The Task Force recommends that the City of Ottawa review the issue of the viability of heritage properties and develop a strategy to meet their special circumstances.
Submissions from business owners on the tax burden being carried by commercial and industrial taxpayers in Ottawa made the point that, relative to the benefits received (i.e. municipal services provided), commercial and industrial properties are over-taxed compared similarly assessed residential properties.
A review of the literature on this issue (Kitchen, Slack and others) confirmed this finding, and further spoke to the negative impact this tax burden has on job creation and prices. As Harry Kitchen noted recently, high rates of property taxation on the commercial and industrial sectors “represent a fixed cost of doing business that reduces economic activity, lowers output and reduces the number of jobs.” 
The Province of Ontario has recognized this proposition by creating “ranges of tax fairness” in its legislation, to bring non-residential property taxation more closely aligned with residential. Indeed, any changes in relative tax burden has been legislated to be in one direction only – down for non-residential property taxation, until the “range of fairness” is met for that tax class. This means that any reduction in this area is permanent. And it means that the loss in revenue would have to be made up from the residential property tax sector.
The Task Force heard arguments for a reduction of the non-residential tax burden. There arguments were direct unfairness (benefit principle), unfairness of effect (horizontal equity), unfairness of taxation without representation (accountability), economic efficiency (neutrality) and economic competitiveness.
The Task Force considered economic studies that have shown that in Canadian cities the business sector pays a higher proportion of property taxes than the portion of benefits it receives. The Task Force considered economic studies that reported that occupiers, landowners, consumers, and employees all ultimately pay the commercial tax. Harry Kitchen, a leading economist in this area, has stated that the burden of over taxation on business generates income distributional consequences that are probably unfair on grounds of either ability to pay or benefits received or both.
Further, the argument was made that business owners have no vote for their business properties, which breaches the principle that there be no taxation without representation. Residents vote taxes on themselves and on business. Arguably, it is fair for residents to vote the same taxes on others as on themselves, but it is unfair to vote more taxes on others than on themselves.
The Task Force reviewed economists’ arguments that under taxing residential properties leads to an oversupply of services (and perhaps excess use of serviced land for residential purposes), and that overtaxing business leads business to use less space than would be efficient at the real cost of space. Many Task Force members considered that this tax burden may well reduce economic activity, lower output and reduce the number of jobs.
There was some considerable debate among Task Force members concerning this proposition, as some maintained that the real burden for paying these taxes fell ultimately on the consumer, not the business owner. Others pointed to studies that property taxes were rarely the major consideration in the location decisions of firms, and noted that property taxes were a deductible expense for businesses, thus not only mitigating its impact, but providing an advantage not available to residential property taxpayers.
In the end the Task Force accepted the proposition that business and commercial taxpayers are over taxed at the municipal level relative to the benefits they receive. In reviewing the tax burden for non-residential property tax classes, the Task Force returned to the principle that the tax burden should be related to the value of the benefits received for taxes paid.
The Task Force recommends that the City of Ottawa should use the benefit principle to determine the property tax burden on all property tax classes (residential and non-residential).
However, given the limited time and resources available to the Task Force, and the significant consideration that any changes in this area were, due to provincial legislation, irreversible, the Task Force could not make a recommendation as to the exact ratio of taxation for non-residential tax classes. It was the Task Force’s view that a detailed study would be required, not only to quantify the benefits received from property taxes paid by commercial and industrial properties, but also as a means of showing residential property taxpayers (who would bear the costs of compensating for any reduction in the non-residential tax ratio) the rationale for such a policy.
The Task Force recommends the City of Ottawa commission a detailed study of municipal services accruing to the residential and non-residential property tax classes, and that the results of that study be used to guide adjustments in the tax ratios of the various classes, when and where appropriate.
The Task Force has recommended that the multi-residential tax ratio be moved to become equivalent to residential taxes, over a period of two years. As indicated earlier, this should have only a minor impact on residential property taxes, and the economic effects are likely to be substantial, particularly in encouraging the construction or conversion of more affordable housing.
Given the evidence that the non-residential sector already pays substantially higher taxes than the residential sector, it is the Task Force’s view that the lowering of the multi-residential tax ratio should not be financed through even higher commercial and industrial taxes.
The Task Force recommends that, to the extent that the equalization of tax ratios between the residential and multi-residential tax classes is implemented without being financed by new revenues or re-allocation of responsibilities, then the City of Ottawa should adjust its non-residential tax ratios so that the tax burden on the non-residential sector is not increased by that equalization.
In another section of this report the Task Force has recommended a significant reduction in the overall level of property taxes, through the use of ability-to-pay tax revenues to fund such social programs as education, welfare assistance, child care subsidies, public health, and social housing. This is deemed to be more appropriate than property taxes, as these programs are re-distributive in nature, and achieve broad social goals un-related to property services. As well, the Task Force has made other recommendations regarding possible municipal revenues based on the user-pay principle, in the area of fuel taxes, vehicle fees, and hotel taxes. If these recommendations were adopted by the provincial government, the overall reduction in property taxes for all tax classes would be significant. This would then create the opportunity to redress the uneven tax burdens between the residential and non-residential tax classes.
The Task Force recommends that, in the event that the Province of Ontario adopts recommendation #2 concerning the funding of social programs, recommendation #5 concerning a municipal hotel tax, recommendations #6 and #7 concerning fuel taxes and vehicle registration fees, then the City of Ottawa should re-examine the relative tax burdens of its tax classes, based on the benefit principle and the findings of the detailed study suggested in recommendation #22.
If increased reliance on user fees and some access to ability-to-pay related taxes through the province were to substitute for some part of property taxes, resulting in a change in the tax mix, then property taxes would be a less significant part of the overall tax mix and any remaining inequities related to assessment or to the inherent problems with property taxation would be somewhat less.
Moreover, if the Task Force recommendations on taxation of existing multi-residential property were accepted, one large element of unfairness in the system would be removed, even if property taxes as a whole were to remain as significant a part of the overall mix as they are now, since tenants tend to have lower incomes, on average, than homeowners.
