2020 Taxation Understanding the inequities in the taxation of multi-residential properties When it comes to paying taxes, owners of multi-residential properties in Canada have always been treated unfairly when compared to single-family property owners. By every metric, rental property owners in different jurisdictions pay more than their fair share of property taxes, capital gains taxes, and income taxes. While all levels of government continue to look for ways to make rental housing more affordable for low-income people, higher taxes on rental properties mean higher rents for tenants. Balancing the tax rates and rules between single-family and multi-residential property owners would benefit both rental property owners and tenants. This article examines several ways in which rental property owners pay more than their fair share of the tax burden compared to singlefamily property owners. It also describes the impact of the tax disparity on both owners and tenants, and possible solutions to these issues.
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Report By David Gargaro
Disparity between multi-residential and single-family property taxes across Canada In many cities across Canada, multi-residential properties pay higher property rates than single-family properties. In some cases, rental property owners pay more than double the property tax rate paid by single-family home owners. Table 1 lists 2020 property tax rates for multi-residential and single-family properties for a number of cities across Canada, and shows the percentage difference in the rates.
Table 1: Comparison of property tax rates across Canada City
Multi-res tax rate
Single-family/ condo tax rate
% more for multi-res
Fredericton, NB
2.554
1.431
178%
Moncton, NB
2.773
1.650
168%
Saint John, NB
2.908
1.785
163%
Halifax, NS
1.206
1.206
-
St. John’s, NF
0.770
0.770
-
Charlottetown, PEI
1.910
1.670
114%
Montreal, PQ
0.641
0.637
101%
Toronto, ON
1.093
0.600
182%
Ottawa, ON
1.446
1.085
133%
Hamilton, ON
2.729
1.189
230%
Saskatoon, SK
0.912
0.912
-
Calgary, AB
0.752
0.752
-
Edmonton, AB
1.035
0.933
111%
Vancouver, BC
0.293
0.293
-
Victoria, BC
0.504
0.504
-
What do these numbers mean? • Multi-residential properties in New Brunswick are taxed, on average, at a rate that is 69 per cent higher than owner-occupied properties, 89 per cent higher than other Atlantic provinces, and 212 per cent higher than those in other provinces across Canada.
• Multi-residential properties in Hamilton are taxed at a rate 2.3 times higher than singlefamily homes or condos, and bear a much higher property tax rate than either type of property in Toronto. • Some cities, particularly in Western Canada, tax multi-residential and single-family properties at the same rate.
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This last statement is important for understanding how owners of multi-residential properties are treated with respect to property taxes. It demonstrates that it is possible for multiresidential and single-family homes to pay the same property tax rates, which is also fair to both types of residential property owners and to tenants. Why is New Brunswick collecting much higher property tax rates for multi-residential properties than the rest of Atlantic Canada? Owneroccupied (i.e., single-family homes) and nonowner-occupied properties (including rentals) are taxed at both the municipal and provincial levels. However, owner-occupied homes receive a property tax credit, which eliminates the provincial property tax. In essence, they’re only taxed at the municipal level. “We have been lobbying the provincial government on correcting this double taxation for 16 years,” said Willy Scholten, President, New Brunswick Apartment Owners Association. “In the initial years, we had to educate government officials and politicians on the numbers and why it is inconsistent with the rest of the country. We have been successful in getting to a position where this is no longer questioned. The two issues that we face now are the province does not want to give up the revenue that they are getting and how to make the change to ensure the savings go to the tenants.” One of the key issues is that the Province of New Brunswick does not want to give up the revenue it’s getting from multi-residential properties. They also want to ensure that the savings from reducing the property tax rates go to tenants. However, property taxes in New Brunswick are equal to all other expenses combined for rental property owners. Property taxes are the key determining factor in rent, as all the expenses are passed along to tenants. The “double property tax” in New Brunswick increases rents and limits the supply of affordable housing. Since property tax rates are so high, property development is undertaken by only a few local developers. “Property taxes should not be different whether you own a home or rent a home,” said Scholten. “By eliminating that discrepancy, and bringing New Brunswick in line with the rest of the country, it will reduce cost pressures on landlords impacting rental rate decisions, help with the
