This bulletin outlines the new optional features of the property tax capping flexibility that were introduced in the 2004 Ontario Budget. These measures are contained in Section 329.1 of the Municipal Act and in accompanying regulations. These options will enable municipalities to facilitate the transition to current value assessment (CVA) and to maintain a manageable pace of change for taxpayers.

CAPPING FLEXIBILITY OVERVIEW

• The Province is giving upper-tier and single-tier municipalities greater flexibility in determining the level of the cap on reassessment-related property tax increases for commercial, industrial and multi-residential properties.
  
  
• Starting in 2005, municipalities will be able to set the annual percentage rate of the cap using some or all of the following parameters:
  
  
  • set the annual cap at 5 per cent of the previous year's annualized taxes (default);
    
    
  • or up to 10 per cent of the previous year's annualized taxes; or
    
    
  • set the annual cap at the greater of the above or up to 5 per cent of the previous year's annualized CVA taxes.
    
    
• Municipalities may also move capped or clawed-back properties directly to their CVA taxes if the taxes are within $250 of the properties' CVA taxes. The threshold can be less than $250.

• Municipalities can also phase out the “new construction treatment” by creating floors establishing a minimum percentage of CVA tax responsibility, such that eligible properties would be taxed at:
  
  
  • up to 70 per cent of CVA-level taxes in 2005;
    
    
  • up to 80 per cent of CVA-level taxes in 2006;
    
    
  • up to 90 per cent of CVA-level taxes in 2007; and
    
    
  • up to 100 per cent of CVA-level taxes in 2008 and future years.
    
    
    
• These options can be used to accelerate the progress to CVA taxes and significantly increase the number of properties that are paying CVA-level taxes. Properties that reach their CVA-level taxes continue to be protected by the cap from the impacts of ongoing reassessments.
  
  
• These options can be adopted on a class-by-class basis. For example, a municipality could decide to cap its multi-residential class at 5 per cent of last year's annualized taxes while capping the commercial and industrial classes at 10 per cent of last year's annualized taxes.
  
  
• Determining the appropriate level of capping protection will be an annual decision. Each year municipalities should take into account the impacts of the current reassessment as well as past progress towards CVA taxes.
  
  
• In determining the capping structure to be adopted, each municipality should consider the current distribution of capped taxes in each capped class and the tax impacts of the options including how options under consideration would affect capped properties, the claw back rate, and any possible capping shortfalls.
  
  
• If a municipality decides to adopt an option other than the default option (i.e., other than 5 per cent of last year's annualized taxes), the municipality must specify the option in a by-law each year. This might be done as part of the ratio and rate setting process.
  
  
• As under the ordinary capping program, the total tax revenue for each capped property class resulting from choosing one or more of the new capping and threshold options can not exceed the CVA taxes for that class of property.
  

CAPPING FLEXIBILITY EXAMPLES

• The following examples compare the tax impacts under different capping options. For simplicity, it is assumed that there are three properties in the capped class.
  
  
• Example 1 illustrates the impact of using different capping percentages based on last year's annualized taxes.
  
  
• As shown below, using the current or default capping level of 5 per cent of last year's taxes, property 1 experiences a much larger capping increase than property 2 even though both properties have the same CVA or destination taxes.
  
  
• Increasing the capping limit to 10 per cent of last year's taxes speeds the progress to CVA as both capped properties experience a larger increase than under the default capping level of 5 per cent. As expected, the higher limit reduces the claw back rate, in this case from 93 per cent to 86 per cent.
  

Example 1: 2005 Capping Change Using Last Year's Annualized Taxes

	Last year's (2004) annualized taxes	2005 starting CVA taxes	Capping change under various percentages
			5% of last year's annualized taxes	7.5% of last year's annualized taxes	10% of last year's annualized taxes
Property 1	$5,000	$6,000	$250	$375	$500
Property 2	2,000	6,000	100	150	200
Property 3	13,000	8,000	-350	-525	-700
Total	$20,000	$20,000	$0	$0	$0
Clawback %			93.00%	89.50%	86.00%

• Example 2 illustrates capping where the municipality has chosen to set the maximum cap amount at the greater of 10 per cent of last year's annualized taxes and 5 per cent of last year's CVA taxes.
  