The effect of “hot” housing market trends leading to an upward movement in assessment may create a situation where there is an unrealized capital gain in the value of a property that could lead to an increase in taxes even when there has been no change in services provided. This is a particular issue with respect to people who have lived in their own home for an extended period of time, do not intend to move, but find that the nature of their neighbourhood is changing, with the result that the assessed value of their house is rising. Indeed, this has led to the frequent observation by residents who spoke to the Task Force: “My taxes went up despite no changes to my services, no changes to my home, no changes to my income, and no changes in the City’s tax rate. This is not fair!” For people on fixed incomes and limited incomes, including elderly homeowners, single parents and the disabled, this presents a burden serious enough to drive them out of their house, for reasons over which they have no control.
Under the Municipal Act, municipalities are required to provide relief from tax increases to low income seniors and low income persons with disabilities with respect to their principal residence. Relief is mandatory where the homeowner, or the spouse of the homeowner, is a ‘low income senior’ or a ‘low income person with a disability’. Municipalities also have the option, under the Act, to cancel, reduce or refund property taxes for owners of residential, farm and managed forest property if the taxes on the property are “unduly burdensome”.
In the Task Force’s view, the mitigation system currently in place in the City of Ottawa which addresses these responsibilities is woefully inadequate, based as it is on those whose circumstances either qualify them for the Ontario Disability Support Program (which provides an annual income of $11,160 for a single adult), or the Old Age Security-Guaranteed Income Supplement (which provides for an annual income of $11,835 for a single senior). According to City staff estimates, only 8 people in Ottawa are expected to qualify this year.
The Task Force believes that a broader program of mitigation is required, so to ease the burden on low-income families, seniors and the disabled from the effects of market-driven housing prices that lead to higher property taxes. While future assessments will be subjected to a 3-year rolling average, the tax burden must still be paid. A tax deferral scheme is preferred, as it could operate at no loss to the City, based on its prior claim on the assets of the property, yet would provide relief to those who wish to end their days in their own homes. The Task Force proposes that for seniors, this scheme would apply to those who fall below the median income level for seniors in Ottawa (in 1998 this came to $24,100).
The Task Force recommends that the City of Ottawa develop mitigation measures for residential property taxpayers based on the following factors:
· The amount eligible for mitigation is the amount by which tax increase is above 5% in any given year;
· The mitigation would be in the form of a tax deferral financed at some reasonable rate of interest (for instance prime plus 2 percentage points); and
· The mitigation would be available to seniors whose annual incomes are below the median income line for seniors in Ottawa, those with disabilities, and those who fall below the Statistics Canada Low Income Cutoffs for the City of Ottawa.
The Task Force, having heard from taxpayers, having reviewed the literature, and having examined the issues relating to property assessment and property taxation, are firmly convinced that there is a strong and immediate case for reform – reform in what property taxes are used for, reform in how property assessment is calculated, and reform in how the property tax burden is shared in our community.
The Task Force believes that the case for these reforms will become more pronounced in the foreseeable future, and more recognized by taxpayers and voters, as the issues of fairness and frustration surrounding the current system become more apparent:
This is why reforms are needed. The frustration of ordinary taxpayers with the current system is important. In our democratic system taxation does, and must, depend on the consent of the governed. That is why transparency and accountability are so important. And why ability to pay is important. And why the benefit principle is important.
The recommendations of the Task Force on what property taxes should pay for would, if adopted, reduce property taxes in Ottawa by some 45%. For a residential homeowner paying $3,000 annually in property taxes, that is an expected reduction of $1,350. This is important, because property taxes are not based on ability to pay, and relating property taxes to property-related services is a principle that most taxpayers can accept.
Further, the Task Force recommendations concerning property assessment would make a complex and incomprehensible assessment system more transparent, easier to understand, and therefore more acceptable to taxpayers.
Further, the Task Force recommendation making the property tax burden equivalent between residential and multi-residential properties would reduce the rents of tenants by an anticipated $40 a month ($480 a year) at the end of two years (based on a monthly rent of $1,000, or $12,000 a year). This is important, because there is no justifiable reason why tenants should pay more for the same services as their residential neighbours.
To enable these and other reforms to come about, we must ensure that not only decision-makers at the municipal and provincial level are informed, but also the people who hold the ultimate power in a democracy – the voter. For many the property assessment and taxation system is arcane, abstruse, and difficult to comprehend. This makes the challenge of reform even harder. Therefore it is necessary to start by educating and provoking a discussion.
Therefore the Task Force believes it is important to ensure widespread circulation of its report beyond simply the government of the day, to the community in Ottawa through their associations, as well as to the politicians. Not all will agree with our recommendations. But by reading about the issues that were raised during the Task Force’s activities, and by looking critically at what is being proposed by the Task Force, voters will be better enabled to make the property tax system fairer. We look forward to this.
The Task Force recommends that, due to the need for greater public understanding of the importance surrounding the issues of property assessment and property tax issues, the City of Ottawa circulate copies of this report to the Ontario Minister of Finance, Minister of Municipal Affairs & Housing, appropriate opposition critics, area M.P.P.s, the Association of Municipalities of Ontario, and the Municipal Property Assessment Corporation, and to community associations and taxpayer groups in the City of Ottawa, and that copies be distributed to Ottawa Public Library branches.
1. The Task Force recommends to the Province of Ontario that property taxes should continue to form the basis of funding those municipal programs that are justifiably and closely related to serving property (land and buildings), based on the benefit principle. This would include (but not be limited to) police, fire protection, and infrastructure (roads, sewers, community facilities, etc.).
2. The Task Force recommends to the Province of Ontario that property taxes should not form the basis of funding such income-redistributive social programs as education, welfare assistance, childcare subsidies, social housing, and public health; these programs should be funded from ability-to-pay tax revenues.
3. The Task Force recommends that the City of Ottawa should move to the fullest use of user fees based on the benefit principle - where possible, where meterable, where it promotes efficient use of resources, and taking into account issues of access to these services by low income residents. Further, the City of Ottawa should review the extent to which the benefit principle is being applied to City services through user fees and on any changes which could be made to more fully reflect the benefit principle in funding local services and programs.
