CAPTR

Why is property tax reform needed in Ontario?

The Problem

Home and cottage owners have received their January 1, 2008 assessment notices. These notices will reflect property value increases from 2005 through 2007, a period which saw steeply rising real estate values that will be reflected in the tax assessments of hundreds of thousands of Ontarians. Because some neighbourhoods and properties will be up more than others, taxes will shift from area to area and from one neighbor to another.

Here are two hypothetical but realistic examples of how this shift could affect you:

The Liberal Solution

What has the government done to deal with the volatility that is the underlying weakness in the present assessment-based system for distributing property taxes?

In the spring 2007 budget the Liberal government scrapped the plan for annual assessments and introduced a four-year assessment cycle. The next assessment will be effective at the end of 2011, once again following the scheduled fall provincial election of that year. Increases in the 2008 assessment — and in all future assessments — will be phased in over each subsequent four-year period.

Property taxes are distributed to home owners based on assessment. From this bit of recent history it is quite apparent that the Liberal government recognizes the unpopularity of the system. It produces volatile and unpredictable tax shifts from one neighborhood to another and from one home owner to another. By reverting to a four-year assessment cycle timed to follow election dates, the Government is not solving the core problem. In the short run the phasing-in of assessment increases over four years smooths out the impact of that increase. In the Toronto and waterfront examples above, the home and cottage are simply permitted to pay their 2009 tax increases in four installments. But this less frequent assessment and four year phase-in in no way deals with the fundamental issue of volatility. It does not solve the real problem.

The problem is that you get hit again at the end of 2011 with another assessment and you are stuck with the impact of that assessment on your taxes for another four years. The property tax economists who believe in market value assessment also believe that the more frequent the assessment, the more fair the system. By reverting to a four year cycle in Ontario, the risk of being hit at assessment time by a hot local market or by an inaccurate valuation is much greater. The four-year assessment cycle does nothing to deal with volatility and unpredictability over time — the fundamental problems with the assessment-based system for distributing property taxes.

A real fix to the system is of particular importance when you recognize, as pointed out in a recent CFIB study, that Ontario's residential property taxes are among the highest in the Western World.

The Real Solution

In order to deal with the volatility inherent in a system based on real estate values, it is necessary to place a limit on individual property value increases resulting from each new assessment. That limit or ceiling should relate to the historic increase in Ontario real estate values which have, over extended periods of time, been roughly double the rate of inflation. The government could quickly develop a logical and easily implemented ceiling on assessment increases. This simple step will stabilize the system and bring about a predictable and more equitable property tax regime in Ontario.

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