CITY OF TORONTO, CHANGES IN THE CAPPING PROGRAM
(the following article was prepared in the fall of 2005;  since then the City of Toronto has implemented some of the changes being considered.  The cap on a tax increase arising from a change in assessment is now 5% of the property's CVA)

Our Fall 2005 newsletter discussed the expected changes to the capping program in the City of Toronto.   The Capping Program was introduced to protect properties from the move to tax properties based on their current value, that was introduced in 1998.  However, extensive inequities remain in the tax system as the cap slowed the move to CVA to a crawl and as increases in property values have generally pushed CVA levels even higher.  Some 18% of all properties in the commercial/industrial/multi-residential classes (collectively called the business classes) would face tax increases of 18% or more if their taxes were moved to the CVA level.  As noted below the strip retail properties (stores with apartments that are typical of downtown Toronto) as a class have benefited the most from the capping program.  On average their taxes are about 54.2% below the CVA level.  By comparison the smaller office buildings are, as a class, taxed on average at about 12.2% more than the CVA level. 

The table below identifies classes of property and the impact of moving from 2004 actual taxes to the 2004 CVA-level.  

	2004 Taxes Paid ($M)	Current CVA ($M)	Current CVA Impact ($M/%)
Comm. Condo	23.5	$21.4	($2.1)	(8.9%)
Hotel/Motel	93.9	$70.5	($23.3)	(24.9%)
Large Office Towers	450.9	$429.0	(21.9)	(4.9%)
Neighbourhood Shopping Centres	210.7	$200.4	($10.3)	(4.9%)
Office Building <50,000 sf	549.2	$482.3	($67.0)	(12.2%)
Other	248.4	$257.3	$9.0	3.5%
Parking Lots	12.9	$39.9	$27.0	209.5%
Regional Shopping Centres	126.6	$136.8	$10.2	8.0%
Retail/Strip Retail	143.1	$220.5	$77.5	54.2%
Total All Commercial	2,155.3	$2,155.3	xxxx	xxxx

The Province of Ontario has now passed legislation to expedite moving properties to their CVA level.   In particular the City of Toronto staff studies and recommendations to City Council have urged that the cap now be calculated at the rate of 5% of the previous years CVA level tax as opposed to 5% of the previous years taxes.

To better understand the impact of the new changes being contemplated consider the following example for a retail strip store with apartments above:

The above situation is typical of many downtown strip retail stores with apartments above.  In this example we have described the retail as comprising about 40% of the total value.

The property pays about $ 10,931 in actual taxes.  Without the capping program the taxes would move immediately to $ 17,154 in annual taxes.  The current capping program would allow the commercial taxes to increase by only 5% of the previous years taxes.  In this case the next year’s tax on the commercial component would be limited to an increase of only 5% of 7,304 – ie only $365.20.  A similar formula would be applied each year until the CVA level tax is reached.

For the year 2006 it appears that the City of Toronto will look at increasing the cap to 5% of the CVA level taxes (as opposed to 5% of the previous years actual taxes).  In the above example that would amount to 5% of $ 13,526 or $676.30 instead of $ 365.20.

Look at your property assessment.  Do you think that the assessment correctly shows your properties value?  Although we are not aware of any study showing how accurate assessments of the downtown properties are, we have seen many properties which sell for well over their assessed value.   Furthermore, current assessments are made as of the year 2003.  Some parts of the City have shown price increases that are dramatically above those for other commercial properties in the City and the new assessments to be made for the 2006 tax year, will be updated to the January 2005 valuation.

Property assessments can therefore increase either because these assessments were too low even as of the 2003 valuation date or because of increases in property values.  Generally note that if commercial property assessments increase by, for example, 10% then the tax rate would be reduced by a similar level so that the overall commercial taxes charged would stay the same.  It is only to the extent that a property assessment increases by more than the average increase in assessment for commercial property - because it was originally under-assessed or because of increases in value  - that there is an effective tax increase.  For the sake of this illustration we will consider an assessment increase made for the 2006 tax year were there has been no offsetting change in the tax rate.

In this example, there would be an immediate increase in the residential taxes as these taxes are not capped.  The commercial taxes would remain subject to the cap.  In this example, if the City implemented the changes in the cap discussed above, the tax increase would become 5% of the CVA level taxes or $1,353.

Over time total taxes would move from an actual tax of $ 10,931 to $ 34,306. 

However the City is considering plans that would reduce the total CVA level tax to be levied against commercial property owners over the next 15 years (10 years for the small neighbourhood strip stores) and shifting those taxes to residential property owners.  If such a proposal was accepted it would involve a shift (based on the current tax revenues) of $ 310 million to the residential class – a 28% increase in the tax burden carried by that class.  Whether the City has the political will to follow through on that recommendation remains to be seen.

The foregoing has been prepared for discussion purposes.  Every property has to be evaluated on its own merits, but this discussion hopefully will help identify the issues that are relevant to your property or a property you may consider purchasing.