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By Altus Group | March 27, 2020

The real estate industry is currently facing unprecedented economic headwinds due to the COVID-19 pandemic, and financial relief now hinges on the actions of all levels of government. While every real estate sector has been impacted, hospitality and retail are facing particular adversity. These industries are crucial in serving a multi-billion-dollar consumer economy, underlining why it is imperative that property tax relief is delivered.

The following Q&A will explore potential tax relief programs including tax abatement, deferrals, and vacant space relief:

How can property tax relief assist me?

While landlords have taken measures to assist tenants, they alone cannot secure the stability of their tenant base—whether by rent relief or deferral— Property tax relief could be a valuable component of a broader initiative to assist all commercial property owners, and their tenants, impacted by the unprecedented measures already imposed and any additional measures taken to limit the incidence of COVID-19 in our communities.

Property tax relief can target all property owners or a class of property – such as the commercial property class – by simply lowering tax rates and funding the lost tax revenue by increasing transfers from other levels of government.

Why can't the municipalities do more?

Property tax is imposed and collected by municipal governments, but the powers and responsibilities of municipalities are determined by provincial governments. Municipalities are obliged to provide most of the public services we rely on daily including fire and police services and garbage collection. Although municipalities receive significant revenue through transfers from other levels of government and user fees, property taxes are the largest source of municipal revenue. Significantly, while municipalities can borrow money for capital projects, unlike the provincial and federal government, they may not run deficits to cover operating expenses and their borrowing capacity is limited by provincial oversight.

Property tax has two components: a municipal and an education portion and serves as a revenue source for provinces through the education tax component collected by municipalities on behalf of the province. The municipal portion is established by each municipality based on a determination of the tax revenue the municipality requires. The education portion, which typically comprises approximately 50% of the property tax, is set by the provincial government to help fund elementary and secondary education. In Ontario, this tax rate is set under Ontario Regulation 400/98 made under the Education Act, RSO 1990, c E.2. Although municipalities collect the property taxes, the education portion is remitted to the province. For example, in 2019 approximately half of the property taxes for a commercial property in Toronto were levied by the Province of Ontario for education; the commercial property tax rate in 2019 was 2.137487%, 1.03% of which was the education tax component.

What is a property tax abatement?

A property tax abatement can be made by either a municipality or a province. Provinces have greater flexibility due to their ability to run deficits, greater borrowing authority and capacity, and broader revenue sources. For example, British Columbia recently announced a cut to property taxes such that business and light and major-industry property classes will see their school tax component cut in half. The goal of this cut was to allow businesses that own their property to obtain immediate relief and commercial landlords can cascade savings to their tenants. Similarly, Alberta Premier Jason Kenney stated the government would be reversing the education property tax increase announced in its 2020 budget. At the time of writing, March 27, to our knowledge, no other provincial or municipal government has announced plans to implement any form of tax abatement. We will continue to monitor the situation. Click here to download information made available by municipalities across the country.

What is a deferral program?

A deferral program can be implemented at the municipal or provincial level to alleviate property tax payment. For example, the City of Toronto recently provided both residential and commercial property owners the opportunity to defer their tax payments without penalty for 60 days starting March 16, 2020. In addition, on March 25, the Ontario government announced its deferral of the property tax payments that municipalities make to school boards by 90 days. The goal of deferring the June 30 quarterly remittance is to enable municipalities to provide businesses and residents property tax deferrals.

Tax deferrals, while the easiest vehicle for municipalities to implement do not forgive or abate the tax. While deferring payment provides immediate cash flow relief, it could simply be deferring the larger problem: landlords will never recover the lost revenue.

What is targeted property tax relief/vacant space relief?

Targeted property tax relief is specific and more complex, and often must meet a set of criteria. An example of this would be the recently phased-out Ontario Vacancy Rebate program. Under this program, the province required municipalities to establish a program to rebate property taxes on eligible vacant units. The province set the framework and minimum requirements of the program, and the municipalities had flexibility regarding eligibility, rebate percentages and administrative elements of the program.

A program like the Ontario Vacancy Rebate program, rebating a portion of taxes to the landlord, could be based on vacancy or loss of rent attributable to the current pandemic. Since property taxes are not paid directly by tenants, but rather indirectly through the landlord as a component of rent, the proposed program could provide a rebate to landlords subject to an eligibility requirement that the landlord abated the payment of rent, including property taxes, from the tenant for a specified period of time.

What is next?

In these turbulent and uncertain times, something must be done. Action can be taken to defer or reduce property tax burdens to ensure the viability of the commercial real estate market, including the hospitality and retail sectors, imperiled by the COVID-19 pandemic. Collaborative and joint action by provincial and municipal governments including the implementation of immediate tax relief measures including tax abatement, deferrals, and vacant space relief is direly needed to help stabilize hospitality and retail properties in the wake of COVID-19. We will inform you if any of the tax relief options listed above are approved in the future and provide updates on our dedicated resource page.

Questions for our experts?

We are here to provide practical advice to our clients by answering frequently asked questions.  We will continue to provide updates on our resource page as the situation evolves.  Send us your questions.

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