Changes to Alberta Assessment and Tax: Regulated Industrial Property Assessment Minister’s Guidelines
What is happening?
The Regulated Industrial Property Assessment Minister’s Guidelines (RIPA) has been proposed to replace the 2005 Construction Cost Reporting Guide (CCRG), the document which currently lays out the framework for reporting and assessing industrial property in Alberta. The CCRG has been under review for the past several years, and the RIPA as currently proposed is the result of those reviews. The RIPA has been posted on the Alberta Municipal Affairs website and “will be available for review until July 17, 2017 in order to give practitioners and other interested parties an opportunity to consider the impact of the proposed procedures and to provide any feedback on potential issues. “ If passed, these guidelines will become effective January 1st, 2018.
What is the purpose of the new guidelines?
The draft version of RIPA states that the “intent of regulated assessment is standardization”. (RIPA, S 3, ‘Interpretation’). In more practical terms, the objective is to ensure that assets with similar specifications, or similar economic viability, will receive comparable assessments regardless of geographical location or other factors. To achieve this, the RIPA and the CCRG both provide guidelines for the removal of costs considered ‘non-standard’.
What are the impacts of the new guidelines?
Although a comprehensive discussion of every effect of the new guidelines is beyond the scope of this communication, the following are a selection of the updates and changes that we feel will impact our industry most significantly:
- Abnormal cost
A major area of cost exclusion built into the CCRG was Abnormal Cost. This section provided a framework for compensating for (among other things) the effect of when the construction workforce is on site but a lack of supplies, or a work slowdown due to faulty installation or other errors halts actual construction. The logic behind this is that to arrive at an equitable assessment, these costs should not be considered as they vary drastically in severity from project to project.
The RIPA removes this section, and states that its “List of potential included cost is non-exhaustive, while the list of excluded costs is a complete list.” (RIPA, Part 4, Div1, S 19) –eliminating the ability of an assessed person or entity to exclude these costs for assessment and tax purposes as they are not explicitly listed in the text of the RIPA. The RIPA further states that:
“Costs must not be considered as excluded costs where there is factual ambiguity as to whether or not costs qualify as excluded costs“ (RIPA, Part 4, Div2, S 22)“, and places the authority of deciding whether or not there is ‘factual ambiguity’ with the assessor. We are concerned that this places an enormous amount of discretion in the hands of the assessors and will lead to inequitable assessments.
- Calculation of Labour cost
Labour costs are no longer to be determined by actual expenditures, but instead by the rates and classifications that appear in the Statistics Canada National Occupation Classification. From the text of the RIPA (Part 3, Div1, S14):
“The portion of included cost that reflects labour costs for a project for a year must be determined only in accordance with this section, where an assessed person reports labour costs for a classification on the basis of:
- The classification, according to the National Occupation Classification, and
- Classification hours worked
This will fail to take into account the costs associated with rework, do-overs due to construction errors, faulty installations and other events of this nature. Some projects incur significant costs due to errors and events like these, while other projects which go more smoothly may incur very minimal costs. This would appear to contradict the stated goal of equitable assessment. Furthermore, there is no mention of how the cost for travel, or overtime hours worked will be treated – these are areas of substantial expenditure, and both were explicitly listed as excluded costs in the CCRG.
RIPA (Part 4, Div2, S22(o)) states:
“Debottlenecking is intended to exclude the costs of design-based do-overs that occur during construction. While included cost are intended to broadly reflect a standardized cost of construction, the cost is not intended to reflect work done two or more times due to design changes. However, costs excluded from de-bottlenecking should not reflect costs associated with do-overs due to construction errors and faulty installations.”
As above, our concern is that this will lead to inequitable assessments – with some projects suffering significant expenditures due to errors requiring re-work or ‘do-overs’ and others incurring very minimal costs.
‘Alteration’ is a new term in the RIPA which does not appear in the CCRG, and is defined as follows in ‘Definitions’, part (b):
“Alteration” means any change from the previous state of the assessed property,
(i) including work to improve the operational capacity or efficiency of the assessed property, to extend the life of the assessed property, and any additions, upgrades, modifications, replacements, reconditioning and retrofits of the assessed property.”
We are concerned that this will result in many costs being capitalized, assessed, and taxed as equipment which should more properly be considered operational or maintenance expenses.
- Transportation costs
The intent of this section in the CCRG was to standardize the costs of freight for materials by removing costs associated with transportation from the Edmonton area to the actual site. In this way, the cost of transportation is standardized for all Alberta projects as if they were built within a 50KM radius of Edmonton.
The RIPA (Part 3, Div2) states:
“The transportation costs determination is designed to treat all assessed property as if it is located in the Edmonton area. By treating it as if it is in the same location, this allows transportation costs to be standardized.
If a transportation cost is built into the purchase price of a material, then there is no transportation cost to be determined for the purposes of section 18. There is only the price of the material, which is not to be adjusted for transportation costs. If, however, the vendor has shipped the material, and charged a separate shipping cost, then the shipping cost may be standardized according to section 18.”
The above language is concerning to us because it will fail to recognize transportation costs built into material price. The practical effect of this will be that assessees’ who do not force their suppliers to separate freight costs on their invoices will be explicitly precluded from removing transportation costs from their assessments, and suffer higher taxes as a result.
The RIPA (Part 3, Div2, S18, (b)) also provides that:
“If the materials originated at a place closer to the location of the assessed property than the Edmonton area, the estimated cost of transporting the materials to the City of Edmonton is the transportation cost.”
This practical effect of this could be that, for example, an assesse with a project in the Wood Buffalo area purchasing materials sourced from the city of Fort Mac could be assessed for the transportation cost of materials from Fort Mac to Edmonton, rather than from Fort Mac to the job site – and be taxed for transportation costs that were never even incurred. We are concerned this will lead to inequitable assessments.
What action can you take?
Subsequent to review, please feel free to share your thoughts with Altus. We will incorporate any comments in a response to Alberta Municipal Affairs.
The MRAT (Matters Related to Assessment and Tax) and a new regulation on non-residential subclasses are set to be released. We will issue further communication subsequent to our review of this documentation.
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Last updated on September 12th, 2019 at 12:58 pm