Managing Commercial Property Taxes as an Owner or Tenant – Insights from Robert Cushing
You're listening to another episode of PwC's Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today's busiest tax directors.
Gerry Lewandowski: Here with us today is Robert Cushing, a senior member of PwC Canada’s Indirect tax group based in Toronto and a specialist in commercial property taxes. Robert has been with PwC Canada for six years and provides commercial property tax advice as well as supporting and filing or challenging appeals for large commercial property owners and tenants. Robert will share with us some of his insights on the importance to businesses of properly managing their commercial property tax bills whether as owners or as tenants who are allocated property taxes by the property owner.
Thank you for joining us Robert.
Robert: Thank you, Gerry.
Gerry: The first question Robert. I guess we would all want to know "why property taxes?" Why should tax directors be concerned about better managing property taxes?
Robert: Well Gerry, property taxes can be a financially significant tax burden to many companies and as such they should be reviewed. Many financial and tax professionals have gained experience in corporate tax so it’s often that property taxes is one of the least understood taxes and without proper expertise, there are more often than not too many property taxes being paid.
As well, as noted some tax and finance professionals think that commercial property taxes are as easy to manage as personal property taxes….which is definitely NOT the case.
So companies who are relying on so-called experts in property taxes need to ensure these experts understand all aspects of the property tax system and some of its complexities.
Gerry: Now, when would a company want to file an appeal to a property tax assessment?
Robert: Well, essentially Gerry, all commercial property tax payers should file an appeal as a matter of course, otherwise to not file is considered to be an assumption that the property taxes assessed are correct. And we know that’s not the case.
For instance here in Ontario, property taxes are assessed by MPAC (MPAC is the provincial assessment agency that assesses all properties in Ontario. MPAC assesses all properties once every four years and so at a minimum, an appeal should be filed once every four years at the beginning of the reassessment cycle.
Filing an appeal often is necessary in order to be effective in dealing with MPAC as they tend to deal with taxpayers who file appeals. MPAC must, by legislation, deal with taxpayers who file appeals so those that haven’t filed an appeal fall to the back of the queue.
Filing an appeal also forces the taxpayer to collect and MPAC to consider the records relating to the value and actual use of the property. This is very important because MPAC does not attend at the property in order to verify the assessment. In other words, once they come up with an assessment they don’t go out to visit the property and any mistakes there will just sit on their files.
And finally, when a tax payer files an appeal, the assessment is subject to the scrutiny of the Assessment Review Board. And the Assessment Review Board an independent third party.
So in effect the taxpayer gets the assessment reviewed by MPAC which has a vested interest in the assessment. It’s also reviewed by the tax advisor and finally by an outside independent party called the Assessment Review Board.
Gerry: Now, what kinds of property tax rebates or relief may property owners or tenants apply for?
Robert: Commercial property owners, Gerry, may obtain rebates in paid taxes (a rebate is essentially a refund) where the particular use of a portion or all of the property becomes taxed at a lower rate than its current classification for property tax purposes.
For instance, once such instance is with unoccupied land or space where a certain portion of land in a commercial or industrial property is not being used or where certain space in a commercial or industrial property is not rented or being used then a property tax rebate may be available
Another instance, where a landlord has a large track of land and there’s a industrial or commercial or property on it, it’s possible that the unused portion of the land could be taxed at the conservation land rate or it could be taxed at the managed forest land rate or possibly the owner could get a farmer to farm the vacant portion and then the property would not only be taxed at farm rate but also farm tax rebates would be applicable.
Gerry: Robert, are certain types of properties or certain types of owners exempt from property taxes?
Robert: Yes. Within the Assessment Act there’s quite a section on property uses which are exempt from tax. For example, a property that has a registered charity occupying either all of it or part of it would be partially or fully exempt from property taxes in respect of properties that are related to their charitable activities but the registered charities must have a registration number under the Income Tax Act
As well, particular properties may be temporarily exempt from property taxes such as land which qualifies as being under "environmental remediation"…the rules relating to qualification as well as the phase-in of remediated properties are made at the municipal level so the rules vary from one municipality to the other.
