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Toronto Looks for New Revenue Commercial Sector Tagged as Lucrative Source
May, 2007
By Barbara Carss
Business interests are lining up against proposals for new municipal taxes in the City of Toronto. Consultants advise that a slate of nine revenue-raising options that are now allowed under the new City of Toronto Act, 2006 could generate about $339 million annually. City officials recently completed a series of public meetings and consultations with stakeholders to get feedback on these so-called revenue tools, which were outlined in a discussion paper released earlier this spring.
Possible revenue-raising options include: municipal sales tax on cigarettes, alcohol and admissions to amusement venues; a 0.5% municipal land transfer tax; a $100-per-stall annual tax on commercial parking spaces in the downtown core; a $40-per-vehicle registration tax on passenger and light commercial vehicles; road tolls; and a tax on outdoor advertising space. For now, Toronto officials are still considering the proposals, and no new taxes would be introduced until at least 2008.
Some of the measures under consideration come with implementation costs and/or administrative complications that would make them largely impractical. However, the three proposed taxes that would target the real estate development and property management sectors - the land transfer tax and taxes on commercial parking spaces and billboards - are deemed easier to collect, with the political advantage of affecting a relatively limited number of ratepayers.
"These proposed new Toronto taxes are in effect new commercial property taxes by stealth," asserts Juri Pill, Chair of the Toronto Office Coalition and Senior Vice President, Research, with Oxford Properties Group.
BUDGET DILEMMA
In contrast, Toronto's precarious finances are no secret. The Toronto Board of Trade's budget deputation for 2007 acknowledges that the City has been in a "fiscal straitjacket" since 1998. In particular, the City faces the pressures of: carrying approximately $600 million of social services costs previously funded by the Ontario government; maintaining transportation services and taking on new responsibilities for funding GO Transit while funding from senior levels of government has been simultaneously reduced; and maintaining and/or replacing aging infrastructure.
Toronto's recently approved $7.8-billion operating budget for 2007 included a 2.8% property tax increase (3.8% for residential and 1.8% for non-residential ratepayers) and also relies on $278 million from City reserve funds. Provincially mandated programs represent about 33% of the budget, while transit and emergency services account for another 32%.
Both the adherents and critics of the new City of Toronto Act, 2006, have been aware that it would bestow powers, including taxing authority, that are unique among Ontario's municipalities. "We were kind of expecting this at some point given the City of Toronto Act," observes Chris Conway, the Director of Government Relations with the Real Property Association of Canada (REALpac). "We were involved very extensively in lobbying over the Act and we cautioned at the time about giving the City new tools."
The Board of Trade urges the City to hold its discretionary spending to no more than the inflation rate and explore ways to increase revenue from existing sources before instituting any new taxes. It also calls on senior levels of government to resume responsibility for services that are unduly burdening the property tax base.
"Any new taxes must be fully assessed for their economic impact, administrative and implementation costs. The Board believes that these new tools should be only considered after social services and social housing costs are uploaded, sustainable transportation funding is secured from senior levels of government and internal savings are achieved," the Board's budget deputation stated.
STRETCHING THE TORONTO-905 GAP
Based on sales prices and volumes in 2006, the proposed 0.5% land transfer tax could yield approximately $103 million for the City. Analysts calculate such a tax would add about $1,750 to the average purchase cost of a home in Toronto.
It is expected to be an infrequent tax for the majority of residential buyers since home purchases are a relatively rare event in most consumers' lives. However, some observers predict there could be negative fallout for renovation trades, designers and appliance/furniture retailers if the new tax gobbles up funds that owners would otherwise spend on home improvements.
Commercial and multi-residential real estate players will be making more significant outlays because they acquire properties more frequently and sales prices are typically much higher than for residential properties. Nevertheless, in a sellers' market, the new tax is unlikely to have much influence on purchasers' decisions except perhaps in a situation where two more-or-less identical buildings are for sale on opposite sides of Toronto's municipal boundary.
"It's not a big enough dollar amount to really have an impact on buying criteria or demand," says Lorenzo Di Gianfelice, an appraiser and sales representative with RE/MAX Commercial Focus, who specializes in apartment building sales. "With the strong demand there is for apartment buildings in Toronto and the lack of supply, it's not a disincentive. I don't think it's going to have a big effect on the Toronto market."
In the office building sector, industry advocates maintain a municipal land transfer tax would erode overall competitiveness and send the wrong message. Commercial property tax rates in Toronto are currently two to three times higher than rates in the surrounding 905 Regions, but Toronto Council has pledged to narrow that gap.
"It would undermine the policy direction," Pill says. "It would directly reduce the value of existing office buildings and discourage future office development. This new tax would increase sprawl by making Toronto office development even less competitive with development in the 905 area."
