Canada: Legal And Regulatory Issues Facing Building Owners And Property Managers

Last Updated: April 16 2019
Article by Jeff G. Cowan, Ryan L. Morris, Lia Boritz and Caitlin E. Steven

Property Assessment and Taxation

Assessment Act, R.S.O. 1990, Chapter A.31; Municipal Act, 2001, S.O. 2001, Chapter 25; City of Toronto Act, 2006, S.O. 2006, Chapter 11, all as amended The Assessment Act, Municipal Act, 2001 and City of Toronto Act, 2006 govern all aspects of real property valuation and municipal taxation in Ontario, subject only to special Acts that govern specific properties or municipalities. Generally, all real property, structures and fixtures are liable to assessment, with specified exemptions from municipal taxation such as for government and some agency properties, hospitals, public schools, certain charities, and machinery and equipment used for manufacturing purposes. Retroactive assessments can be made for the two years prior to the taxation year in the case of property not previously assessed, but this is limited to omitted assessment, and does not include a change in the assessors' opinion of value. The provincial Municipal Property Assessment Corporation (MPAC) is responsible for the assessment (valuation) of real property.

All real property is valued at its "current value", which is to reflect the estimated sale price of the "fee simple if unencumbered" interest as of the valuation date. For the taxation years 2013-2016, this valuation date was January 1, 2012 (2012 CVA). For the taxation years 2017-20 the valuation date is January 1, 2016 (2016 CVA), with any increase in value from the 2012 CVA being phased in at 25% in each year, so that the full 2016 value will be effective for 2020. There is no phase in of any reduction in value. For the next cycle of taxation (2021-2024) the valuation date is January 1, 2019 so as to permit more time.

All assessed real property is classified by MPAC for municipal taxation purposes, including, but not limited to, residential, multi-residential, commercial and industrial classes, according to definitions in regulations. Multi-residential, commercial and industrial taxes are generally significantly higher than residential. However, hi-rise residential condominium units are not valued or taxed as multi-residential units but as houses. The province levies a business education tax on commercial and industrial properties significantly higher than that on residential properties, which it is reducing gradually. Municipalities are responsible for setting the tax rates applicable to the different tax classes, which are subject to "ranges of fairness" so that the multi-residential, commercial and industrial tax rates, which are usually higher than residential tax rates are not permitted to exceed a certain multiple of the residential tax rates.

The introduction of "current value" assessment in 1998, and the increases in value experienced for the 2009-2012 taxation years and generally for 2013-2016 have been and are subject to a complicated municipal "capping and clawback" tax system that reduces increases on taxes arising from new assessments, yet also "claws back" reductions arising from reduced values. For changes to properties resulting from re-zoning, demolition, or new construction or alterations, the phasing in of increased assessments is separately regulated and complicated. However, given that the "new" current value has been in place for 18 years, most properties are now at or close to their current value so that they are unlikely to be subject to significant capping or clawback, except for commercial, industrial, or multiresidential properties in Toronto that received tax increases of more than 10%, primarily as a result of being assessed not on their existing use, but on their highest and best use for future development.

Assessment values and tax classifications may be appealed to the Assessment Review Board. Appeals for multi-residential, commercial and industrial properties for the new cycle of assessment values for 2017-2020 must have been made by March 31, 2017 for the 2017 taxation year, March 31, 2018 for the 2018 taxation year, and April 1, 2019 for the 2019 taxation year. Once made, appeals are deemed to apply for any subsequent taxation years so long as no hearing has taken place and no new assessment notices have been issued for the property. For the new assessment cycle for 2021-2024 taxation years, a new appeal must be brought commencing in 2021 or later, as prior year appeals (i.e. for taxation years 2017-2020) will not be deemed for a new assessment cycle. For properties in the residential class, even if only a portion, a request for reconsideration must first be made to MPAC (Municipal Property Assessment Corporation) by March 31 of the year in question, and only after MPAC has responded to the request (which must be by September 30 of the year or later by agreement) can an appeal be then made to the Assessment Review Board within 90 days of the mailing of the MPAC response. Supplementary assessments for new construction which commence upon occupancy, for a change in classification or for land or buildings omitted from assessment, must be appealed within 90 days of the mailing of the notice of supplementary assessment. Municipalities are statutory parties to all assessment appeals, and may initiate their own appeals, on notice to the assessed owner, if they feel an assessment is too low. The larger municipalities have their own assessment departments to monitor and initiate appeals, generally when a property has been sold for more than the assessed value.   Applications for tax rebates may be made for commercial or industrial vacancy, non-profit tenants, newly exempt properties, demolition and heritage properties (if municipality permits), or to correct gross and manifest errors. Municipal rebate applications, generally must have been made by, by February 28, 2019 for qualifying events in 2018.. Applications (other than vacancy rebates) can be made for the year prior to the year in which the qualifying event occurred if MPAC agrees that a mistake was made. Recent amendments have enabled municipalities to phase out or eliminate vacancy rebates. Tax incentives exist for brownfield redevelopment, and for certain properties within community improvement areas as designated by the municipality.