4. The Task Force recommends that the City of Ottawa develop or extend programs to ensure access for low-income residents for all existing and future City services funded by user fees.
5. The Task Force recommends that the Province of Ontario amend the Municipal Act to permit municipalities to impose a visitor room tax on hotels, motels and similar establishments.
6. The Task Force recommends that the Province of Ontario provide some portion of the fuel tax to municipalities, to be used to fund the provision of local transportation services (roads, sidewalks, public transit, etc.).
7. The Task Force recommends that the Province of Ontario provide some portion of the vehicle registration fee to municipalities, to be used to fund the provision of local transportation services (roads, sidewalks, public transit, etc.).
8. The Task Force recommends that the City of Ottawa, directly through its own provincial and federal representatives, as well as through the Association of Municipalities in Ontario (AMO) and the Federation of Canadian Municipalities (FCM), press for an ongoing funding program from both federal and provincial governments to support municipal infrastructure, based on joint priorities.
9. The Task Force recommends that the Municipal Property Assessment Corporation, as a public agency, make the methods, parameters and technology upon which it calculates property assessment open, accessible and transparent to property taxpayers.
10. The Task Force recommends that the Municipal Property Assessment Corporation, as a public agency, provide all relevant information (e.g. the subject property profile, etc.) used to calculate the assessed value of a property in its Notice of Assessment sent to the property owner.
11. The Task Force recommends that the Municipal Property Assessment Corporation base its assessment of a residential property on the most recent sale price for a property (reflected in public land registry records), and indexed to average sales prices for that community, and adjusted for significant positive and negative changes to the property.
12. The Task Force recommends that the Municipal Property Assessment Corporation investigate and consider adopting the pre-consultation process used for non-residential property in British Columbia and in Quebec, in order reduce disputes in valuations.
13. The Task Force recommends that in cases where a successful property assessment appeal has general application, then the Municipal Property Assessment Corporation adopt as a policy that it will re-assess the relevant properties based on that general application for that tax year.
14. The Task Force recommends that Assessment Review Board members should be given more training on assessment practices and administrative procedures, should be appointed to longer terms to increase their independence, and should be familiar with the area under their jurisdiction.
15. The Task Force recommends to the Province of Ontario that the Assessment Act be amended to permit property assessment appeals up to 30 days after the due date of final property tax bills in a tax year.
16. The Task Force recommends that the Assessment Review Board establish a policy to have the costs of a successful appeal by a property taxpayer be re-imbursed by the Municipal Property Assessment Corporation; further, filing fees for appeals should be refunded in situations where disputes have been successfully resolved prior to the ARB hearing.
17. The Task Force recommends that the City of Ottawa, on the basis of fairness and the benefit principle, adopt a strategy to reduce the multi-residential tax ratio, beginning in 2002, to reach an equivalent tax burden for similar residential properties within two years.
18. The Task Force recommends that the City of Ottawa provide sufficient resources to enable those tenants who qualify for a rent reduction as a result of the adjustment in multi-residential tax ratio, to be able to receive such a rent decrease.
19. The Task Force recommends that the City of Ottawa review the issue of the viability of small rural businesses and develop a strategy to meet their special circumstances.
20. The Task Force recommends that the City of Ottawa review the issue of the viability of heritage properties and develop a strategy to meet their special circumstances.
21. The Task Force recommends that the City of Ottawa should use the benefit principle to determine the property tax burden on all property tax classes (residential and non-residential).
22. The Task Force recommends the City of Ottawa commission a detailed study of municipal services accruing to the residential and non-residential property tax classes, and that the results of that study be used to guide adjustments in the tax ratios of the various classes, when and where appropriate.
23. The Task Force recommends that, to the extent that the equalization of tax ratios between the residential and multi-residential tax classes is implemented without being financed by new revenues or re-allocation of responsibilities, then the City of Ottawa should adjust its non-residential tax ratios so that the tax burden on the non-residential sector is not increased by that equalization.
24. The Task Force recommends that, in the event that the Province of Ontario adopts recommendation #2 concerning the funding of social programs, recommendation #5 concerning a municipal hotel tax, recommendations #6 and #7 concerning fuel taxes and vehicle registration fees, then the City of Ottawa should re-examine the relative tax burdens of its tax classes, based on the benefit principle and the findings of the detailed study suggested in recommendation #22.
25. The Task Force recommends that the City
of Ottawa develop mitigation measures for residential property taxpayers
based on the following factors:
· The amount eligible for mitigation is the amount by which tax increase is above 5% in any given year;
· The mitigation would be in the form of a tax deferral financed at some reasonable rate of interest (for instance prime plus 2 percentage points); and
· The mitigation would be available to seniors whose annual incomes are below the median income line for seniors in Ottawa, those with disabilities, and those who fall below the Statistics Canada Low Income Cutoffs within the City of Ottawa.
26. The Task Force recommends that, due to the need for greater public understanding of the importance of the issues of property assessment and property tax issues, the City of Ottawa circulate copies of this report to the Ontario Minister of Finance, Minister of Municipal Affairs & Housing, appropriate opposition critics, area M.P.P.s, the Association of Municipalities of Ontario, and the Municipal Property Assessment Corporation, and to community associations and taxpayer groups in the City of Ottawa, and that copies be distributed to Ottawa Public Library branches.
(from the Ottawa City Council meeting of April 11, 2001)
MOTION NO. 9/14
Moved by Councillor Alex Cullen
Seconded by Councillor Shawn Little
Whereas residents of Ottawa and their elected representatives have expressed concern over significant property tax increases as a result of market value assessment, based on increased property values resulting from housing market fluctuations, despite no change in the City’s tax rates, despite no increase in City services, and unrelated to any change in to the homeowner’s income;
Whereas residents of Ottawa and their elected representatives have expressed concerns over the burden of property taxes, in particular the cost of contributing to provincially-mandated income re-distribution programs (social assistance, social housing, child care subsidies);
Whereas residents of Ottawa and their elected representatives have expressed their concerns over the limitations of property taxes upon the ability of municipalities to meet their responsibilities in providing public infrastructure (i.e. roads, sidewalks, transitways, water, sewers, etc.);
Whereas the City of Ottawa is urging the Provincial Government to begin a public review of property assessment issues, of the appropriate role of property taxes in funding local services and provincially-mandated services, and of the appropriate use provincial tax revenues to better enable municipalities to provide public infrastructure necessary for economic activity;
THEREFORE the City of Ottawa establish a Task Force to conduct a public review of property assessment issues, of the appropriate role of property taxes in funding local services and provincially-mandated services, and of the appropriate use provincial tax revenues to better enable municipalities to provide public infrastructure necessary for economic activity;
AND that this Task Force be composed of City of Ottawa ratepayers, City Councillors, and City staff, that it be empowered to hold public meetings to elicit public comment on these matters, and that it prepare a report for City Council’s approval by November, 2001, to be submitted to the Provincial Government;
AND that the Association of Municipalities in Ontario be requested to establish a similar Task Force at the provincial level.
