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By Altus Group | November 14, 2019

Here’s what Canada’s cannabis producers need to know about property assessment and taxation

Commercial cannabis-growing facilities absorbed more than nine million square feet of real estate last year – and millions more square feet are in the works. In this rapidly expanding industry, property assessment and taxation are unsettled and unrolling as provincial and municipal governments try to determine how best to deal with a massive influx of commercial cannabis operations. For Canada’s cannabis producers, this can mean opportunity or adversity – depending upon your course of action. Consider a commercial grower in Ontario; a facility worth $10 million could pay as little as $25,000 in annual tax if its activities are classified as farm – or as much as $400,000 if they are classified as industrial. The difference could depend upon the actions this company takes. Here’s why.

How property assessments are determined

Cultivation and production of cannabis are regulated by the federal government. Health Canada licenses commercial production, import, export and sale of cannabis for both the medical and recreational markets.

Provincial governments set the rules that determine the property assessments and classifications.

Municipalities manage land-use designations and zoning and set tax rates for their jurisdictions. Tax rates are determined by a municipality’s revenue requirements divided by the assessment base.

Assessments are typically conducted by a provincial authority, such as the Municipal Property Assessment Corporation (MPAC) in Ontario and BC Assessment Authority (BCA) in British Columbia or at the local level as is the case in Alberta and Quebec. Assessors classify a property for tax purposes and determine the appropriate assessment.

All provinces assess properties either at market value or a percentage of market value, with various applications related to classification. In most provinces the assessment system favours farm properties. In Ontario and Quebec, for example, municipalities are permitted to levy different tax rates for seven major classes of property including residential, commercial, industrial and farm. For Ontario, the tax rate for farm property is 25 per cent of the residential rate.

Property tax is based on “real property,” which refers to land and improvements to the land. But in some jurisdictions, machinery and equipment affixed to real property are included in valuing the property and in others they are not. Machinery and equipment used in a manufacturing or processing function can be assessable and taxable depending on the provincial jurisdiction. Typically, this function within a cannabis production facility does not meet the definition of ‘farming operations.’

No consistency in assessment and taxation of properties used for cannabis production

Many municipalities are reviewing and rezoning bylaws to allow commercial cannabis production in industrial zones and conversion of vegetable greenhouses to cannabis cultivation. Currently, growing cannabis is considered to be an agricultural activity, whether this takes place in greenhouses, on farmland or vertically grown in  a new or repurposed industrial facility.

Property assessment and taxation of cannabis operations is inconsistent across the country. Here are some examples.

  • In Alberta, cannabis production is considered to be farming and has a property tax exemption on the building housing the grow operations. *At the time of publication, the Alberta Government announced that growing facilities will face a change in tax status in the 2020 tax year and will no longer be tax exempt.
  • In Ontario, the value of a property for tax purposes that is classified under farm or industrial is based on the value of the land and the building, but not the equipment used in the activities.
  • Beginning this year, new legislation in British Columbia excludes cannabis production facilities from farm classification.
  • In Quebec, no definitive legislation is determined yet for cannabis production and its tax classification (which can include commercial, industrial or farm). There are, however, tax credits varying from 30 to 40 per cent applicable to properties classified as farm.

A property may also be assessed based on split classifications when there are ancillary activities, such as warehousing.

As new cannabis operations surge across Canada, governments are now questioning whether these should be classed within existing definitions of agricultural/farm use, whether zoning by-laws should be amended or whether a new specific-use category should be introduced.

Do you know if your property is being taxed fairly?

So far, provincial assessors and municipalities are weeding through the current legislation to determine how cannabis growers and producers should be treated. As we look to the recent changes in BC and Alberta, we can be certain that legislators are considering changes, as the sector rapidly becomes larger and more established.

Today, assessments can vary widely, which is why growers need to be proactive. If your company only grows and harvests cannabis, your property would be assessed under the agricultural/farm classification and is taxed at a lower rate. But if you are also involved in production, assessment and taxation can fall into grey areas.

Consider these examples. A business purchases an existing farm with the intention of converting several greenhouses once used to grow peppers into facilities for cannabis production. It also intends to build a warehouse. Another company purchases an old industrial plant and will retrofit this facility for cannabis production.  And another cannabis operation renovates an old warehouse into a modern grow house with cutting and packaging, and growing rooms.

When purchasing these properties, these companies receive an assessment notice for the year in which they take possession. They also receive the previous year’s tax bill. Neither of these documents reflect the taxes they will likely be required to pay. The change in ownership, the amount paid for the property, the change in use on the property, conversion, construction – any of these activities can trigger a reassessment and possibly a new, higher, tax bill.

If these companies’ intended activities are assessed at agricultural/farm rates, this cost may not be significant. If the classification changes for all or a portion of their property, the assessed value and/or tax rate could multiply up to 16 times – and impact the financial health of these operations.

It’s important to know whether your property is being assessed and taxed fairly. It’s also important to be aware of, and prepared for, potential changes in legislation.

Steps you can take to mitigate property tax risks

There are a number of steps that cannabis producers should consider in order to mitigate the risk of potential property tax escalation. First, recognize that legislation is changing and prepare for what’s ahead by staying informed.

In fact, as legislators and assessors grapple with how to address the issue of property assessment and taxation related to the rapidly expanding number of cannabis producers, this would be an ideal time for the industry to secure the assistance of professional lobbyists. With the aim of fair taxation, these professionals can help to inform legislators tasked with policy decisions about the workings of the cannabis sector. You can be sure that tobacco growers did so many years ago – and they remain within the agricultural class.

It’s also important for cannabis growers to dedicate internal resources to property assessments and tax bills. Allocate a knowledgeable individual or team in your organization to assume responsibility for monitoring of legislative changes, records maintenance of facilities and construction activities and communication with municipal staff and assessing authorities.

Another important step is to develop a proactive property tax strategy. Don’t wait for an assessment to arrive. Determine how your company can reduce property tax liability by achieving the lowest possible assessment and taxation. Is your current taxation fair? Is the property being assessed in the most appropriate class? If you are planning to purchase, build, renovate or expand – how will this affect property taxes?

Consider securing the professional expertise of a property tax consultant to identify savings, to forecast property taxes for future years or to launch a tax appeal if needed. Knowing the valuation parameters behind property tax assessments can help to minimize tax liabilities and protect your future bottom line.

Using these nugs of knowledge can help to shape the success of your cannabis business.

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