Many businesses across BC are facing an existential threat in the form of unsustainably high property tax bills. This problem is fueled by the BC Assessment process of valuing properties based on the “highest and best use” of the property (such as a redevelopment), and not on its current use. Due to this model, businesses, whether property owners themselves or through their leases, are being taxed on the future development potential of their sites with little regard for the current use of the property, or the cash-flow or profitability of the current business.
These high property tax bills can threaten the survival of many small and medium-sized businesses, and risk hollowing out local economies as businesses are forced to either relocate or close altogether due simply to the skyrocketing cost of their property tax bills. A provincial solution that mitigates the impact of soaring, inequitable property assessments on the tax bills facing the business community is needed.
Background
Property taxes are the principal funding method for local governments, and generate the revenue to fund important local programs such as police and fire services, parks and recreation, and roads, sewers and other basic infrastructure. Property taxes are based on two factors: a local tax rates and rates set by the Province of BC and the value of a property.
The local tax rate is set by municipal governments to meet the funding requirements of their annual budgets. There are nine classes of properties[1], one of which is assigned to each property. The tax rate for each property class is set by local governments and is then applied against the assessed value of a property to determine its property tax bill.
Other tax rates determined or enabled by the Provincial Government are also applied against the assessed value of a property to determine the total property tax bill.
The value of a property is based on an assessment conducted annually by BC Assessment, a provincial crown corporation responsible for maintaining up-to-date assessments of the value of properties throughout BC.
However, as laid out in the BC Assessment Act and executed out by BC Assessment, the value of a property is based on several factors, including its “highest and best” use. This takes into account what a given property could potentially be used for or what could possibly be built there that would be of more value than its current use.
For example, a property on a busy corridor may currently be used for a one-story retail bakery even though its local government could permit a future multi-level residential development to be built there. In this instance, BC Assessment would value the property not just as a small, local bakery, but would take into account the value of the potential redevelopment. Then, the property taxes due would be calculated based on that higher, full-market value. This means the bakery would be taxed substantially more than it would be as just a bakery; the property tax will be calculated based on the value of the future potential development.
An additional problem arises dues to the significant difference in the tax rates of business and residential properties in BC cities, where businesses have substantially higher rates. For example, a city may have a “Business Other” tax rate for that small bakery of 10.6618, whereas the “Residential” tax rate for a residential development might be only 3.169. However, since the bakery’s property in this example will be classified as a business, it will pay the higher business tax rate on the full value of the property (including the appreciation driven by the residential redevelopment potential.
Given the rapid and sustained increases in property values experienced across the province and in particular in population centres, along transit corridors, near popular tourist destinations, or on high streets, this current method of property assessment has created a scenario where BC businesses can be faced with significantly higher, and in some cases unsustainable, property tax bills despite there being no change in the current business use or improvement to the property, based solely on redevelopment potential or speculation.
Unfortunately, in these scenarios, the cash flow of the existing business may simply be insufficient to support the tax bill causing the business to possibly scale back, struggle, or close. It is a system which needs reforms that separate the current-use value from the redevelopment value for the purposes of taxation.
A Provincial SolutionSome limited policy options to mitigate property tax swings do exist at the municipal level, however provincial action is required to develop a solution to properly address this problem. One of those solutions should be the creation of a permanent, new sub-classification for the redevelopment potential of commercial properties.
With this solution, BC Assessment, in determining the value of a property, would differentiate between the value of the current building and usage (classified as Class 6-Other Business) and any additional value based on the unbuilt development potential, which would be classified under a new commercial sub-class.
This new commercial sub-class would enable the separation of “development potential” value from “existing use” value for the purposes of taxation, allowing local governments to then provide a lower tax rate on the “development potential” value portion.
In the above example, under this new model the local bakery would see savings as instead of having the business tax rate applied on the entire $20 million value of the property, it would only apply on the $1 million value of its current business use, and then a lower rate – determined by its municipal government – would apply to the portion that is value derived from redevelopment potential.
This solution would provide both a province-wide mechanism for addressing this problem (the new sub-class) and also local control by municipalities in how it is implemented (the mill rate for that new class), which should allow this model to be more successful and widely adopted than mitigation measures thus far, helping to deliver fairer taxation for BC’s small business community.
THE CHAMBER RECOMMENDS
That the Provincial Government:
- Work with BC Assessment and municipal governments to address soaring, inequitable property taxes on businesses by creating a new commercial sub-classification that would separate a commercial property’s current-use value from the value of its redevelopment potential, and empowering municipalities to apply a different, lower mill rate to that redevelopment value for the purposes of levying property taxes.
[1] Residential, Utilities, Supportive Housing, Major Industry, Light Industry, Business Other, Managed Forest Land, and Recreation Property, Non-Profit Organization.