Newsletter Article - July/August 2024

Equities in Assessed Value but not in Tax Classification in Ontario

Submitted by: Robert Brazzell and Damian Bernacik, Colliers Realty Tax Legal Services Professional Corporation, Toronto, ON

In Ontario, the Assessment Act determines how properties are assessed and classified for property taxation purposes. One of the primary objectives of the Assessment Act is ensuring that the property tax burden is evenly and fairly distributed among taxpayers.

Accordingly, the Assessment Act mandates that properties be assessed at a value representative of the amount of money that a property might be expected to sell for in an open market transaction on a given valuation date. Importantly, if that value is higher than the assessed values of similar properties, the Assessment Act under section 44(3)(b) provides for the reduction of that value to make it equitable.

Unfortunately, the Assessment Act does not provide an equitable safeguard for taxpayers facing inequitable taxation due to a lack of uniform treatment by the assessment authority in determining tax classifications. This rigidity in tax classifications produces significant disparities in taxation when similar properties used for the same purposes are erroneously assessed in different tax classifications.

Equity Adjustments to Assessed Values

Equity adjustments are applied when a property’s assessment results in an inequity or, in other words, an unfairness to the taxpayer. Historically, the Assessment Review Board (the “Board”) often identified such inequities by using Assessment to Sales Ratios. These ratios were used to determine if similar properties were under-assessed relative to their market values, and if the under-assessment margin exceeded 5%, the Board would adjust the assessment downward to make the assessment equitable.

In recent years, however, reliance on the Assessment to Sales Ratio as the primary measure of equity has waned, with it falling out of favour at the Board. For instance, in Seidler v Municipal Property Assessment Corporation, Region 13, 2021 CanLII 22017 (ON ARB), the assessment authority provided an Assessment to Sales Ratio based on a study including the assessments and sales of 30 properties. However, the Board held that the best evidence from which an equity determination could be made was from the assessed value of a single similar property.

Similarly, the Board in Bell Canada v Municipal Property Assessment Corporation, 2023 CanLII 3033 (ON ARB), reduced the assessed value of a property by 45% to make it equitable. In this case, the Board established the quantum of the required equity adjustment by accepting the evidence of the assessed value of one similar property as preferable to the Assessment to Sales Ratios studies submitted by the parties. Significantly, the Board’s decision was recently upheld by the court in Municipal Property Assessment Corp. v. Bell Canada, 2024 ONSC 3670 (CanLII).

The shift from a systemic reliance on Assessment to Sales Ratio in establishing whether assessed values are equitable was inevitable given that section 44(3)(b) does not prescribe any particular methodology to determining equity. This evolution means the Board and taxpayers have greater latitude in arriving at the preferred method of ensuring that the tax treatment of a property is fair.

Assessment Delay and Growing Inequity

It is trite that inequities in property taxation have been greatly exacerbated by the delay in reassessment. There are increasing inequities prevalent both within and between property tax classes the further we move from the legislated January 1, 2016, valuation date. How this issue is addressed by the stakeholders in Ontario’s property tax system has yet to be established.

Inequity of Tax Classifications

The safeguards to ensuring fairness and an equitable distribution of the tax burden on assessed values do not extend to tax classifications under the Assessment Act. This is problematic as tax classifications dictate the tax rate a particular municipality will apply in taxing a property.

The tax consequences from inequitable tax classifications can be stark due to the differences in tax rates between tax classes. For instance, in the City of Stratford, Ontario, the property tax rates for the 2024 taxation year are as follows:

*Tax rates have been rounded to the hundredth percentage point

In Ontario, the sale of agricultural produce directly to consumers from farm properties is commonplace. Most of these properties are classified in either the Farm or Residential Property Tax Class. However, some properties are placed in the Commercial Property Tax Class by the assessment authority, and their owners find themselves paying taxes that are several multiples higher than their neighbours despite similar or identical property use. Regrettably, the Assessment Act lacks a legislative provision ensuring their fair and equitable treatment in these instances.

Inconsistent tax classifications are relatively common as it relates to the application of the industrial and commercial tax classes to property. Undoubtedly, some of this is due to the broad scope of uses that may be classified as industrial under O. Reg. 282/98, including any use that involves the “manufacturing, producing or processing” of anything or research or development in connection thereto. The inconsistent and sometimes incorrect application of these provisions means that some taxpayers may be subject to discriminatory taxes relative to owners of properties classified more favourably.

Tax classification determinations are further complicated by the fact that the uses of a property can vary year during and between years. Difficulties with tax classification determinations are illustrated by Municipal Property Assessment Corporation et. al v. County of Wellington, 2023 ONSC 591 (CanLII). This decision led to the reclassifications of gravel pit properties across Ontario, as these properties were found to have routinely been incorrectly classified by the assessment authority. Moreover, this case illustrates a broader inequity as properties that were subject to the Board decision at first instance were reclassified, presumably meaning that gravel pits without open appeals for earlier years in the current extended assessment cycle would be inequitably taxed for those years relative to those gravel pits that were reclassified.

Review of the Assessment Act

Recent case law allows greater flexibility for adjusting assessed values to ensure that equity, a cornerstone of Ontario’s property tax system, is maintained. However, inconsistent determinations of tax classification have created inequities which are antithetical to Ontario’s claim of a property tax system premised on fairness.

Given the challenges with tax classification determinations, the stark consequences stemming from inequitable tax classifications, and the importance of having an equitable tax system, equity of tax classifications should form part of the consultation process with the provincial government prior to the pending general reassessment.