(from the Ottawa City Council Meeting of May 23, 2001)
MOTION NO. 12/2
Moved by Councillor Jacques Legendre
Seconded by Councillor Elisabeth Arnold
WHEREAS tenants of units in buildings taxes in the MULTI-RESIDENTIAL property tax class have historically paid a disproportionate share of municipal taxes through their rents;
WHEREAS those who are economically-challenged or disadvantaged in our society are most frequently tenants;
WHEREAS 15%-20% of rents paid by tenants go directly to pay property taxes;
WHEREAS Provincial law requires that any savings generated through lowering property taxes be passed on to tenants;
BE IT RESOLVED THAT the reduction proposed by staff in 2001 for the property tax ratio in the MULTI-RESIDENTIAL property tax class be applied every year until parity with the RESIDENTIAL class is achieved.
YEAR TAX RATIO
(2.3359 is current ratio)
MOTION NO. 12/3
Moved by Councillor Alex Munter
Seconded by Councillor Rick Chiarelli
WHEREAS Council has already cut the multi-residential tax rate for 2001 and this motion seeks to repeat these tax reductions in 2002, 2003 and future years;
RESOLVED THAT this motion be referred to the Task Force on Property Assessment & Property Tax Issues for a report on this matter, which is to include:
(from the Ottawa City Council meeting of September 26, 2001)
AGRICULTURAL AND RURAL AFFAIRS COMMITTEE REPORT 6
1. MOTION – SMALL RURAL COMMERCIAL BUSINESS TAX CLASS
That Council approve the following motion:
WHEREAS rural businesses experienced an unprecedented increase in their share of the total commercial taxes paid in Ottawa-Carleton for the 1998 taxation year;
WHEREAS that increase was attributed to two factors - the notable decrease in assessed value of inner-city commercial properties; and, the former provincial rule which specified that any "loss" in taxation within a class had to be made up within that class (i.e., the share of the overall tax burden could not be shifted between classes);
WHEREAS it was promised to rural businesses, should the relative weight of assessed values within the broad commercial class return to a balance comparable to pre-1998, that rural businesses would see that change reflected in a decreased share of taxes within the commercial class;
WHEREAS Council recognized this promise when it asked the Province, on 23 May, 2001 to create a special property subclass within the commercial tax class referred to as Small Rural Commercial Businesses" to allow municipalities the opportunity to reduce property tax burden in order to strengthen and sustain rural economic development";
WHEREAS, as expected, the 2000 assessment noted a significant increase in the value of inner-city properties, particularly office properties;
WHEREAS, because the Province changed certain tax rules beginning with the current taxation year, making it possible to shift the tax burden between property classes;
WHEREAS the broad commercial class in the 2001 taxation year was required, by Council policy, to shoulder a greater share of the total tax requirement so that a lower tax rate could be created overall;
WHEREAS the result of this policy decision by Council is that small rural businesses did not receive the property taxation relief from a re-balancing of the assessed values within the commercial class as promised, and continue to pay considerably more than their fair share of the commercial tax burden;
THEREFORE BE IT RESOLVED that the Corporate Services Department report to the Agriculture and Rural Affairs Committee no later than the end of October 2001 on the negotiations with the Province on the creation of the Small Rural Commercial Business tax class, and in the absence of significant progress, recommend other strategies that would restore rural businesses to a position of fairness and equity within the commercial tax class, and;
THAT the Agriculture and Rural Affairs Committee recommend Council approve this recommendation and that it be forwarded to the Special Advisor to the Minister of Finance, responsible for review of the regulation that defines property classes under the assessment system, and to the Corporate Services and Economic Development Committee, and to the City of Ottawa Task Force on Property Assessment and Property Tax Issues for information.
(from the Ottawa City Council meeting of November 14, 2001)
Moved by Councillor Gord Hunter
Seconded by Councillor Rainer Bloess
That the City of Ottawa request that the proposed Municipal Act 2001 be amended to include a provision for the City to impose a visitor room tax on hotel, motels and similar establishments with all monies raised to be made available for reinvestment in the Tourism and Convention business.
Councillor Alex Cullen (Bay Ward) – Chair
Councillor Rick Chiarelli (Baseline Ward)
Councillor Clive Doucet (Capital Ward)
Councillor Janet Stavinga (Goulbourn Ward)
John Dickie (representing the business community and nominated by the Greater Ottawa
Chamber of Commerce and the Business Owners and Managers Association – (BOMA))
Gilles E. Girard
Bev Millar (representing the Rideau Township Chamber of Commerce)
Diane Blais (Committee Co-ordinator)
Ken Hughes (Financial Services)
Dan O’Hagan (Office of Councillor Cullen)
At Task Force Meetings:
September 13, 2001 Mr. Harvey Sasseville, MPAC
Mr. Jetze Falkena, MPAC
September 20, 2001 Prof. Frances Woolley, Department of Economics, Carleton University.