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extremely low vacancy rates by encouraging outside developers that are non-existent now to build in the province and encouraging existing developers to do more, and allow landlords to make improvements to their properties. All of these things will improve the quality of life for tenants in New Brunswick.” Many cities in Ontario (including Hamilton) have a similar problem with high property tax rates for multi-residential properties. Prior to 1998, when the Province of Ontario introduced Market Value Assessment (MVA), property tax assessments varied by municipality, which made it difficult to compare properties. At the time, there was no intention to dramatically change the property taxes paid by different classes of properties. The municipalities were allowed to set their own rates for multi-residential and single-family properties, which enabled them to obtain the same revenue from each property class as they did before MVA. However, bringing the differences in the tax rates into the open did not solve the problem. “We have a situation where the poorest members of our society are paying the highest property tax rates,” said Arun Pathak, President, Hamilton & District Apartment Association (HDAA). “Generally, income tax is a progressive tax, so the more you earn, the higher the tax rate. The incomes of renters are well below the incomes of homeowners; imposing a higher tax rate on lower income people causes the tax to be regressive. Low-income people are paying a higher tax rate, which is contrary to Canadian values of fairness.” According to provincial government guidelines, the multi-residential property tax rate should be between 1 and 1.1 times the single-family residential rate. New multi-residential properties are taxed at the single-family residential rate in most Ontario municipalities. If property taxes decrease by more than 2.49 per cent from one year to the next, the municipality must inform tenants of the reduction, including a calculation of the corresponding rent reduction, which takes place automatically (without any need for the rental property owner’s approval). For example, if Hamilton’s property rates were equalized, the decrease would equate to a 12 per cent reduction in rents. This rent reduction would be revenue neutral for owners of multi-residential properties, as taxes are included in the rent.
“The benefits of an equalization of the rates would be an immediate reduction of rents for all tenants who don’t move,” said Pathak. “Competition at lower costs might very well keep rents down, but over time, even if property owners did increase the rent on turnover, they would have more funds for maintenance and improvement of their properties.”
For example, if you had a capital gain of $500,000 from selling a rental property, then half of that, or $250,000, would be taxable at your marginal tax rate. If you fall into the 33 per cent marginal tax rate (the top federal tax rate), then you would pay $82,500 in capital gains taxes to the federal government, and more to your provincial government.
The main issue for municipal politicians in Ontario is that they don’t want to equalize the property tax rates, as the increase in property taxes would mean single-family homeowners would pay more. Homeowners generally complain about an increase in their property taxes, and they tend to vote in greater numbers than tenants. Municipal politicians don’t want to come off as the “bad guys”; since many tenants are unaware of the inequity in property taxes, most politicians won’t put much effort into equalizing property tax rates.
Owners of a principal residence do not pay tax on their capital gains when they sell the property or it passes on through to an estate upon the owner’s death. Owners of multi-residential properties must pay a capital gains tax on 50 per cent of the gain when they sell the property. This also applies if someone receives the rental property through an inheritance. So, if a rental property owner passed along their apartment building to their children, tax is paid on the deemed disposition of the testator.
“Even if municipal politicians understand the unfairness of the different property tax rates, they often won’t do anything about it,” said Pathak. “Some municipalities have made a few small changes in the multi-residential property tax rate, but others have found excuses to block it wherever and whenever they could. Overall, they have taken small steps to prevent the situation from getting worse.”