  
• As illustrated below, in this case:
  
  
  • property 1 receives a capping increase of $500 or 10 per cent of last year's annualized taxes which is greater that 5 per cent of its annualized CVA taxes;
    
    
  • property 2 receives a capping increase of $310 which is 5 per cent of last year's annualized CVA taxes; and,
    
    
  • property 3 experiences an $810 reduction as the claw back percentage has been reduced to reflect the level of protection provided.

Example 2: Option 2 Last Year's Annualized Taxes and Annualized CVA Taxes

	Last year's(2004) annualized taxes	Last year's (2004) annualized CVA taxes	2005 starting CVA taxes	Capping Parameters
				10% of last year's annualized taxes	5% of last year's annualized CVA taxes	Capped Amount
Property 1	$5,000	$5,800	$6,000	$500	$290	$500
Property 2	2,000	6,200	6,000	200	310	$310
Property 3	13,000	8,000	8,000	-700	-600	-810
Total	$20,000	$20,000	$20,000	$0	$0	$0
Clawback %						83.80%

THE $250 THRESHOLD

• Municipalities can also adopt dollar thresholds of up to $250 within which properties that are close to their current year CVA level taxes can be taxed at their CVA taxes.
  
  
• Like the capping options, adopting the threshold is an annual decision that must be set out in a by-law each year.
  
  
• Municipalities can select different thresholds for the capped and clawed back properties as long as the overall cap and claw back does not result in a revenue gain.
  
  
  • For example, a municipality could opt for a $100 threshold on capped or increasing properties while setting a $250 threshold on decreasing properties.
    
    
• It should be noted that the threshold applies to the capped tax. For example, suppose a property sees a $300 increase due to the cap, bringing the capped tax (including levy adjustments) to within $200 of its CVA taxes. If the municipality has adopted a capping threshold of say $250, the property would move to its CVA taxes immediately and receive a total increase of $500.
  
  
• In Example 3, the $250 threshold is combined with capping at either the 10 per cent level of last year's annualized taxes or 5 per cent of last year's annualized CVA taxes. The municipality is able to provide a further $250 decrease to property 3 by using the $250 threshold approach to move property 1 to its CVA taxes.

Example 3: The $250 Threshold

	Last year's (2004) annualized taxes	Last year's (2004) annualized CVA taxes	2005 starting CVA taxes	Capped Taxes
				Capped Taxes without threshold	Capped Taxes with Threshold
Property 1	$5,000	$5,500	$5,750	$5,500	$5,750
Property 2	2,000	6,500	$6,250	$2,325	$2,325
Property 3	13,000	8,000	$11,850	$12,175	$11,925
Total	$20,000	$20,000	$20,000	$20,000	$20,000

• In determining whether to adopt thresholds each year, municipalities should consider:
  
  
  • the combined impact of the cap and the threshold; and
    
    
  • the impact of the threshold(s) on the revenue generated by the class.
    
    
• As under the ordinary capping program, the total tax revenue for each capped property class resulting from choosing one or more of the capping and threshold options can not exceed the CVA taxes for that class of property.
  
  

FURTHER INFORMATION

For general information about the capping options available to a municipality, you can contact the Ministry of Finance.

Phone:	Allan Doheny, 416-327-9592; Almos Tassonyi, 416-327-0252.
Web Site:	English http://www.fin.gov.on.ca/english/bulletins/ Français http://www.fin.gov.on.ca/french/bulletins/

 

Note:

The information in this document is provided for general reference purposes only. For complete information or for precise interpretation, please refer to the appropriate sections of the Municipal Act and Ontario Regulation 73/03 as amended and any other related regulations.