The Urgent Need to Bring Fairness to the Taxation of Multi-Residential Properties in Ontario

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1 The Urgent Need to Bring Fairness to the Taxation of Multi-Residential Properties in Ontario by October, 2001

2 About FRPO FRPO is the largest association in Ontario representing those who own, manage, build and finance residential rental properties. Our membership includes a diverse group of owners and managers, from those with one small building or a few units, up to the largest property management firms and institutional owners and managers. The association also includes our colleagues and partners in industry, including service providers, suppliers, and industry consultants. With more than 800 members in every area of Ontario, and with over 250,000 homes, we represent the full spectrum of the industry in Ontario. The Landlord and Tenant Position on Property Taxation & Classification The fundamental position of FRPO on the issue of property taxation is that multiresidential buildings (7 or more units) is simple: there should be no discrimination in taxation on the basis of tenure - on rental versus ownership. All residential accommodation should be taxed at the same rate. Therefore, there is no rationale for having a separate property tax class for multi-residential. Multi-residential properties should be put in the same class as residential properties. We believe it is grossly inequitable to tax multi-residential tenants at rates which can be over five times those paid by homeowners, condominium residents and tenants in small apartment buildings. This is not only a landlord position; the same view is taken by tenant organizations across the province. The Problem For decades, most Ontario municipalities have taxed multi-residential tenants at rates higher than homeowners and tenants in smaller buildings. There is no policy basis for this differential, which has developed and grown over time primarily as a result of the political perception that tenants do not realize that they pay property taxes and will react less vocally than homeowners to tax increases. As a result, the municipal property tax burden on tenants is now generally 2 to 5 times that of homeowners, condo owners or renters in smaller buildings. This discrimination has been allowed to continue because multi-residential is put into a separate class from residential real estate for assessment purposes. Therefore, municipalities have the opportunity to charge a different tax rate on apartments. These inequities would not exist if, as is the case in some Ratio of Property Tax Rates on Tenants Versus Homeowners for Selected Municipalities, 2000 Durham Region 2.70 Frontenac 5.79 Guelph 3.10 Haldimand-Norfolk 2.34 Halton 2.38 Hamilton-Wentworth 3.06 Lennox & Addington 3.87 London 2.38 Niagara 2.53 Orillia 2.82 Ottawa-Carleton 2.33 Peel 1.72 Red Lake 2.97 Sudbury 1.97 Waterloo 3.21 York Region 2.03 Thunder Bay 2.90 Toronto 4.18 Windsor 2.55 Other Provinces Montreal 1.00 Winnipeg 1.00 Calgary 1.00 Vancouver

3 jurisdictions, all residential properties were put into one class. The Impact of Unfair Taxes Regressive Taxation One of the most troubling aspects of the realty taxation of multi-residential in Ontario is just how regressive this taxation is. The level of regressiviness is unparalleled. Tenant incomes are roughly about half those of homeowners. Yet property tax rates paid by tenants are commonly two to five times the rates paid by homeowners. Ontario Household Incomes, 1996 Census Tenants Homeowners $35,510 $66,179 An example will help illustrate this further. If the typical tenant and typical homeowner were to live across the street from each other in the City of Toronto, in identical buildings and identical units, but one was an apartment building, and the other a condominium, their municipal taxes might look something like this: Comparison of the Taxation of a Tenant Versus A Homeowner In the City of Toronto Tenant Homeowner Occupant s Income $33,590 $66,179 Unit Value $125,000 $125,000 Municipal Tax Rate 2.924% 0.700% Municipal Taxes $3,655 $875 Tax % of Income 10.9% 1.3% As this example shows, property taxes as a percent of income are ten times higher for the tenant than the homeowner. Even if the two had the same incomes, the tax rate for the tenant would still be over four times that of the homeowner. Unfair Taxation Creates Affordability Problems The most recent estimates of Core Need 1 suggests that there are over 450,000 tenant households in Core Need in Ontario, about one third of Ontario s renters. Of these, about 300,000 are paying over 50 percent of their income in rent, or about 22 percent of Ontario s renters. 1 Core Need is defined to be those households paying more than 30 percent of their income to afford suitable (i.e. an appropriate size for the household) and adequate (not in need of major repairs) housing. 2