October 11, 2001 Mr. John Clark, President, Appraisal Institute of Canada
November 15, 2001 Mr. Larry Hummel, Vice-President Property Values, MPAC
Mr. John Hall, Valuation Manager, MPAC
Mr. Brian Guérin, MPAC
At Town Hall Public Sessions:
September 25, 2001 at Ottawa City Hall (110 Laurier Ave. W., Ottawa)
(12 people in attendance)
Mr. M. Costa – residential assessment
Mr. L. Caparelli (Co-chair, Tenants & Landlords for Fair Taxation) – multi-residential tax class
Mr. W.B. McCormick – residential assessment
Mr. C. Layfield – residential assessment
Mr. D. Crane – heritage business property
October 11, 2001 at former Cumberland City Hall (255 Centrum Blvd.,
(25 people in attendance)
Mr. P. Brisson – property taxes
Mr. T. McNeely – property taxes
Ms. B. McDowall – residential assessment
Ms. B. Godsman – residential assessment
Mr. P. Gilarowski – residential assessment
Mr. G.W. Martin – residential assessment
Councillor R. Bloess – residential assessment
Mr. T. Rizak – commercial assessment
Ms. S. Stephens – federal government payments-in-lieu (PILs) of property taxes
Councillor P. McNeely – residential assessment
Ms. A Bourdeau – multi-residential tax class
Mr. M. Bisson – residential assessment
Councillor H. Kreling – thank you to Task Force
October 22, 2001 at Ben Franklin Place (101 Centrepointe Dr., Ottawa)
(90 people in attendance)
Mr. G. Edvardsson – residential assessment
Mr. H. Mistry – property taxes
Mr. W. Weir – property taxes
Mr. W. Tupper (representing the Rideau Assessment & Tax Evaluation
Committee) – rural commercial property tax class
Mr. P. Sweetnam – commercial assessment & property taxes
Ms. G. Church (representing City Living) – multi-residential property tax class
Ms. M. Singleton (representing City Living) – multi-residential property tax class
Ms. P. Logan – residential assessment
Mr. J. Walker – property taxes
Mr. T. Curran (President, Crystal Beach-Lakeview Community Association) – residential
assessment & property taxes
Mr. D. Tuck – property taxes
Mr. P. Kondruss – rural commercial property tax class
Mr. R. Brocklebank – residential assessment & property taxes
Mr. Amin – multi-residential property tax class
Mr. R.D. Mather – residential assessment
Mr. K. Ramsay – residential assessment
Mr. B. Stewart – residential assessment
Mr. M. Bell – residential assessment & property taxes
Ms. D. Bury – residential assessment
Mr. M. Caplan – residential assessment & property taxes
Mr. P. Dupont – property taxes
Mr. I. Elbert – residential assessment
Mr. C. Fortier – property taxes
Mr. F. Galipeau – residential assessment & property taxes
Mr. M. Gérin-Lajoie – property taxes
Mr. W. Heslop – residential assessment
Mr. E. Hopkins – residential assessment
Mr. B. Ifill – residential assessment
Mr. W. Illing – residential assessment
Mr. I Isbester – residential assessment & property taxes
Mr. B. Lipski – residential assessment
Ms. J. Lowthian – multi-residential tax class
Mr. J. Mazutis – property taxes
Mr. S.A. Mockler – residential assessment & property taxes
Ms. S. Morrison – residential assessment
Mr. D. Mulcair – residential assessment
Mr. S. Pappas – property taxes
Ms. P. Proulx – residential assessment
Mr. W. Smith – property taxes
Mr. W. Stewart – residential assessment & property taxes
Mr. C. Sundstrom – residential assessment
Mr. G. & Mrs. S. Thompson – residential assessment
A Primer on Property Assessment & Taxation
Association of Municipalities of Ontario, Toronto, 2000
Early Warning: Will Canadian Cities Compete?
Federation of Canadian Municipalities, Ottawa, 2001
Fair Taxation in a Changing World
Ontario Fair Tax Commission, U. of T. Press, 1993
Local Services Re-alignment: A User’s Guide
Association of Municipalities of Ontario, Toronto, 1999
Municipal Finance and Governance Reform Symposium
Canadian Tax Foundation, Toronto, 2001
Municipal Finance in a New Fiscal Environment
Harry Kitchen, C.D. Howe Institute, Toronto, 2000
Municipal Property Assessment Corporation Annual Report 2000
Municipal Property Assessment Corporation (web site: www.mpac.on.ca)
Ottawa-Carleton Fair Tax Working Group Report
Regional Municipality of Ottawa-Carleton, Ottawa, 1993
Property Assessment: Achieving Consistency
Brett Ifill, Municipal Monitor, December 2000/January 2001
Property Tax Reform in Ontario: Goals and Accomplishments
Diane Ross, Canadian Tax Foundation, Toronto, 2001
Property Taxation: Reform or Abolish?
Jack Mintz, C.D. Howe Institute, Toronto, 2001
Review of the Property Assessment Process: Final Report
Marcel Beaubien, M.P.P., Toronto, 2001
Towards a Partnership to Invest in Economic Growth: Ontario and Federal Government Tax Revenues from the City of Ottawa
KPMG, Ottawa, 2001
Trends in Municipal Finance in Canada: Past and Future
Harry Kitchen, Canadian Tax Foundation, Toronto, 2001
Understanding the Evolution of Property Tax Policy
Enid Slack, Canadian Property Tax Association, Ottawa, 2000
Urban Public Finance in Canada
H. Bird & E. Slack, John Wiley, Toronto, 1993
Principles of Good Property Taxation
Prepared by Frances Woolley, Department of Economics, Carleton University
for the City of Ottawa Task Force on Property Assessment & Property Tax Issues
Principles of Good Taxation
There are some basic principles for good taxation that most people agree on.
Pretty well everybody would agree that taxes are necessary to raise revenue. But ideally they should raise revenue without creating big distortions in people’s behaviour.
Most people would agree that taxes should be, in some sense, “fair”, whether that means that people in the same situation pay the same tax, or, by another definition of fairness, that people who can afford to pay more do pay more.
In a democracy, the process of taxation needs to be responsive, open, and politically accountable: people need to know how much they are paying in taxes, how their taxes are calculated, and have a meaningful input into the policy formation process.
But when it comes down to designing property tax policies for the new City of Ottawa, there are difficult tradeoffs and choices to be made.
