In its on-going efforts to revamp Ontario, the Provincial legislature has recently passed Bill 106, The Fair Municipal Finance Act, 1997. This Bill amends several acts including the Assessment Act and the Municipal Act with respect to municipal financing. The Act deals with both Assessment and Tax collection. Most of the changes come into effect in 1998, although the Act provides for municipalities to opt to phase in the changes over an 8 year period.
With respect to the assessment of land, the act calls for all municipalities to adopt a current market value form of assessment. Since most of the municipalities in Stormont, Dundas, and Glengarry counties including the City of Cornwall have had Market Value Assessment for a number of years now, the changes in assessment methodology will have little impact locally for 1998. However, the Act calls for property assessment to be on a three year rolling market value system. For example; June 30, 1996 will be the valuation date for taxation years 1998, 1999 and 2000 year assessment calculations. While the assessment methodology won't change much for most of our region, individual property assessment may change as the valuation date changes from base year 1992 in the City and various other base years between 1994 and 1998 in most of the Counties. Those property owners whose property values increased over the past few years will see an increase in assessment while areas where property values declined should see corresponding decrease in assessment values. Changes in taxes will result, but they will vary with changes to tax rate and property classification.
Another area where change will occur is with respect to Business Assessment. Currently, with few exceptions, all corporations or persons carrying on a commercial and/or industrial business in the province are assessed on that business. The Business assessment is calculated as a percentage of the commercial/industrial property assessment. The Act repeals Business Assessment and as a consequence Business Taxes will no longer be collected. Municipalities stand to lose between 30% and 40% of their commercial/industrial tax revenue unless that revenue is made up elsewhere in the tax revenue chain. It's likely, depending upon how municipalities elect to treat the ensuing loss in revenue, that commercial/industrial rate payers perhaps even residential tax payers, will face substantial increases in tax contributions in 1998. While it may appear that where the property owner and business owner are one and the same there would be little effect to the bottom line, that may not be so. Business assessment varied as a percentage of property assessment depending upon the type of business operated. As a result, without new classifications of property assessment specific to the type of business operating on the property, applying the average loss in business assessment revenue to the property assessment will in itself create winners and losers.
The reallocatement of Business Assessment to Commercial/Industrial Assessment can affect Landlords drastically. Many of the commercial leases in our area are gross leases where the property taxes are being paid by the Landlord and the rent includes the property taxes. Since commercial/industrial business tenants currently pay their own business taxes, the off loading of Business assessment from Tenants to Landlords could have a dramatic affect to the bottom line of both sectors. Some tenants will be winners and some landlords losers, possibly by more than 50% of the current property tax bill in extreme cases. Landlords with these types of leases should start now to renegotiate rentals with this in mind. Many thousands of dollars are at stake, even for the small investors. The loss to landlords offering gross leases is not only an increase in property taxes without a method of recovery but also a loss in building value resulting from the poorer bottom line.
As mentioned earlier, municipalities are able to phase in these changes to Assessment over the next eight years, if they so elect. This can soften the blow to property owners but does not change the ultimate negative effect on annual revenue and on property values. Owners will have to be diligent and ensure they recover this loss in revenue from tenants and protect the value of their investments. Make sure you review and where possible renegotiate commercial leases of properties where property tax is the responsibility of the Landlord.
It's too early to identify all of the ramifications of the Fair Municipal Finance Act, 1997; based on what I read and hear from various sources, the changes occasioned by this Act will affect commercial and industrial property owners for many years to come. I will provide additional information on this subject as it becomes available..... Stay tuned!
Additional information can be found on the Government of Ontario's web site (Ministry of Finance): http://www.gov.on.ca/FIN/english/propeng.htm
Terry Landon is Vice President and the Broker of Record of RE/MAX Cornwall Realty Inc., real estate brokerage, a founding Director of the Real Estate Council of Ontario, Past President of the Cornwall and District Real Estate Board and a proud member of Team Cornwall.