4 The reason most of these renters have affordability problems is because of low incomes. Tenant incomes have been declining over the past 30 years, resulting in an increasing proportion of tenants experiencing affordability problems. Average tenant incomes in Ontario declined by 3.9 percent between 1991 and 1996 in nominal terms. 2 However, rents in Ontario have been on a downward trend over the long term. As the chart opposite shows, even in Toronto, which has had a consistently tight rental market since 1975, rents have lost considerable ground to inflation. Rents in Toronto Compared to Inflation, = CPI Canada CPI Toronto Rented Accomodation Unfair municipal taxation of renters significantly exacerbates affordability problems. Fair taxation of renters across Ontario would take tens of thousands of households out of Core Need. Tax Distortions Create Artificial Behaviour Unfair taxation of multi-residential in many municipalities creates artificial pressure for owners to convert their buildings to an alternative use in order to escape this unfair treatment. The tax advantages to conversion can be enormous, benefiting both owners and occupants alike. For example, a rental apartment owner who converts her building to condominium, yet continues to rent to the same tenants, would be required under provincial legislation to pass on what amounts to thousands of dollars in savings to the building s tenants. Similarly, owners of buildings with less than 9 or 10 units can achieve massive savings by reducing the number of units in the building to six, moving them out of multiresidential and into the residential class. Doing so is perfectly legal, and within their rights. Furthermore, the tax treatment is a major disincentive to increasing the number of units in a smaller building through additions, or by subdividing units. The latter changes may in fact be appropriate to serve the changing demographics of household formation in Ontario. As average household size declines, smaller, more affordable, units are more appropriate in some circumstances. Once again, unfair tax policy is causing artificial behaviour. Business decisions are being driven by tax policy, and not by business fundamentals or consumer needs. 2 Source: FRPO based on the Statistics Canada Census, 1991 and

5 Inconsistent Tax Treatment The current system allows municipalities to maintain tax ratios for multi-residential properties outside the ranges of fairness. Therefore, historically unfair taxation is perpetuated under the current system. Dealing with this issue is a challenge, sometimes financially, sometimes politically, or both, for many municipalities. As a result, there is inconsistent treatment of renters relative to homeowners across jurisdictions in Ontario. Clearly, provincial leadership is required to ensure its citizens receive fair and equal treatment across the province. Universal Agreement That No Policy Rationale for Discrimination While some have attempted to justify differential rates on the basis that apartment owners receive a tax write-off, therefore suggesting that tenants can bear a higher tax burden, this is a false premise. Tenants pay the full cost of property taxes through their rent, and pay those costs in after tax dollars. As one study noted, this thinking is based on the simplistic notion that municipal taxes will always be borne by the landlord rather than by the tenant landlords do not pay municipal taxes; tenants pay them. This reality is reflected in Ontario s rent control system, which allows the full impact of a tax increase (or decrease) to be added to (or deducted from) the rent. Ontario s Fair Tax Commission Numerous reports and studies have commented on the inequity of the property tax differential between the residential and multi-residential classes. In 1993, the massive 1,100-page report of the Fair Tax Commission noted that The current treatment of property taxes on rental property is unsatisfactory for a number of reasons. First and most important, on average tenants are over-taxed relative to single-family homeowners. The Fair Tax Commission report stated unequivocally that we can see no justification for a distinction in tax rate policy on the basis of the type of tenure enjoyed by the occupant of the dwelling under consideration. As a result, Recommendation 88 of the study was that All residential property should be assessed on the same basis whether the property is occupied by an owner or a tenant. This inequity has long been the greatest in Toronto, Ontario s largest tenant population, where multi-residential tenants have been taxed at for to five times the rate of homeowners, condominium owners and renters, and other renters. Studies examining the property tax situation in the City of Toronto (formerly Metro Toronto) by Anne Golden and David Crombie also called for the elimination of the punitive tax on multi-residential tenants. Metro Toronto Council In the fall of 1997, the Council of Metropolitan Toronto adopted the report of a multisector Housing Stakeholder s Panel, which again highlighted the inequitable taxation of apartment units. The recommendations endorsed by Council included that the New City 4