There are trade-offs between fairness and revenue needs. Fairness, for example, may mean giving low-income people and certain other individuals and organizations some form of property tax relief, but this costs municipal governments revenues, and raises the tax burden on other people. How should this tradeoff be managed?
There are trade-offs between achieving fairness and maintaining stability. Fairness means that existing inequities in the property tax system should be removed as quickly as possible; yet when inequities are removed, some people will face unanticipated increases in their property taxes, compromising the stability of the tax system and creating hardship that did not exist before.
None of the goals listed below is an “absolute good”. Each is desirable in some senses, but a good taxation system is a tradeoff between a range of desirable goals. In a democracy the tradeoffs are made with input from taxpayers, and they need to feel that the balances achieved reflect their values and their needs.
Given limited resources, and limitations on the City of Ottawa’s jurisdiction, what goals should the City of Ottawa try to achieve?
What are the trade-offs between the various goals of a good taxation system?
Goals for a Good Tax System
The Goal of Neutrality Defined
Taxes should not distort economic behaviour, including decisions about where to live and work and what improvements to make to one’s property.
An Example of Neutrality
An entrepreneur is deciding where to set up her business. She faces the same property tax rate whether she locates on Merivale Road in Nepean, Richmond Road in Ottawa or Edgewater St. in Kanata. Property taxes do not affect her location decision.
Issues for Discussion About Neutrality
The Goal of Fairness Defined
The tax system should be fair in its relative treatment of different individuals. This has several different aspects.
Examples of Fairness
Fairness can be thought of in terms of ‘vertical equity’, ‘horizontal equity’ and the application of the ‘benefit principle’. These are defined below.
A. Vertical Equity Defined
People who have a greater ability to pay taxes should pay higher taxes.
An Example of Vertical Equity
The Pilons have a household income of $150,000 a year and own a home assessed at $250,000. Their property taxes are 2 percent of $250,000 or $5,000.
The Sheppards have a household income of $50,000 a year and own a home assessed at $125,000. Their property taxes are 2 percent of $125,000 or $2,500.
The Pilons pay twice as much property taxes as the Sheppards. According to the principle of vertical equity, this is good, because they have a greater ability to pay taxes.
Issues for Discussion About Vertical Equity
B. Horizontal Equity (or Non-Discrimination)Defined
People who are the same in all relevant respects should be treated equally.
An Example of Horizontal Equity
The Hill family and the Collins family are neighbours. Each family’s income is $70,000 per year. Each family lives in a house assessed at $135,000. The two families are the same in all relevant respects, and pay the same taxes. According to the principle of horizontal equity this is a good thing.
Issues for Discussion About Horizontal Equity
C. The Benefit Principle Defined
People who benefit more from government services should pay more in taxes to support those services.
An Example of the Benefit Principle
A house on Glebe Avenue valued at $237,600 has a frontage of 33 feet. A house on Fentiman Avenue valued at $180,000 has a frontage of 25 feet. The sidewalk in front of both homes is plowed by the City. The Glebe Avenue house has 32 percent more sidewalk, gets 32 percent more snow removal and pays 32 percent more property taxes. According to the benefit principle this is a good thing.
Issues for Discussion About the Benefit Principle
The Goal of Stability Defined
Taxes should not fluctuate dramatically from year to year.
An Example of Stability
The Zhang family bought a home in 1999. Their 2001 tax bill is two percent higher than their 2000 tax bill, an increase less than the rate of inflation. They feel their property taxes are stable, and this allows them to plan for the future.
An Example of Change
Ottawa homes are currently selling for more than their assessed value – sometimes substantially more, as shown in the table below. Since assessed values are supposed to reflect market prices, we can expect to see substantial changes in assessed values in the near future.
Examples of assessed value and 2001 selling price for selected Ottawa homes
2001 Assessed Value (June 30, 1999 Values)
2001 Selling Price
. Assessed and selling prices are actual figures; street names have been changed to respect owners’ privacy.
Issues for Discussion About Stability
The Goal of Flexibility Defined
Taxes should respond to changes in economic circumstances.
An Example of Flexibility
When the O-train line is opened, owners of property close to the railroad lines will be affected. Some will be hurt by increased noise, others will gain from quick and frequent public transit into the city. The benefits and costs of owning property close to the O-train will be reflected in changes in property values. People whose property becomes more valuable because of good access to public transit should see an increase in the assessed values of their homes, and their property taxes.
Issues for Discussion About Flexibility
v) Accountability (Political Responsibility)
The Goal of Accountability Defined
The goal of
accountability means that governments should be accountable to taxpayers both
for the amount of taxes paid and the use of government revenues.
The amount a
household pays in property taxes is the assessed value of their property times
the property tax rate.
means that people know who is responsible for assessing the value of their
property and how to appeal their assessment.
means that people know who is responsible for setting the property tax rate and
know who to complain to if they think taxes are too high or too low.
Accountability means that people can find out the relationship between the taxes we pay and what we get for them. People know who sets policy.
An Example of Accountability
The City of Ottawa and MPAC (the Municipal Property Assessment Corporation) have taken measures to enhance accountability. The City of Ottawa and MPAC web sites provide information about how property taxes are calculated. The MPAC web site allows anyone to compare their property assessment to those of neighbouring properties, and provides a venue for appealing property taxes. Because property taxes are often paid directly, rather than deducted at source, people know how much they are paying in property taxes.
A Failure of Accountability?
The amount any one household pays in property taxes depends upon decisions of three different players. Property assessments are done by MPAC. The guidelines MPAC uses to assess property are laid down by the Ontario provincial government. Tax rates for municipal services are set by the City of Ottawa, but the City’s choice of tax rates is constrained by Ontario provincial government policies. Education taxes are collected by the City of Ottawa as part of people’s property taxes, but education funds go to local school boards, which do not report to the City. Given this complicated tangle of responsibilities, who is accountable for an average person’s property taxes: MPAC, the provincial government, or the City of Ottawa? Or do overlapping jurisdictions mean taxpayers do not know who to hold accountable for what?
Issues for Discussion About Accountability
vi) Simplicity and Transparency
The Goals of Simplicity and Transparency Defined
The tax system should be simple. For the City, simplicity means the tax system is easy and relatively inexpensive to administer. For taxpayers, a simple tax system is easier to understand, so more transparent.
