Property Assessment and Classification Review - Industrial Class

ISSUES AND RECOMMENDATIONS

INDUSTRIAL PROPERTY CLASS

When the property classes were defined as part of assessment reform in 1998, the government attempted to classify different types of properties in a manner similar to the way in which the properties were treated prior to reform. During the consultations for this review, it became apparent that several unintended changes were engendered by the definition of the industrial property in O. Reg. 282/98.

Taxpayers and municipalities expressed their shared concern that the definition of the industrial class has been cast very broadly in O. Reg. 282/98 with the result that many types of properties that were treated as commercial prior to reform have been classified as industrial since 1998. This situation has caused concern because the industrial tax rate tends to be higher than the commercial rate in most municipalities.

The portions of the definition of the industrial property class that are causing the most concern are as follows:

Ontario Regulation 282/98
Section 6
(selected excerpts)


(1) The industrial property class consists of the following:
  1. Land used for or in connection with,
    1. manufacturing, producing or processing anything,
    2. research or development in connection with manufacturing, producing or processing anything,
    3. storage, by a manufacturer, producer or processor, of anything used or produced in such manufacturing, production or processing if the storage is at the site where the manufacturing, production or processing takes place, or
    4. retail sales, by a manufacturer, producer or processor, of anything produced in such manufacturing, production or processing if the retail sales are at the site where the manufacturing, production or processing takes place.

  2. Vacant land principally zoned for industrial development.
(2) The following are included in the industrial property class:
. . .
4. elevators used to receive, store, clean, treat or transfer feed for livestock or grain.

The opening words of this provision - "land used for or in connection with manufacturing, producing or processing anything" - have resulted in changes to the tax treatment of numerous properties. Businesses such as denturists, artisans, print shops and software developers now find themselves treated as industrial because they are producing or processing something. As well, it has been indicated that the scope of the class may be broadened even further in the future because the phrase "in connection with" may have to be interpreted as extending to off-site activities. Another concern about the industrial class definition is that it expressly includes some business activities which are not industrial in nature, such as research and development, retail sales, and grain storage facilities.

Requests for a narrower definition of the industrial property class have been made by taxpayers and municipalities alike. While municipalities are usually reluctant to request amendments that would diminish their tax base, they are concerned about the potential demise of businesses which now find themselves in an unsustainable tax position due to unexpected changes that accompanied reform.


Recommendation:

The following changes are recommended to the definition of the industrial property class:

Manufacturing

  • It is recommended that the phrases "in connection with" and "producing or processing anything" be removed from the definition of the industrial class, so that the opening portion of the definition would read "land used for manufacturing".

  • If the meaning of the word "manufacturing" is not clear within the context of the body of case law that has interpreted that word over the years, it is recommended that the Minister of Finance prescribe a definition.

  • It is recommended that consideration be given to including some processing activities in the industrial class if the processes are industrial in nature, but these activities should be narrowly defined or specifically listed in the regulation (as is currently done for a few activities such as mining and quarrying) to avoid unintended expansion of the class.

Research and Development

  • It is recommended that research and development (R&D) be removed from the industrial class, and that R&D facilities be included in the commercial class.

Retail Sales

  • It is recommended that retail sales premises be removed from the industrial class and included in the commercial class.

    There is a general policy under the Assessment Act that the assessed value of mixed-use properties should be apportioned among different tax classes based on the use of each portion of the property. The same policy ought to apply to different activities that occur within industrial facilities.

Grain Elevators

  • It is recommended that grain elevators be removed from the industrial class.

    As noted above under the discussion of farm properties, it is recommended that grain elevators located on farm properties be included in the residential class, and grain elevators located off farm properties be included in the commercial class.

Zoning

  • As a failsafe mechanism, to ensure that businesses do not get unintentionally included in the industrial class (for example, in cases where it is unclear whether an activity should be characterized as "manufacturing"), it is recommended that regard be given to the zoning of the property. It is recommended that businesses located in commercially-zoned areas not be included in the industrial property class.

Discussion:

The words "producing or processing anything" appear to be the main cause of the unintended expansion of the industrial class.

R&D is not an industrial process. R&D activity is commercial in nature, involving extensive research by scientists, engineers, and other professionals. While there may be some assembly of prototypes at R&D facilities, this activity should not be mistaken as manufacturing. R&D is a vital activity which should be encouraged and supported. All members of our society benefit from the scientific and medical research that is conducted by private enterprises.

To address the suggestion that was made during the consultations that small (light) industrial facilities should be taxed at a different rate than larger (heavy) industrial facilities, it is noted that municipalities have the option of applying graduated tax rates within the industrial property class. This mechanism allows upper-tier and single-tier municipalities to set lower tax rates for lower-valued properties in the commercial or industrial classes.




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