Excise Tax Act, R.S.C. 1985, c. E-15, as amended

The Excise Tax Act ("ETA") governs the application of Goods and Services Tax ("GST") and Harmonized Sales Tax ("HST"), which applies at the blended rate of 13% in the province of Ontario. GST/HST is a form of value-added tax on commercial and consumer transactions that the recipient of consumer and commercial property or services is generally required to pay based on the value of consideration paid for the property or services. This tax is generally collected by the supplier and after deducting available input tax credits, the net tax is remitted to the Canada Revenue Agency ("CRA").

Real property is "property" for purposes of the ETA and where the property is located in Ontario, the applicable tax is HST. The recipient of supplies of property in Ontario must pay HST on taxable supplies of real property (which include rentals and sales). Supplies of commercial real property are generally taxable. The purchase of used residential property and most residential leases are exempt supplies and as such, HST is not payable on these supplies. This applies to used single-family homes, duplexes, mobile homes, condominiums and multi-unit residential buildings, including both walk-up and high-rise apartment buildings. The purchase of a new residential property or a new residential rental property, however, is a taxable supply to which HST applies, although certain rebates may relieve some of the cost of the HST.

Generally, GST/HST is paid by the recipient to the supplier. However, where the recipient is a GST/HST registrant, in most cases the recipient will be able to self-assess the HST on a taxable real property purchase.

Things to watch out for:

  • HST cannot be collected as "rent", but Landlords can reserve remedies as if it was payable as rent;
  • Landlords and Tenants must be careful about whether payments (i.e., allowances, etc) are inclusive or exclusive of HST – If a lease is silent (i.e., does not contain an overriding clause with respect to HST), the general rule is that HST is not included in the amount set out as payable in the lease; and
  • The relevant GST/HST rate on supplies in respect of real property will be driven by the province in which the real property is located.

Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended Taxation Act, 2007, S.O. 2007, c. 11, schedule A, as amended

The Income Tax Act (Canada) and regulations thereunder govern liability for Canadian federal income taxation. The Taxation Act, 2007 governs liability for provincial income tax in Ontario, but generally parallels the Federal statute and is also administered by the Canada Revenue Agency. A few things of note in relation to common forms of consideration connected to a commercial lease:

  • Depending on the circumstances, a tenant inducement payment by a landlord can result in either a current deduction, amortization of the expense over the term of the lease or an addition to the capital cost of the building. The determination of what is the appropriate method is driven by what provides the most accurate picture of income;
  • While tenants may prefer an amortized rate with a payment schedule reflective of having a rentfree period, a landlord will generally prefer an explicit rent-free period as it should not be required to include any rental income in respect of such period. Further, a rent free period allows a landlord to have a higher face rate;
  • Security deposits are generally not taxable to the landlord unless and until the tenant no longer has a right to be refunded the deposit. Similarly, while a prepayment of last month's rent is required to be included in the landlord's income in the year of payment, the landlord will generally be entitled to an offsetting reserve and, accordingly, will effectively be required to include the amount in income in the year such month falls;
  • Lease cancellation payments made by a tenant to a landlord are required to be included in income of the landlord.
  • Provided the leased property is owned by the landlord at the end of the applicable taxation year (or by a person with whom the landlord was not dealing at arm's length), lease cancellation payments made by a landlord are generally deductible by the landlord on a pro-rated basis over the lesser of (i) the remaining term of the lease (including all renewal periods) and (ii) 40 years. Where the landlord (and each person with whom the landlord was not dealing at arm's length) does not own the leased property at the end of the year, the landlord will generally be entitled to deduct either (i) half of the lease cancellation payment that was not previously deducted, if the leased property was capital property, or (ii) the full amount of the lease cancellation payment that was not previously deducted, in any other case.

Green Initiatives

Smoke-Free Ontario Act, S.O. 1994, c. 10, as amended

The Smoke-Free Ontario Act prohibits smoking in enclosed public places and all enclosed workplaces including restaurants, bars, schools, private clubs, sports arenas, work vehicles, offices and entertainment venues, including casinos, bingo halls, bowling and billiard establishments. The Act permits residential care facilities to operate controlled smoking areas so long as they are specially designed to ensure that no one outside the room is exposed to second-hand smoke. The Act stipulates who may enter a smoking area and under what conditions, and further sets out requirements for engineering design, function and maintenance of these areas. Further, the Act governs and prohibits tobacco sales to minors as well as the display and promotion of tobacco products.

Technical Standards and Safety Act, 2000, S.O. 2000, c. 16, as amended

The Technical Standards and Safety Act, 2000 regulates fuel suppliers, storage facilities, transport trucks, pipelines, contractors and equipment or appliances that use fuels. The Act aims to protect the public, the environment and property from fuel-related hazards such as spills, fires and explosions. The Act provides for rules with respect to the authorization required in order to carry out certain activities prescribed by the Minister, safety and compliance orders, and inspections. It further sets out the powers and duties of directors, inspectors and investigators under the Act.

Liquid Fuels Handling Code, 2007, as amended

The Liquid Fuels Handling Code is made under the authority of the Technical Standards and Safety Act. The Code regulates the storage and handling of gasoline and associated products at bulk plants, marinas, retail outlets and private outlets. The Code also contains requirements for environmental remediation, equipment installation and operating requirements for gasoline facilities.

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