An Example of Simplicity and Transparency
A tax system is simple if the cost of running the tax system uses a small percentage of the revenue raised. People’s property tax assessments arrive on time and are simple and easy to understand.
Issues for Discussion About Transparency
· Designing a good tax system involves many difficult trade-offs.
· Sometimes the best solutions can be found by thinking “outside the box”.
· If there is no way to devise a property tax that is fair, neutral, stable, flexible and accountable, perhaps it is best to raise more revenue from other tax sources.
· For example, Greater Vancouver’s TransLink (Vancouver Regional Transit System) is partially funded by a 4 cent per litre gasoline tax.
· Perhaps accountability can best be achieved by changing the ways cities operate – changing the mix of services cities are responsible for providing, or giving cities more authority to act in their citizens’ interests.
Where To Go To Find Out More
General Information About Property Taxes and Assessment
· Association of Municipalities of Ontario (AMO) website at www.amo.on.ca.
See especially A Primer on Property Taxation and Assessment and press releases on related subjects. The AMO website also contains documents from the Ontario Department of Finance on taxation and assessment and links to other sites, including the Department of Finance Government of Ontario: http://www.gov.on.ca/, or go directly to http://www.gov.on.ca/FIN/english/neweng.htm.
The AMO website also has links to another website called Your Local Government with a wealth of information on powers and responsibilities of municipalities, relations between provincial and municipal governments, and links to the websites of other towns and cities in Ontario.
City of Ottawa website has a wealth of information about assessment, taxation
and what services are paid for out of property taxes. See the City’s website at http://www.city.ottawa.on.ca/
· The Municipal Property Assessment Corporation (MPAC) has details about how assessment is done. See the MPAC website at www.opac.on.ca. Another useful site to find out about property assessment is the City of Toronto’s Answers to questions on Property Assessment in Toronto http://www.city.toronto.on.ca/taxes/taxq_a.htm.
Sources Used in Preparing This Primer
Marcel (2001) Review of the Property Tax
Assessment Process: Final Report http://www.gov.on.ca/FIN/english/opacrepe.pdf
· Harris, Richard and Michael Lehman (2001) “Social and geographic inequities in the residential property tax: a review and case study” Environment and Planning 33: 881-900.
· Ontario. Fair Tax Commission (1993) Fair Taxation in a Changing World: Report of the Ontario Fair Tax Commission Toronto:
University of Toronto Press.
· Slack, Enid (2001) “Understanding the Evolution of Property Tax Policy” paper prepared for 2001 - A Property Tax Odyssey, 34th Annual National Workshop, Canadian Property Tax Association Inc.
· Bish, Robert L. “Local Government Amalgamations: Discredited Nineteenth-Century Ideals Alive in the Twenty-First.” C.D. Howe Institute Commentary 150 (March 2001) http://www.cdhowe.org/pdf/bish.pdf
Assessed value is price placed on land and buildings by an assessor (i.e. for Ontario, an employee of the Municipal Property Assessment Corporation (MPAC)) for use in levying property taxes.
Assessment measures how much a property should be taxed. In general:
Assessment x tax rate = taxes paid.
In the current Ontario system, the assessment is an estimate of the market value of the property at a relatively recent date. Previously in Ontario, the assessment was related to the market value of a property at a much earlier date or through a formula which varied according to the property type. Methods of estimating the value of a property are set out under the entries: cost approach, income approach and direct comparison approach.
In some assessment systems, the figure placed on a property for taxation purposes is based on physical measurement rather than value. See unit assessment.
The ratio of the assessed value to market value is called the assessment ratio.
The Cost Approach is a form of market value assessment. It assumes that an informed purchaser would pay no more for a property (land and buildings) than it would cost to buy a similar piece of land on which a building is constructed with characteristics comparable to the property to be purchased.
The market value of a property is estimated as:
Value of Land + Cost of Improvements (i.e., Building) - Depreciation = Total Value of Property
Depreciation has three components:
· Physical Depreciation - loss in value due to normal wear.
· Functional Depreciation - loss in value due to the structure's inability to function effectively.
· Economic Depreciation - loss in value due to location.
The Cost Approach is used most often when the property being appraised is new or nearly new, there are no comparable sales, or the improvements are relatively unique or specialized.
A property’s current value is an assessor's best estimate of what the property would have sold for on the open market at a specific time. In 2001, the value was based on the property's estimated sale price as of June 30, 1999.
The term “current value” is used to describe Ontario’s present system of property tax assessment. Current value assessment is a form of market value assessment, in that it is based on a property's estimated value if sold on the open market between a willing seller and a willing buyer. The characteristics of a property like its size, age, location and amenities are considered when determining a property's value.
The term current value is used to distinguish Ontario’s present system of tax assessment from the previous market value system. Unlike Ontario’s previous market valuation assessment system, current value assessment includes annual updating of assessments (starting in 2004). Starting in 2006, current value assessment will be based on a three-year averaging of annual values, to reduce variability in assessments. See also “market value” and “fair market value”.
Direct Comparison Approach
The Direct Comparison Approach estimates market value based on the sales of comparable properties. It assumes that an informed purchaser would pay no more for a given property than the cost of acquiring a comparable property.
When using the direct comparison approach, the sales price of comparable properties may be adjusted to reflect value trends in the market, location, or physical characteristics. Once the sale price of a comparable property is adjusted, the reconstructed value reflects the "probable selling price" of the property being appraised.
Using the Direct Comparison Approach to value is most appropriate when the market is active and many properties with similar characteristics are selling.
Fair Market Value
"Fair Market Value" is the price for property that would be agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances; it is the highest price a property would bring if it were exposed for sale on the open market for a reasonable period of time.
Many sales occur at prices other than the “fair market value.” Often the sale price is adjusted because of time pressures on the buyer or seller. Other factors that affect sale prices include owner-held mortgages and property transfers within families. This is the reason why a property’s “market value assessment” may be different from its purchase price.
