Value Volatility Drives Assessment Reforms New Schedules and Appeal Procedures in Ontario and Manitoba
May, 2008

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By Barbara Carss

Reassessments now underway in Manitoba and Ontario herald a new schedule for property assessments and a new approach for appeals. The Manitoba government recently introduced legislation to reduce the period between property valuations from four to two years, while the Ontario government has abandoned a previous plan for annual reassessments and is instituting a four-year assessment cycle with a phase-in of value increases over that period.
 
Seemingly contradictory actions in the two provinces are based on a similar objective to curb volatility and the potential for dramatic jumps in value from one assessment to the next. Both provinces are also trying to open the way for more informal settlements of disputes before a formal appeal is filed.

However, Ontario's commercial, industrial and multi-residential ratepayers have questions about how phased assessment increases will work in tandem with the tax cap and clawback mechanisms the provincial government initially mandated in 1998 to mitigate tax shifts brought about by a province-wide move to current value assessment (CVA). Under that longstanding formula, taxes on some properties are capped below the true CVA-level taxes and municipal governments make up the shortfall in revenue by clawing back tax decreases that other properties should have received.

"In our view it [phased assessment increases] is adding another layer of complexity to an already complex system," says Steven Sorensen, the General Manager of the Toronto-Dominion Centre and Chair of the Toronto Office Coalition, which represents most of the city's major commercial landlords. "The coalition supports establishing a property tax system that is fair, equitable and transparent. Further complications are not leading to transparency."

FOCUS ON RESIDENTIAL

Discontent among residential ratepayers is arguably driving much of the new policy. In general, residential values have increased more rapidly than commercial values in recent years. This means that the residential property class is carrying a greater share of the overall tax burden than it once did even though commercial, industrial and multi-residential properties continue to be taxed at much higher rates. Perhaps more contentiously, dramatically escalating house prices in specific urban neighborhoods have created tax shifts and significant tax increases for some ratepayers within the residential property class.
 
In 2006, the Ontario government cancelled the reassessment that was to have been implemented in 2007 based on January 1, 2006 market values. Assessments in Ontario remain based on market values as of January 1, 2005. The Municipal Property Assessment Corporation (MPAC), an arm's length agency jointly funded by Ontario's 445 municipalities, is currently conducting a reassessment and will issue an assessment roll for 2009 based on January 1, 2008 market values.
 
The 2007 Ontario budget included the promise to phase-in assessment increases for residential, farm and managed forest properties over the four-year assessment cycle beginning in 2009. The 2008 Ontario budget extended that phase-in to other property classes - a move municipal finance officials say is necessary to avoid apportioning an undue tax burden onto those properties that otherwise would have been taxed at full CVA assessments from the first year of the cycle.
 
"If you don't include all the classes then you have no way for a municipality to ensure that the reassessment is revenue neutral," observes Dana Howes, Senior Economic Analyst for Durham Region, one of the five regions that comprise the Greater Toronto Area. "It is problematic in terms of capping and a phase-in occurring together, but at least it's mathematically possible."
 
Phase-ins create other concerns for municipal officials because the Province has dictated that decreases in assessed value will be fully implemented in the first year of the assessment cycle. This could potentially create a revenue shortfall. "The problem with a shortfall is that a municipality is required to fund it some other way - like through its reserves," Howes adds.

MULTIPLE CALCULATIONS

The mathematical minutia of non-residential property tax bills will become a divided responsibility as MPAC determines the phased assessment increase and municipal finance departments calculate caps and clawbacks. "We're now layering on top of a very, very complicated process a further scenario for errors," suggests David Gibson, Executive Vice President with Altus Group's property tax consulting division.

Regulations are still pending to define whether value increases attributable to property improvements, rather than simple market dynamics, will also be subject to phasing or will be passed through immediately. "It [phase-in] is straightforward to do when nothing on the property changes, but there are questions about what will occur when the property changes - if, for example, it was vacant and then a house was built on it," says Rose McLean, MPAC's Director of Legal and Policy Support Services.

MPAC already differentiates the sources of assessment increases on commercial, industrial and multi-residential properties because municipal finance departments need the information to determine whether tax caps are applicable. This information will potentially have to be compiled for the much greater number of residential properties in Ontario as well.

Property owners will be able to appeal their assessment in any year of the assessment cycle, potentially meaning increased administration to correct and update phase-in figures. "If the appeal was successful, we would have to go back and recalculate it, but that doesn't mean the adjustment is retroactive," McLean says. "It would only apply to the tax year in question and forward."

APPEAL MECHANISMS

Many of the other recently adopted amendments to Ontario's Assessment Act - which were part of the Budget Measures Act - arise from a 2006 report from the Ombudsman of Ontario that made 22 recommendations concerning MPAC's practices. Among reforms to the appeal system, the onus will switch to MPAC to prove that assessments are valid rather than, as has historically been the case, requiring property owners to prove that an assessment is incorrect.

