Property Assessment and Classification Review - Farms

ISSUES AND RECOMMENDATIONS

FARMS

Representatives from the farming community and the municipal sector raised a variety of farm-related issues during this review. To provide a forum in which these issues could be addressed in a comprehensive and inclusive manner, a working group was convened with representatives from five farm associations, the Municipal Property Assessment Corporation, and the Ministry of Agriculture and Food. In addition to the working group format, submissions on farm-related issues were received from municipalities and property owners during one-on-one meetings and through correspondence. The discussion below incorporates the issues that were raised from all sources during this review.

Application Process

In order for a farm property to be included in the farmlands property class, the farmer must submit an application to the Ministry of Agriculture and Food by the prescribed deadline prior to the tax year. The deadlines prescribed in O. Reg. 282/98 range from April 30 to June 30, depending upon the region in which a farm is located.

This application process was put in place for two reasons:

  • to establish a provincial review process to ensure that properties which are benefitting from a reduced tax rate are being used for bona fide farming purposes; and
  • to identify eligible properties prior to the preparation of the assessment roll to enable the appropriate tax class to be reflected on the final roll.

While it serves an important purpose, the application requirement has generated several operational concerns, including the following:

  • When a farmer purchases land and begins farming activity on the property after the application deadline has passed for that year, the farmer is not eligible for inclusion in the farmlands property class and cannot benefit from a reduced tax rate for that year, even if the farmer meets all of the criteria for inclusion in the farmlands property class.
  • If a property owner is unaware of the requirement to submit an application for the farm tax classification or forgets to submit the application by the prescribed deadline, the farmer will not be eligible for inclusion in the farmlands property class and cannot benefit from a reduced tax rate for that year, even if the farmer meets all of the criteria for inclusion in the farmlands property class.

Recommendation:

  • It is recommended that a requirement to submit applications for inclusion in the farm property class be maintained.

    The application process is an important accountability measure to ensure that persons who are benefitting from the preferential farmland property class tax rate are conducting bona fide farming operations. The Ministry of Agriculture and Food is the most appropriate entity to receive and review these applications to ensure compliance with the prescribed eligibility criteria from an objective perspective.

  • With respect to the application deadline, it is recommended that there be a single common date prior to the tax year that applies province-wide rather than the current system of different application deadlines in different municipalities.

  • To provide the flexibility to respond to situations where the application deadline is missed due to mitigating circumstances, it is recommended that the Ministry of Agriculture and Food be authorized to accept and process applications that are submitted up to December 31st of the taxation year. (A December 31st deadline would provide some consistency to taxpayers as it coincides with the deadline for submitting Requests for Reconsideration under section 39.1 of the Assessment Act.)

    Applications that are submitted and processed prior to the prescribed deadline could be reflected on the assessment roll for the year. For applications that are received after the delivery of the assessment roll, it would be necessary to ensure that MPAC is authorized to issue supplementary notices of assessment to change the classification of eligible properties.

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Note:

These recommendations were made to the Minister of Finance in a letter from the Special Advisor dated June 6, 2002, as part of the pre-budget consultation process.


Assessment Methodology

The Assessment Act stipulates that farm properties must be assessed based on farmer-to-farmer sales, not based on the value of speculative sales to developers or to other non-farmers.

Some members of the farming community came forward during the consultations to express their concern that current assessment practices do not truly exclude sales to non-farmers. This is a particular concern in urban shadow areas (that is, in areas that are in close proximity to major urban centres in which land commands a high sale price).

As an alternative to the current assessment methodology based on farmland sale prices, some members of the farming community advocated the adoption of a productive-use approach to farm valuation based on the output of farms.

More specifically, it was proposed that crop yields be used to measure the productive capacity of farm lands across the province, and that these measures be used as the basis for assessing farm properties.


Recommendation:

  • It is recommended that changes not be made to the method of assessing farm land at this time. It is believed that MPAC's current assessment methodology - which takes into account such variables as soil quality, drainage, mineral composition, and climate zones - does reflect the productive capacity of farm land.

    In making this recommendation, regard is given to the underlying premise of the assessment system which is to establish the value of real estate, not to establish the value of a business activity based on the number of units sold each year.

  • It is recommended that MPAC develop a test to isolate farm lands within urban shadows to ensure that their assessed values are not higher than the assessment rate per acre for similar lands outside the urban shadow area.

    For example, a 20 km radius around major urban centres could be deemed as the shadow area. The assessed value of farm land within this area should not exceed the assessment rate per acre for similar quality lands within a defined radius outside the area.