The Income Approach assumes that the value of a property is equal to the income it will generate over its economic lifetime. When applying this approach, net operating income is estimated as:
Gross Income - Vacancy/Bad Debt = Effective Gross Income - Operating Expenses =
Net Operating Income
expectations a typical investor would have for the property, the annual net
income is converted to a capital value using a market-derived capitalization
= Net Operating Income / Capitalization Rate
The appraiser analyzes sales that occurred in the market place to determine what rate of return investors are seeking for the various types of properties. The capitalization rate increases proportionately with any risk.
The Income Approach is widely applied when appraising income-producing properties.
Market Value System
A “market value” system means that property assessments are based on potential selling prices at a specific point in time – such as the reference year. The Municipal Assessment Act defines “market value” as the most probable selling price had the property been sold by a willing seller to a willing buyer. When determining the market value of a property, assessors consider size, layout, age, location, quality and condition of buildings, selling price of comparable properties, and available services in the area. See also “fair market value” and “current value” above.
The amount of taxes paid per $1000 of assessed value. Property taxes are now calculated using tax rates instead of mill rates, so this term is no longer used. A tax rate of 10% is equivalent to a mill rate of $100 (10% of $1000 is $100, the amount of taxes paid per $1000 of assessed value).
An employee of the Municipal Property Assessment Corporation (For Ontario) who establishes an assessed value for a property.
Property Classification (or Property Class)
A property classification is a grouping of the same type of property for assessment and taxation purposes. There are seven standard classes of property used in Ontario: residential/farm, multi-residential, commercial, industrial, pipe line, farmlands and managed forests.
Property taxes are calculated as:
Property taxes = tax rate x assessed value of the property.
Property taxes in Ontario have several components, including municipal (local) taxes to pay for municipally provided goods and services, levies for special services such as fire or transit. and, if applicable, a region or county tax. An education tax may apply to certain property classes.
Land and buildings. Often called “property,” “real estate” or “land.” In some jurisdictions, including Ontario, fixtures such as air conditioning or hoists are included when valuing real property.
The process of creating a new base for property taxation by updating assessments to reflect more current values. Ontario had its first province-wide reassessment in 1997, and its second in 2000.
The Municipal Assessment Act defines “reference year” as the year immediately following the last general assessment. The reference year is also the specific year used to determine market values.
Tax Rate (Replaces Mill Rate)
A percentage of the assessed value of a property. It is normally a composite of a municipal tax rate and an education tax rate, which is set by the Province. Each property class will have its own tax rate. Property owners are able to calculate how much tax they will owe on their property by multiplying the tax rate for the property class by the assessed value of the property.
The municipal government calculates the tax rate by, first, estimating the cost of locally-provided goods and services (for example, snow removal), and any other municipal expenses. This budget is then divided by the total dollar amount of all the assessed value of real estate in the tax district (provided by the assessor) to determine the tax rate.
Unit assessment is assessment based on physical measurement of a property, such as lot size, frontage, building area or the number or size of windows. The condition of the property may or may not be taken into account.
Ontario Property Assessment Corporation. It was established by the Municipal Property Assessment Corporation Act. OPAC started operating on December 31, 1998, when the Government of Ontario transferred responsibility for property assessment to the Corporation.
The Municipal Property Assessment Corporation. (The following description is taken from the MPAC web site.) Originally named the Ontario Property Assessment Corporation, the Corporation became MPAC as a result of amendments included in the 2001 Ontario Budget. MPAC administers a uniform, province-wide system based on current value assessment. It provides municipalities with a range of services, including the preparation of an annual assessment roll for use by a municipality in calculating property taxes. MPAC carries out its activities in accordance with the provisions of the Assessment Act. Regulations made under the Act by the Province also apply to MPAC if they are related to assessment.
Association of Municipalities of Ontario
Federation of Canadian Municipalities.
Association of Manitoba Municipalities
Canadian Association of Municipal Administrators
Sources Used In Preparing
Property Tax Reform in Ontario:
Goals and Accomplishments
Diane J. Ross
Property Tax Policy Branch
Ontario Ministry of Finance
 Fair Taxation in a Changing World, Report of the Ontario Fair Tax Commission, 1993
 According to Harry Kitchen, this trend to increasing importance of the local property tax, and the withdrawal of senior levels of government from financial responsibility for outcomes at the municipal level, has been going on all across Canada in recent years. But it has been particularly noticeable in Ontario, and Ottawa is just one of a number of large Ontario cities which have been affected by the withdrawal of the Provincial government.
As a recent document from the Federation of Canadian Municipalities (FCM) noted:
The depth of cuts to municipal governments is underscored by the following summary from the Association of Municipalities of Ontario (Municipal Councillor’s Guide 2000):
What a difference a decade makes! The Ontario Grant Reforms Committee of the late 1970s had identified almost 90 different grant programs… The number of different grant programs had reached 100 by the end of the 1980s. Today, apart from the possibility of temporary transitional funding, and occasional special financial assistance, municipalities receive essentially one annual grant, the Community Reinvestment Fund (grants to smaller municipalities).
 See Fair Taxation in a Changing World, Ontario Fair Tax Commission, U. of T. Press, 1993
 A comment made by Harry Kitchen, an economist from Trent University and specialist in municipal finance, to a conference Municipal Finance and Governance Reform, Toronto, November 8, 2001.
 The Ottawa-Carleton Working Group in 1993 noted that user fees may be appropriate where:
There is a clear relationship between fees paid by users and benefits received by users; the taxpayer has a choice as to the extent to which he/she uses the service; it is administratively feasible to collect the charge at a reasonable cost; a goal of the user fee is to influence the use of the service; the benefits can be quantified and attributed to the user; and concerns with respect to equity of access to the service can be accommodated in the design of the fee.
 Slack, Enid. Property Tax Reform in Ontario: What Have We Learned? Presentation to the Canadian Tax Foundation Conference on Municipal Finance and Governance Reform. November 2001.
Kitchen, presentation to conference on Municipal Finance and Governance Reform, Toronto, November 8, 2001
 Harry Kitchen, presentation to conference on Municipal Finance and Governance, November 8, 2001.
 Review of Property Assessment Process: Final Report, Marcel Beaubien, M.P.P., Toronto, 2001