Another example, Gerry, the possibility is the manner in which a taxable tenant of an otherwise exempt property structures it’s lease which may result in the tenant space maintaining the tax exempt status. For example, if an otherwise taxable tenant is occupying space in hospital or a university they can restructure the lease in a manner which would allow their space to maintain the tax exempt status.
Gerry: What about classifications of property for property tax purposes….is this an area where potential overpayments of property tax can arise?
Robert: Yes, Gerry. Incorrect classifications of commercial properties could also lead to potential overpayments of property tax. I’ll give you a couple of examples
Firstly, the classification of the property could be incorrect. If a property is classified as industrial but is primarily used for warehousing then a lower tax rate could apply.
Another instance, there could be a change in use of the property either by the same tenant or as a result of a change in tenancy. If a new tenant decides to use the property for something different than the previous tenant, the property tax classification may change.
Thirdly, a particular property may have multiple classifications depending on the circumstances. For instance, if a manufacturing facility has a detached head office or warehousing facility then the property as a whole may have two different, or three different tax classes such as industrial and or commercial.
Fourthly, another option for a taxpayer is where land in excess of the particular municipality’s bylaw requirements for an industrial or commercial property may be considered to have a different tax classification.
However, Gerry, the really important thing to remember for a taxpayer is when classifying a property is that a property tax advisor MUST attend at the property to be able to properly assess the potential classification issues and whether or not there could be savings.
Gerry: Large commercial property owners or landlords will allocate property taxes to their various commercial tenants and these amounts can be quite substantial to any business. How can you assist commercial tenants in dealing with commercial landlords in these instances?
Robert: Indeed Gerry, commercial property owners with multiple tenants must allocate property taxes among the tenants not only according to the terms of the lease but also according to the legislation.
This is a complex process with a number factors impacting how these allocations are made. For example, there could be competing leases, the terms of one lease can contradict the terms of the other so what you end up with is some tenants underpaying and other tenants overpaying on the allocation process.
It’s very common for me to work with both commercial tenants and landlords in reviewing property tax allocations.
Challenges also exist when commercial property owners get property tax rebates and then the landlord must allocate these rebates back to the tenants. Property tax allocation among tenants for a landlord can be a very prickly area between the landlord and the tenant where an independent advisor is most needed.
Gerry: So Robert, it’s quite clear from what you have mentioned today that there are a myriad of exemptions, rebates, classification and allocation issues as well as other factors that make the management of property taxes to both owners and tenants a challenging responsibility. What do you recommend that executives in charge of property taxes in any business do to better deal with these issues?
Robert: Well Gerry, first and foremost, those in charge of property taxes whether as property owners or tenants need to understand that this is a complex area and appreciate the opportunities for significant tax savings that could present themselves when this area is properly managed. Commercial property taxes are far more complex than your personal property taxes.
Secondly, a property tax advisor is needed to assist with proper management of these taxes. If you are working with traditional property tax advisors, it’s important and quite often very beneficial to get a second set of eyes looking at property taxes.
At a minimum, your property tax advisor should be out visiting the property. In addition, your property tax advisor should have experience in dealing with MPAC and the Assessment Review Board, as well as he should have experience lease allocation along with a clear understanding of the associated legislation such as the Assessment Act, The Municipal Act and the associated regulations tied to that legislation. I would suggest that the property tax advisor should be current in appeal decisions.
My final comment, property tax is a forever shifting landscape and a property tax payer should have somebody who is always on top of it.
Gerry: I’d like to thank you, Robert, for sharing your insights into how to properly manage commercial property tax bills.
For addition information a property tax, please visit our property tax web page at www.pwc.com/ca/propertytax.
The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.
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