Recently my colleague Stephen Longo mentioned the "highest and best use" principle which has been leading to sky rocketing property assessments. It's a real estate appraisal principle whereby property is valued based on its possible uses. In a property tax context, such a valuation can result in not-for-profits and charities receiving significant increases in their assessments because property they own is valued on its notional "highest and best use" instead of its actual current use. To further explain the concern and what organizations should do, I asked Stephen some questions...
Question: Would you please provide an example of how the "highest and best use" principle could affect not-for-profits and charities?
Stephen: If an NFP or charity owned a property that was not tax-exempt and the assessing authority has re-valued it based on its "highest and best use", the NFP/charity would be paying property taxes based on a higher order of use than the actual use – for example, high density condo development. The increase in value and higher property tax class means the NFP/charity would be paying much higher taxes that don't reflect the actual use of the property.
Question: Aren't there tax rebates provided to not-for-profits and charities regarding property tax?
Stephen: NFPs/charities are eligible for a rebate of property taxes paid in commercial or industrial property they own or lease. The rebate is typically 40% of the taxes paid and an application must be made by the last day of February of the year following the year for which the rebate is claimed (i.e. Feb. 28, 2014 for 2013).
Question: What should these organizations look for to determine whether the highest and best use principle has been used?
Stephen: If there has been a significant increase in your assessed value year over year – by an amount greater than 15% – it is possible the property has been re-assessed using its perceived redevelopment potential. You can determine this by looking at your Property Assessment Notice or your Final Tax Bill issued by your local municipality.
Question: What should organizations do if they suspect the principle has been used?
Stephen: The organization should request the detailed valuation records from the assessing authority, known as the Municipal Property Assessment Corporation ("MPAC"). If the property has been valued using land rates, rather than income (for an office building), this is a pretty clear sign it has been valued on "highest and best use". If this has happened, the organization should consult a property tax professional to get advice as to how to challenge the assessment, such as by filing an appeal.
Question: Are there any risks with filing an appeal on one's assessed value?
Stephen: It is possible that MPAC could seek an increase in the assessment if an appeal were filed. When reviewing your assessment, make sure you canvass the "exposure" to the possibility of an increase in the assessment with your professional advisor.
For property in Ontario, it is too late to appeal the 2013 tax year assessments. However, the deadline to appeal your property assessment for the 2014 tax year is March 31, 2014. An appeal filed for 2014 can also impact the 2015 and 2016 tax years.
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