Property Assessment and Classification Review -Guiding Principles

Guiding Principals

As a prelude to the discussion of the issues that were raised by stakeholders during the review, this report commences with a brief reflection upon the overall structure of the property assessment and classification system and it identifies the principles that guided this review.

Goals of Property Tax Reform

When the government undertook to reform the assessment and property tax system in 1998, it sought to achieve the following goals:

  • to create a property tax system that is fair, understandable and accountable to taxpayers;
  • to establish an assessment base that is consistent province-wide and that is based on up-to-date property values;
  • to provide businesses with a level playing field upon which to compete;
  • to provide municipalities with more autonomy to make tax policy decisions that affect their communities and more flexibility to respond to local priorities;
  • to facilitate a manageable transition from the old system to the new system.

Since 1998, the government has made significant progress towards achieving these objectives. The property assessment and classification review that was led by this author was conducted with the aim of further advancing the above-noted goals.

Current Value Assessment

Current value assessment (CVA) is the foundation of Ontario's property tax system.

The government has maintained the position that current market value is the most appropriate basis on which to tax properties. The market value approach is followed in most North American jurisdictions. As well, various studies that were commissioned over the years to examine alternative ways of imposing property taxes concluded that current market value assessment is the fairest approach to property taxation.

It is the opinion of this author that property taxes in Ontario should continue to be based on current value assessment. It is also this author's opinion that exceptions to CVA are appropriate in limited circumstances; namely, for unique properties where equity or practicality render CVA an inappropriate basis for taxation. (Examples of such exceptions are noted in the attached report.)

Property Classification System

When CVA was implemented in 1998, a new property classification system was introduced in Ontario. There are seven standard classes, six optional classes, and three sub-classes, as follows:

Standard Classes Optional Classes Sub-Classes
residential / farm new multi-residential vacant land
multi-residential office building excess land
commercial shopping centre farmland awaiting development
industrial parking lots & vacant land
pipeline large industrial
farmlands professional sports facility
managed forest

The classes and sub-classes are defined in Ontario Regulation 282/98, a regulation made under the Assessment Act.

The purpose of the property classes is to allow municipalities to set different tax rates for the different categories of properties. As such, the classification system provides municipalities with flexibility to respond to local priorities. The purpose of the sub-classes is to provide tax reductions (property in a sub-class is taxed at a fixed percentage rate below the tax rate of the main class).

While municipalities have the ability to set different tax rates for the different classes, they must do so within parameters defined by the Province. In 1998, when the classes were introduced, the Province established target ranges of tax ratios referred to as "ranges of fairness". The ranges of fairness represent the ultimate destination point for the municipal tax levels of each property class. The following ranges of fairness have been prescribed by the Province:

Standard Classes Optional Classes
Multi-Residential 1.0 to 1.1 New Multi-Residential 1.0 to 1.1
Commercial 0.6 to 1.1 Office Building 0.6 to 1.1
Industrial 0.6 to 1.1 Shopping Centre 0.6 to 1.1
Pipeline 0.6 to 0.7 Parking Lots and Vacant Land 0.6 to 1.1
Professional Sports Facility 0.001 to 1.1 Large Industrial 0.6 to 1.1

The ranges of fairness are expressed as tax ratios in relation to the tax rate of the residential property class. For example, the long-term goal is to bring the municipal tax rate of the commercial property class down to 0.6 to 1.1 times the residential tax rate.

In keeping with the provincial goals of simplifying the property tax system and moving the tax rates of the various property classes closer together, it is the opinion of this author that the government should refrain from creating additional property classes and sub-classes. The creation of new tax classifications would increase the disparities between the tax levels of different properties and it would add further complexity to the system.

Retroactivity

Municipalities establish tax rates at the beginning of each calendar year by determining their budgetary needs for that year and calculating the tax rate which must be applied to the assessment base in order to yield the required revenue. This calculation is made on the basis of the assessed values and property classifications shown on the assessment roll that is delivered to municipalities in December of the prior year. The assessment appeal deadline is March 31 st of the tax year, therefore municipalities can ascertain their potential appeal losses in the first quarter of the year prior to finalizing their tax rates.

If any changes are made to provincial policies, legislation or regulations after the delivery of the assessment roll for the tax year, it is difficult for municipalities to respond. If tax rates have already been set when the policy change is made, municipalities may not be able to recover tax revenue losses that result from the policy change.

Therefore, if the government takes action on any of the recommendations contained in the attached report, it is the recommendation of this author that legislative and regulatory changes should not be made on a retroactive basis, except in the case of amendments that are made to clarify current policy in order to preserve the status quo.

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