Conway also critiques the City's consultation paper, which makes comparisons with American cities such as New York, Chicago, Philadelphia, San Francisco and Los Angeles that have even higher land transfer taxes. "They have less tax at the state and federal levels so the total tax burden ends up being less than what we have," he says.
Assumptions about revenue potential and the ease of collection are based on the premise that Toronto will be able to piggyback its tax onto the provincial government's land transfer tax administered through Ontario's land registry system, Teranet. Alternatively, the City would have to send out its own bills to property owners, which would entail more labour and administrative costs.
DOUBLE DIP ON SELECTED TARGETS
Taxes on parking stalls and outdoor advertising space would be even more selectively targeted than the suggested land transfer tax. Property owners theoretically already pay property tax on both those items since all sources of revenue are factored into a commercial building's assessed value.
"It is double dipping," says Celia Hitch, a lawyer with Lang Michener LLP who specializes in real estate and leasing matters. "But, in some ways, it can be seen as a clever tax. It's pretty smart to put a tax on something that doesn't affect 9 out of 10 people."
The City's consultation paper recognizes that there will likely be an increase in assessment appeals after a tax on parking stalls is implemented. "It is anticipated that appeals could become common in the first few years until property owners and property assessors become familiar with the methodology of the tax. Appeals could significantly increase the administrative costs of the tax," it advises.
A lot will depend on the timing of when such a tax is introduced. Commercial property owners will be submitting income and expense information to the Municipal Property Assessment Corporation (MPAC) every year, but with the new four-year assessment cycle (see story, page 1), more time could elapse before changes in value attributable to the tax could be reflected in assessed values.
"The key for us would be, once the tax is introduced, how quickly would the affect of the tax be manifested in the marketplace," says Rose McLean, MPAC's Director of Legal and Policy Support Services. "As soon as we had any evidence, we would reflect it in assessments."
As proposed, the $100 annual parking levy would apply on non-residential and non-institutional parking stalls within the central area of the city, bordered by the CP Rail corridor and/or Dupont Street on the north, Lake Ontario on the south, Bathurst Street on the west and Bayview Avenue and/or the Don River on the east. This would generate an estimated $7.2 million annually.
"It's just an added commercial property tax under a different name that would reduce net building revenues and have no impact on modal split," Pill submits.
Toronto's consultation paper gives the example of the parking tax in the Greater Vancouver Regional District (GVRD) set at 78 cents per square metre (7.2 cents per square foot) that equates to approximately $23.40 per stall. However, the British Columbia government has now agreed to abolish the tax, which was introduced across the entire GVRD in January 2006 with the aim of raising about $20 million annually for road and transit improvements.
"The whole formula designed to get more money from commercial properties was just ill-conceived and poorly planned. The tax could not be administered fairly and was incredibly inefficient, and it was not a good tax demand management tool to get people out of their cars and into taking rapid transit," reports Paul LaBranche, the Executive Vice President of the
Building Owners and Managers Association (BOMA) of British Columbia, which led a coalition of business organizations protesting the tax. "It had a very, very serious impact on our membership, especially in the suburban areas. For businesses in the GVRD, it exacerbated an existing imbalanced commercial tax burden."
CONTRACT WORDING IMPORTANT
Outdoor advertising space offers the most limited and modest revenue generating potential of the nine proposed tax measures. The City's consultation paper suggests four different tax rates ranging from $3 to $10 per square foot depending on the size and medium of advertising. This is projected to raise about $2.6 million annually.
As envisioned, the tax would be added to the property tax bills of the properties where the signs, billboards etc. are located. Since signage on buildings is generally an extra source of revenue for building owners, who have contracted with billboard advertising companies to provide the space, the proposed tax would not be an additional operating expense, but it could reduce profits.
"If the contract was structured on a gross income basis then the building owner would probably have to eat the tax," Hitch says. "Some of the contracts are written so that the advertising company would take care of any taxes, and I'd think most of the more sophisticated property owners would have that kind of contract. Probably any billboard on the Gardiner Expressway is covered by that kind of contract."
IMPLEMENTATION EXPEDIENCY
Six other proposed tax measures are projected to collectively generate about $227 million annually. A 5% sales tax on cigarettes, alcohol and admissions to amusement venues represents an estimated $86 million, while the proposed vehicle registration tax could garner about $42 million. However, many of the measures come with administrative and/or political obstacles.
"One of our concerns is that businesses don't vote so we're a bit of an easy target. City officials go to a meeting with the public and the public gets very angry, but we don't have the same kind of pressure tactics," Conway observes. "It seems like it might be easier for the City to implement the taxes that affect our sector."
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