  • It is recommended that MPAC develop a farm assessment education and training program to address the concerns of the farming community that farmer-to-farmer sale prices do not reflect the productive capacity of farm lands.

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Note:

These recommendations were made to the Minister of Finance in a letter from the Special Advisor dated June 6, 2002, as part of the pre-budget consultation process.


Farm Buildings

A complex series of issues was raised in connection with the assessment and tax treatment of buildings that are used for farm-related activities.

Although many people think of farming as the growing and harvesting of crops or the raising of livestock and poultry, there are many additional activities that occur prior to the delivery of farm products to the consumer.

The spectrum of activities that occur in conjunction with farming were grouped, for the sake of this discussion, into the following categories:

  • "primary agricultural production" - this term is used to refer to the first and most fundamental stage of agricultural production involving such activities as growing and harvesting crops, and breeding and raising livestock and poultry;

  • "value-retention activities" - this term is used to refer to activities which move a step beyond primary agricultural production to perform some processing of the farm product without changing the nature of the product and which are necessary to preserve farm products for market (for example, cleaning, sorting, and storage);

  • "value-added activities" - this term is used to refer to activities which utilize farm products to create a new product, such as turning apples into apple pies, and this phrase is also used to refer to the retail sale of farm products.

Since 1998, land used for primary agricultural production has generally been assessed and taxed at farm rates, while properties used for value-added activities have generally been assessed and taxed at commercial or industrial rates. Properties used for value-retention activities have been treated inconsistently, depending upon whether the activities are conducted on the same parcel of land as primary agricultural production, depending upon the ownership of the property, and depending upon the assessor's interpretation of the nature of the activity.

The current lack of consistency in the treatment of farm activities is largely a result of a lack of clarity in the governing legislation. Under the Assessment Act, property that can be characterized as "farm land or buildings used only for farm purposes" is assessed at farm rates. However, the Act does not define "farm purposes". Therefore, it is left to the discretion of the assessor to decide whether a particular activity is for farm purposes or whether it goes beyond farm purposes to the point of being "producing or processing anything" within the meaning of the definition of the industrial property class.

Prior to the reforms of 1998, properties in most regions were assessed and classified based on their predominant use, even if there was more than one activity on the property. Under the current system, where portions of a property are used for different activities, assessors must apportion the total assessment of the property among the various classes according to the distinct uses on the property. The new approach is more equitable because it taxes properties according to their actual use; however, it has led to the need for assessors to categorize the different activities that take place on farms.

The overriding message that was conveyed during the consultations is that the farming community and municipalities would like to see clarity, consistency and equity brought to the property tax treatment of farm operations. There also appears to be a particular sentiment that family farms are an integral part of our agri-food sector and they must be supported to ensure that Ontario residents continue to receive high quality food at reasonable and affordable prices.

In order to achieve clarity and consistency, it is necessary to establish rules that will have province-wide application. In doing so, it is recognized that some farmers may experience tax changes (increases or decreases). Such changes are inevitable if the ultimate goals of equity and consistency are to be achieved.


Recommendation:

The following recommendations are made with respect to the classification of farm buildings and related facilities:

Activities conducted ON the farm property

  • Activities which can be characterized as "primary agricultural production", and which are carried out on the farm property, should be included in the farm property class.

    The phrase "primary agricultural production" is being used to refer to the first and most fundamental stage of the agricultural process which includes such activities as growing and harvesting crops, and breeding and raising livestock.

    The Minister of Finance should define this category of activity in regulation in consultation with the Ministry of Agriculture and Food.

  • Activities which can be characterized as "value-retention activities", and which are carried out on the farm property, should be included in the residential property class.

    The phrase "value-retention activities" is being used to refer to activities which move a step beyond primary agricultural production to perform some processing of the farm product without changing the nature of the product, and which are necessary to preserve or prepare farm products for market.

    The Minister of Finance should define this category of activity in regulation in consultation with the Ministry of Agriculture and Food.

  • Activities which can be characterized as "value-added activities", which are carried out on the farm property, should be assessed at commercial or industrial rates and included in the commercial or industrial property class (based on the activity).

    The phrase "value-added activities" is being used to refer to activities which utilize farm products to create a new product, and this phrase is also used to refer to the retail sale of farm products and equipment.

    Such activities could attract commercial or industrial classification. For example, a store located on a farm that sells produce grown on the farm would be included in the commercial class, and a manufacturing facility that produces wine from grapes grown on the farm would be included in the industrial class.