Herein lies the main issue with the capital gains tax in Canada. When a family has owned multiresidential properties for years or decades, selling
Treatment of capital gains taxes In Canada, the Income Tax Act requires that a person pay taxes on capital gains when they sell capital property for more than what they paid for it. Capital property includes securities (e.g., shares, stocks, bonds, REIT units) and real estate investments (e.g., cottages, rental properties), but does not include principal residences. You would pay income tax on 50 per cent of your capital gains based on the following formula: Capital gain or loss = Proceeds of disposition – (Adjusted cost base + outlays and expenses) • Proceeds of disposition = how much you sold the price of capital • Adjusted cost base = how much you originally paid for the capital • Outlays and expenses = costs deemed necessary before selling (e.g., repairs, finders’ fees, commissions, brokers’ fees, surveyors’ fees, legal fees, transfer taxes)
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“Even if municipal politicians understand the unfairness of the different property tax rates, they often won’t do anything about it...” the property or passing it along to children will result in significant capital gains taxes. Since capital is mobile, and investors compare after-tax returns, the capital gains tax on multi-residential property is effectively borne by tenants through the rents they pay over time. Homeowners do not have to pay that tax. Rents cost more directly because rental developers have to pay land prices determined in the market for condo developments. Higher costs result in less rental supply, which results in higher rents “Taxing capital gains upon the sale of a principal residence is the most logical way to equalize tax treatment if there is a societal goal to treat owners and rental properties the same,” said Frank A. Clayton, Ph.D., Senior Research Fellow, Centre for Urban Policy and Land Development, Ryerson University. “However, this would incur the wrath of homeowners at election time.” Another option for equalizing the situation is to exempt multi-residential property from capital continued on page 22
gains tax. This would enable developers to compete for development land, and freeing them from the capital gains tax would draw out more rental supply, which would help moderate rents.
Inequity in treatment of imputed income The Canadian income tax system sometimes taxes imputed income. For example, if an employer provides a medical-dental-disability-life insurance package, some aspects of that package are reported as income, and taxed in the employee’s hand even though the employee never received any money; they received the financial benefit of their employer-provided benefit. Living rent free in owner-occupied housing is also a benefit, but it is not subject to income tax in Canada, even though it is taxed as imputed income in several European countries.
“Taxing capital gains upon the sale of a principal residence is the most logical way to equalize tax treatment if there is a societal goal to treat owners and rental properties the same...” The concept of imputed income can be difficult to understand. Suppose that an individual purchases rental property as an investment and rents it out. That individual is now a rental property owner who earns income through the monthly rent paid by the tenant. The property owner must pay taxes on the rental income, less any expenses. Now suppose the property owner decides to move into the home instead, thereby becoming an owner occupant. The property owner no longer receives rental payments, and is not earning taxable income. The owner of the home is in effect renting from himself, tax free. According to taxation theory, the non-cash benefit for the property owner in occupying the home instead of renting it out should be considered part of the owner’s net income. This income is imputed since no cash is changing hands, much like the benefits many employees receive from their employer. This imputed income (less applicable
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expenses, such as mortgage interest, property taxes, utilities, etc.) should be taxed based on what the owner would have earned if the home was rented to a tenant. However, homeowners avoid this tax. “We have estimated that the subsidy to homeowners from the non-taxation of net imputed rental income is around $8 billion per year” said Clayton. “It provides a financial incentive for homeownership, which renters do not get.” There are two ways to eliminate the discrimination of imputed income – either remove the subsidy to homeowners by taxing the imputed income, or provide rental property owners with subsidies to balance out the difference. The former option is unlikely, as single-family property owners would balk at paying tax on something they’ve never paid tax on. Therefore, it would be more palatable to provide rental property owners with subsidies for providing residential rentals at any price point. From a policy perspective, a tax on imputed income could be imposed in a tax-neutral way. As a result, everyone’s income tax rates would go down by the amount that tax revenue would increase from the addition to the tax base. Economists are generally in favour of broader tax bases coupled with lower tax rates because they avoid economic distortions and maximize total income. That should be the case in this instance.
Conclusion Homeowners of single-family properties and condos receive many more tax advantages than renters and rental property owners. Multiresidential property owners pay, on average, more in property taxes, and are disadvantaged from a capital gains tax perspective when they try to sell or transfer their properties. At the same time, owner-occupiers do not have to pay taxes on the imputed income from living in their homes. There are different ways to equalize these discrepancies that would benefit both tenants and rental housing providers. Such changes would require determination on the part of various levels of government, but they would also eliminate tax practices that discriminate against tenants and owners of multi-residential housing.