Canadian property taxes and the overburden put on commercial properties

Commercial property taxes and the need to manage this significant liability

Altus Group’s Canadian property tax rate benchmark report is designed to help commercial property owners better understand and manage one of their most significant operating expenses. For more than two years now, commercial property values have been under pressure due to elevated interest rates, combined with higher vacancies and stagnating rent growth in some sectors. When property tax assessments aren’t adjusted to reflect declining values, property taxes become even more burdensome for commercial real estate (CRE).  

To assist CRE owners, the report examines municipal legislation and compares key property tax metrics in eleven major cities across Canada. By examining the relationship between property taxes and sale prices, CRE owners can not only identify opportunities to appeal assessments but also better anticipate where property tax assessments are likely to rise or fall in future tax years. Property tax benchmarking illustrates how market values, assessments and tax policy come together to impact property tax costs for similar properties in each city. 

The inequity of commercial vs. residential property taxes – What is fair?

While property taxes widely vary across regions and CRE sectors, it is clear that commercial properties across Canada are overburdened as a source of municipal tax revenue. Our study indicated that across the eleven cities examined, commercial properties pay on average 2.83 times more taxes than residential, on properties of equal value. For 2024, Quebec City had the highest rise in the commercial-to-residential tax ratio (8.7%) followed by Halifax (4.5%) and Vancouver (3.7%). While Calgary’s ratio rose by 9.5% in 2023, this year’s increase was less than 1%, as the city was compelled to shift some tax burden from the commercial to the residential class to maintain the municipal portion of the tax within the provincially mandated ratio.

This year, the report also looks at variations within the commercial tax class. In cities like Ottawa and Halifax, property tax policy is used as lever to mitigate shifts in tax burden between sectors, or to place a higher relative burden on the most valuable properties. The fairest approach to taxation is to treat all taxpayers equally in relation to the value of their property. 

Figure 1 - 2024 commercial-to-residential tax ratios

Assessment-to-sale ratios indicate where in Canada tax assessments should rise or fall in 2025

Assessment-to-sale ratios (ASR) examine the relationship between property assessments and sale prices. Where assessments are out of date or generally misaligned, the ASR analysis provides insight into whether there is an opportunity to reduce an assessment on appeal. ASRs can also give an indication of where one could expect assessments to rise and fall in future tax years. 

In Vancouver, the ASR for office properties was generally lower than that of other sectors. Since office assessments were lowered for 2024, this analysis suggests the valuations may have been overcorrected, and some office properties are likely to face property tax increases for 2025. 

The ASRs for Calgary and Edmonton properties were more widely dispersed than in Vancouver. Multi-family assessments in these cities are closest to sale prices, while many properties in the commercial sector—particularly retail in Edmonton — are likely to face increases.    

Assessments in Ontario continue to be based on values as of January 2016, due to the indefinite suspension of the reassessment. As a result, assessments in Toronto and Ottawa are well below current sale prices – particularly in the industrial sector. 

More than 50% of the industrial properties sold in Toronto in 2023 and 2024 are assessed at less than 35% of their sale price, and this sector will likely see substantial increases in property tax with the next reassessment. Properties in the office and retail sectors that have not appreciated in value at a similar rate should see reductions in property tax – when the province finally moves forward with a reassessment. Although Montreal will not be reassessed until 2026, the ASR analysis suggests that the revaluation will result in lower assessments for office, higher assessments for retail, and much higher assessments (and likely taxes) for industrial properties.  

Higher assessed values don’t always translate to higher taxes

Our analysis of taxes paid on a per square foot basis for benchmark properties in each of the cities within the report illustrates how different factors combine to impact property taxes paid by region and CRE sector. The highest valued properties are often not the highest taxpayers.

In the office sector, Montreal’s taxes per square foot rank as the highest in Canada, although in Toronto and Vancouver offices have higher assessed values. Taxes in the industrial sector for Toronto and Ottawa were quite low, given that assessments have not yet captured the post-pandemic increases in industrial values. Halifax industrial properties paid the highest property tax per square foot due to municipal tax policy, which levies higher tax rates against high-value properties in prime areas. 

Municipal pressure to generate revenue means property taxes aren’t the only levies CRE owners need to manage

Our spotlight within the 2024 report focuses on some of the other taxes CRE properties are forced to manage. Varying from region to region based on municipal budgets and taxing powers, these taxes can add a significant amount to the per square foot costs, and place further pressure on properties facing challenges with maintaining occupancy.

These additional taxes may be intended to fund municipal services or infrastructure or to spur much-needed residential development. Unfortunately, many of these costs reduce the economic viability of existing properties, as well as the feasibility of redevelopment, and increase costs for the end user.

Conclusion

The 2024 Canadian Property Tax Rate Benchmark Report illustrates how governments rely on commercial real estate to fund municipal services and, operations and schools, by requiring commercial properties to pay substantially higher tax rates as a percentage of their value. Additional “a la carte” levies to address social, environmental and economic issues only work to increase the inequities between taxpayers and exacerbate the challenges of high costs and reduced occupancy faced in recent years. More than ever, owners, occupiers and investors in commercial real estate need to pro-actively manage their property tax liabilities.

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