  • To maintain the commitment that was made by the Province in the 1997 Ontario Budget, it is recommended that the land underneath value-added buildings on farm properties be assessed at farmland rates (while the buildings would be assessed at commercial or industrial rates).

Activities conducted OFF the farm property

  • Activities which can be characterized as "value-retention activities" and which are conducted off farm property should be included in the commercial property class.

  • Activities which can be characterized as "value-added activities" and which are conducted off farm property should be included in the commercial or industrial property class (based on the activity).

  • Grain elevators located off farm property should be included in the commercial property class, not the industrial class.

  • Storage facilities which are located off farm property, and which are owned and operated by farmers and are used exclusively for the storage of produce grown on the farmers' own lands, should be included in the residential property class.

    Storage facilities which are located off farm property, and which are owned or operated by persons other than farmers storing their own produce, should be included in the commercial property class.

    • Storage is a unique situation because many farmers were encouraged some years ago by the Ministry of Agriculture to jointly purchase off-site storage facilities to take advantage of economies of scale rather than having excess storage capacity on their individual farms (this is particularly prevalent in the case of apple farmers).

Government-Owned Farmland

Prior to 1998, under the former farm tax rebate program, eligible farmers received rebates of 75% of the taxes that were levied on their farm properties.

Government-owned farmlands were not eligible for the farm tax rebate. The rationale for excluding government-owned properties from the farm tax rebate program was rooted in a belief that a government entity should not be providing rebates to another government entity.

In 1998, when the farmlands property class tax reduction program was created to replace the farm tax rebate program, the eligibility criteria from the rebate program were carried forward into the new property class system. Therefore, government-owned farmlands are not presently eligible for inclusion in the farmlands property class.

Recognizing that government-owned farmland is frequently leased to tenants who undertake their own farming operations on the land and who pay the applicable property taxes, it is widely felt that the exclusion of government-owned land from the farmlands property class creates an unjustifiable inequity in the treatment between farmers renting privately-owned land and farmers renting government-owned land.

Recommendation:

  • To provide fair and consistent treatment to all members of the farming community, it is recommended that government-owned farmlands which are occupied by tenant farmers be eligible for inclusion in the farmlands property class.

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Notes:

  • This recommendation was made to the Minister of Finance in a letter from the Special Advisor dated June 6, 2002, as part of the pre-budget consultation process.
  • In the Ontario Budget on June 17, 2002, the Minister of Finance announced that the Government plans to make government-owned farms, which are occupied by tenant farmers, eligible for inclusion in the farmlands property class.

Mixed-Use Properties

As a general rule under the current assessment system, if a property has more than one use (for example, a commercial retail store on the ground floor with a residential unit on the second floor), the assessment of the property will be apportioned into different classes on the assessment roll with the value attributable to each activity being placed in a different property class according to its use.

This rule is stipulated in section 14(5) of the Assessment Act which states:

If portions of a property are in different classes of real property, the assessment corporation shall determine the share of the value attributable to each class and assess the property according to the proportion each share constitutes of the total value and include each proportion on the assessment roll.

Submissions that were made during the consultations indicated that the general apportionment rule for mixed use properties as set out in section 14(5) of the Assessment Act is not always being applied to farm properties. For example, if there is a 200-acre parcel of which five acres in one corner is used for a commercial purpose (e.g. a retail store) and the balance of the parcel is farmed, the prevailing current practice is to include the five-acre commercial portion in the commercial property class, and to include the balance of the property in the commercial excess land sub-class, with none of the property being included in the farmlands class.

It appears that the treatment of mixed-use properties with farming activity in a manner different than the general apportionment rules that are applied to other types of properties is resulting from an ambiguity in Ontario Regulation 282/98.

Recommendation:

  • It is recommended that O. Reg. 282/98 be amended to clarify that the portions of mixed-use properties that are used for bona fide farming activity should not be included in the excess land sub-class, but rather, should be included in the property class which most appropriately reflects the circumstances on the property.
    Farming activity could attract different classifications depending on the circumstances of the specific property. The farmed portion of a property may be included in the farmlands class, the residential class, or one of the farmland awaiting development sub-classes.

Discussion:

The requirement that the assessed value of mixed-use properties be apportioned among different tax classes based on their use was premised on the policy objective of promoting fairness for taxpayers. In keeping with that objective, it is recommended that properties with multiple uses, one of which is farming, be treated in the same manner as other properties with multiple uses.


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Note:

This recommendation was made to the Minister of Finance in a letter from the Special Advisor dated June 6, 2002, as part of the pre-budget consultation process.