6 of Toronto tax multi-residential buildings at the residential rate; and that the City phase in equalization of property taxes for the existing multi-residential and residential classes. Niagara Region More recently, a Community Advisory Committee, made up of a citizen panel from Niagara region, advised Niagara Regional Council to adopt a five year strategy to bring multi-residential tax rates in line with those on single family homes. This committee also found that there was no basis for discriminatory tax treatment of renters. Regional Council agreed and adopted a five year multi-residential reduction strategy in May of Studies and Action in Other Jurisdictions In many other states, provinces and cities, there is no tax distinction on the basis of ownership versus rental tenure. This is true even in highly urbanized jurisdictions like California, Massachusetts and British Columbia. The province of Manitoba formerly taxed apartment and rented condominiums at 1.5 times the residential rate and 2.2 times the rate of owned condominiums. Effective January 1992, the Manitoba government began a phase-out of this differential in ten, equal annual increments. That ten year phase out is now complete. Renters are now taxed at exactly the same rate as owners. (Manitoba Regulation 29/90) Similarly, in the City of Calgary, measures have been taken to phase out a differential between the apartment and ownership classes. In 1995 the differential was reduced and a study commissioned to determine whether it should be eliminated altogether. The report by the Calgary Tax Review Committee, chaired by former Alberta Chief Justice Laycraft, concluded that there was no rationale for treating owners and renters differently. The report notes that No person has suggested to the Committee any justification for it other than the difficulty of replacing the revenue that would be lost by abandoning it. 3 The Committee recommended eliminating the differential, and Calgary Council adopted a program to phase-out the remaining gap over three years. The City of Saskatoon recently went through a similar exercise. Currently, multi-family properties are subject to an effective tax rate of 87% higher than that applicable to singlefamily homes and apartments. On March 5, Saskatoon City Council approved a plan to eliminate the entire discrepancy in effective tax rates over an 11-year period. In 2005, after completion of the next general re-assessment, the plan will be reviewed by Council to determine if the phase-in should be accelerated or decelerated. The decision stems largely from a Local Tax Review Committee Report in 1997, produced by a citizen s committee appointed by Council. As with every other formal review that has been undertaken in any jurisdiction, they came to the conclusion that there is absolutely no justification for taxing apartments at a different rate than condominiums or single-family homes. 3 The Calgary Tax Review Committee, Report to City Council, September,

7 Recent Developments in Ontario Under the Fair Municipal Finance Act, municipalities have been given the sole authority to set tax rates for different classes of properties. It is now purely a municipal decision whether to perpetuate or eliminate the discrimination against multi-residential tenants. The province has also established ranges of fairness to indicate the preferred and equitable relationship between different types of classes. As announced by the Minister of Finance on February 5, 1998, the fairness range for multi-residential properties is 1 to 1.1 times the residential rate. In other words, the multi-residential rate should be, at most, 10 percent higher than the residential rate. At the same time, the province has moved to ensure that there is no discrimination in the collection of property taxes for educational purposes. Residential and multi-residential taxpayers now pay the same rate for this portion of their property taxes, and the province is to be commended for making this change. In order to ensure that the benefits of reduced taxes will flow through to tenants, Section 136 of the Tenant Protection Act provides that where property taxes are reduced, the rent is reduced automatically as a matter of law. Landlords are obligated to pass on rent decreases to tenants under the legislation. As well, for reductions in all buildings over 6 units, the municipality shall notify the landlord and all tenants of the reduction in rent. Section 136 of the Act was added during the legislative review of the TPA at the direct request of tenant organizations, and this provision is supported by tenant groups across Ontario. Why Do Landlords Support Equalization Since the Tenant Protection Act so clearly compels landlords to pass on tax reductions to tenants, some have questioned why landlords support equalization. The answer is quite simple: it is good for business. Even through the full savings are passed on in the form of reduced rent and a landlord s Net Operating Income remains unchanged, the units become much more marketable at lower rent levels. As with any product, the lower the price, the more customers who can afford to buy the product. Many landlords have encountered significant difficulties in finding tenants who can afford to rent their units given the hardships in Ontario in recent years. The number of tenants with affordability problems has risen as the relative wealth of tenants in society has dropped. Lower taxes, and therefore lower rents, will mean fewer vacancies, reduced costs due to default, less hardship for low-income tenants and a better business climate for multi-residential landlords. Across Ontario, many landlords are losing significant numbers of tenants to new home ownership. A study done for FRPO by Clayton Research Associates Limited recently 6

8 found that about 82,000 households leave rental for home-ownership each year. Rental housing is being forced to compete on a playing field that is not level. While there are many government programs to artificially reduce the cost of home ownership (e.g. no capital gains taxation, land transfer tax exemptions, lower property taxes), rental housing costs are artificially inflated. Annuallized Number of Renters Buying a Home, (May), Ontario, GTA and the Rest of Ontario Households (000s) Ontario GTA Rest of Ontario Source: Clayton Research based on Statistics Canada HIFE 1996 Data. What Needs to be Done The appointment of MPP Marcel Beaubien to review the regulation which defines property classes under the assessment system presents a tremendous opportunity. The government will be able review and correct come of the negative consequences of a property tax system which treats citizens who rent their housing differently from those who own. We have passed the point where there is any debate as to whether or not there is any justification for treating tenants and owners differently. We now need to take concrete steps to ensure that all citizens in Ontario are treated fairly, as has been done in other jurisdictions. A process needs to begin to merge the multi-residential class with the residential class. Recommendation: That the province begin a process to bring the tax treatment of renters in line with that of home-owners across Ontario. A 5 year phase-in strategy to bring multi-residential properties into the residential property tax class should be initiated through provincial legislation, subject to any phase-in over a shorter period of time chosen by individual cities or regional municipalities. 7