"Owners have always been guilty and have had to prove themselves innocent. When that gets changed around, I think it's going to be interesting to see how MPAC perceives and reacts to that notion," Gibson says. "Historically, in an appeal to the Assessment Review Board, the assessor would always get the final say and now the complainant will get the final say. They can't introduce new evidence at that point. All they are being allowed to do is summarize in a final format the evidence that has already been given, but the complainants get the last shot to restate their position."

For owners of residential, farm and managed forest properties, the previously informal Request for Reconsideration (RFR) process to petition MPAC to reexamine the valuation will become a required step before filing an appeal with the Assessment Review Board (ARB). Deadlines for submitting RFRs and for MPAC's response have also been established, whereas previously MPAC could respond at any time and petitioners may not have received a response until after the March 31 deadline for filing an appeal.

Under the new rules, ratepayers who submit an RFR by March 31 of the tax year are guaranteed a response no later than September 30. They will have 90 days from the date MPAC returns a decision on the RFR in which to file an appeal.

Commercial, industrial and multi-residential ratepayers can opt out of the RFR step and simply file an appeal by the traditional March 31 deadline, but those who choose to submit an RFR will also have 90 days following MPAC's response to file an appeal. This could reduce the number of so-called protective appeals that property owners previously filed as a contingency in case MPAC did not respond to the RFR before the appeal deadline passed. However, it's expected that many commercial, industrial and multi-residential ratepayers will skip the RFR step.

"It is not mandated, but if they file it, it does extend the appeal period," McLean notes. "Property owners will have the benefit of getting a decision on the request for reconsideration and still having time to appeal so that could be an attractive option if they are hopeful of settling something without having to appeal. For complex cases that involve legal counsel, they may decide to just proceed directly with the appeal."

MANITOBA MEASURES

Manitoba's Municipal Assessment Amendment Act will introduce a process similar to Ontario's RFR mechanism to allow property owners and assessors to mutually agree to revise a property's assessed value or classification without appealing to the Board of Revision. Currently, the City of Winnipeg's Assessment and Taxation Department provides an opportunity for owners to review and discuss preliminary values that are typically released a few months prior to the assessment roll, but there is no forum to negotiate later. "Once we issue assessment notices, there is no ability to adjust the roll except through appeal," says Nelson Karpa, Director of Assessment and Taxation for the City of Winnipeg.

Legislative amendments would enable assessors to make amendments or corrections. The Manitoba Municipal Board would also have powers to request that the parties attempt to reach a solution prior to advancing to a formal hearing.

Both assessors and property owners are optimistic this could result in time and cost savings. "I would say that would be beneficial," predicts Ron Suzuki, President Elect of the Building Owners and Managers Association (BOMA) of Manitoba.

Manitoba has two assessment authorities - Winnipeg's Assessment and Taxation Department, and an office under the auspices of the provincial government that evaluates properties in all other municipalities. A reassessment is now underway based on April 1, 2008 market values. The current assessment cycle, which ends in 2009, uses 2003 market values as the benchmark.

"By the end of the cycle you will be getting a tax bill based on an economic circumstance that is six years old. The question is: how fair is that?" Karpa muses. "The fundamental advantage of a shorter assessment cycle is that the reference year is made closer to the taxation year. At the end of the next assessment cycle for 2010-2011, you will be taxed based on an economic circumstance that is only two-and-a-half years old."

Winnipeg properties typically exhibit a more gradual change in value than is seen in other Canadian cities such as Toronto, Calgary and Vancouver, but market analysts do expect to see some discernable upward movement in the next assessment, particularly among multi-residential rental properties. More frequent reassessment helps smooth out value swings. "A two-year cycle is a more appropriate basis because you can pick up the ebbs and flows in market values more effectively," Gibson asserts.

COSTS AND RESOURCES

More frequent assessment will require more resources, but Karpa stresses that Winnipeg's Assessment and Taxation Department can handle the task. "It's not like a doubling of the effort, but there will be more work involved," he acknowledges.

"The downside I see, potentially, for building owners is that we would have higher costs because we have evaluation costs and legal costs if the process is occurring more often," Suzuki notes. "I think we will have to wait and see how the process will work and see if there will be efficiencies or if we are just going to be doing it twice as often."

Preliminary values will likely be released in Winnipeg this fall around the same time that MPAC sends out assessment notices in Ontario. The clock will then start ticking on MPAC's September 30, 2009 deadline for responding to requests for reconsideration.

"One of the things we wanted to do was engage the property taxpayers much more fulsomely. That was one of the Ombudsman's recommendations. We are hoping that this new timeframe doesn't deter us from that," McLean says. "It will depend on the volume of requests, but we are certainly hopeful that we have enough time."