Name of Classes

Properties with farming activity may be included in a variety of different property classes and sub-classes depending on the nature of their ownership, the type of activity that is being conducted, and the development status of the property.

Farm activities may be included in one or more of the following classes:

  • Farmlands Property Class (includes farm properties which meet the criteria prescribed in sections 8 and 8.1 of Ontario Regulation 282/98);

  • Residential/Farm Property Class (includes farm properties which do not meet all of the eligibility criteria prescribed in sections 8 and 8.1 of O. Reg. 282/98);

  • Farmland Awaiting Development Sub-Class (applies to farmed properties on which a plan of subdivision has been registered);

  • Commercial Property Class (applies to commercial operations taking place on a farm property, such as retail stores selling farm produce);

  • Industrial Property Class (applies to manufacturing and processing operations taking place on a farm, such as making and bottling apple juice).

While most of the class names are self-explanatory, confusion has been expressed about the "residential/farm property class" and the "farmlands property class".

The use of the phrase "residential/farm" class on assessment notices leads many farm property owners to believe that their home will be taxed at the residential rate and the portion of their property that is used for farming will be taxed at the farm rate. However, when their tax bill arrives, owners with the residential/farm classification discover that both their residence and their farm land is being taxed at the residential rate, not the farm tax rate which is 75% lower than the residential rate. By the time they realize the actual tax treatment, it is too late to correct the situation if the classification is incorrect.

The use of the term "farmlands" class has also caused confusion because it appears to create a distinction between the tax treatment of farm land versus farm buildings, even though both land and buildings can be eligible for inclusion in the farmlands property class.


Recommendation:

  • The following name changes are recommended:
    • change the name of the "residential/farm property class" to "residential property class"; and
    • change the name of the "farmlands property class" to "farm property class".

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Notes:

  • This recommendation was made to the Minister of Finance in a letter from the Special Advisor dated June 6, 2002, as part of the pre-budget consultation process.
  • In the Ontario Budget on June 17, 2002, the Minister of Finance announced that the Government intends to change the name of the "residential/farm property class" to "residential property class" and to change the name of the "farmlands property class" to "farm property class".

Tax Rates

The tax rate applicable to the farmlands property class is 25% of the tax rate applicable to the residential property class. The 75% tax rate reduction applies to both the municipal and education portions of the tax.

The tax rate reduction for the farmlands property class was implemented in 1998 as a replacement for the former farm tax rebate program whereby eligible farmers used to receive rebates of 75% of their property tax.

During the consultations, concerns were expressed about the rigidity of the requirement that the farm tax rate must be a fixed percentage of the residential tax rate. This concern was particularly pronounced among communities in southwestern Ontario where the values of farm properties increased at a much faster rate than the values of residential properties upon the last reassessment, and as a result, many farmers faced tax increases that were proportionately higher than those experienced by residential taxpayers.


Recommendation:

  • To give municipalities the flexibility to respond to local conditions and local priorities while still maintaining the protection of a reduced tax rate for farmers, it is recommended that upper-tier and single-tier municipalities be given the ability (on an annual basis) to set a tax ratio for the farm property class that is below 25% of the residential tax rate.

  • It is recommended that the authority to apply a reduced tax rate to the farm class should only apply in respect of the municipal portion of the tax.

    The education portion of the property tax makes up a very small component of the overall tax on farm properties. There is currently a uniform education tax rate of 0.09325% for farm properties, and it is not recommended that there be deviation from province-wide consistency on the education tax.

Discussion:

It has been proposed that the authority to reduce the municipal tax rate for farm properties be accorded to upper-tier and single-tier municipalities because they are the level of municipal government that is ordinarily responsible for setting tax ratios. Local municipalities would continue to have the option under section 442.6 of the Municipal Act of providing tax reductions to farm properties on an individualized basis in cases where council finds the taxes to be unduly burdensome for the property owner.

Consideration could be given to allowing upper-tier and single-tier municipalities to set a tax rate below 25% of the residential rate for the managed forest property class. Currently, the same rules regarding tax rates and ratios apply to the managed forest property class as to the farmlands property class. However, it should be noted that concerns about the tax rate of the managed forest class were not expressed during the consultations.


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Notes:

  • These recommendations were made to the Minister of Finance in a letter from the Special Advisor dated June 6, 2002, as part of the pre-budget consultation process.
  • In the Ontario Budget on June 17, 2002, the Minister of Finance announced that the Government intends to give upper-tier and single-tier municipalities the ability to reduce the municipal portion of the tax rate on the farm property class below 25% of the residential rate starting in 2003.


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