Local businesses that hailed the death of one realty tax should brace themselves to start paying another hidden one this spring.
Business leaders welcomed the Ontario government's plan to scrap the business occupancy tax earlier this year. The tax was formerly levied on all businesses occupying space in commercial buildings. But its elimination may actually result in higher rents for business tenants when new assessment levels are finalized in mid-March.
"My prediction is that come March 15, it could be quite an explosive situation," says Dennis Date, a tax consultant and former treasurer of the City of Kanata.
Killing the occupancy tax is a popular public relations move for the Ontario government, but it also creates a revenue shortfall for the province. To make up the difference, the Mike Harris regime will probably increase the commercial realty tax, a levy paid by the owners of commercial properties.
"(Commercial) realty taxes are going to be increased to recapture the lost revenue in business occupancy taxes. That's absolutely certain," says Dave Patton, president of the Building Owners and Managers Association of Ottawa-Carleton.
This effectively shifts the tax burden from commercial tenants to commercial landlords.
Many business tenants assume this gets them off the hook. But commercial landlords will probably hike rents to pay for the increase to their own taxes.
"In most instances, those increases in (landlords') taxes would then be passed on through the tenants," Patton says. "So this is simply a change in the method of administering the taxes," not a tax decrease, he explains.
Some tenants could be spared a rent increase, however, depending on their lease agreements.
"The concern would be the wording of specific leases," says Steve Rothman of the Regional Group. "The wording of some existing leases may or may not allow the landlord to recover the tax from that tenant."
Tenants holding gross lease agreements (which include operating costs and any taxes in the rent) are probably protected against rent increases. "It would be hard (for landlords) to amend those types of leases to recover the increase in taxes," Patton says.
A major issue for commercial building owners is whether the tax will be charged on vacant properties. Under the old rules, landlords did not have to pay the business occupancy tax if their buildings went unleased. boma has written letters to the province asking if landlords will essentially be stuck paying taxes on empty properties. Clarification is still pending.
Just how much higher the tax rate for commercial landlords will go is still to be determined by provincial and regional governments. Patton has warned boma members to expect a 25- to 30-per-cent jump in realty taxes. One observer says commercial landlords could end up paying a rate twice as high as homeowners when assessments are determined in mid-March.
Date has offered seminars on the new tax system to local business people and politicians in the region. Overall, he says, the complexity of the possible changes have left many business people confused and apathetic about how it will affect them.
"My general impression is that people don't have a clue. There's no public demand for information because no one understands it."
If that's true, then Tony Copple is a rare breed.
Copple is an agent at Investors Group financial consultants in Kanata who also founded a small alliance of west-end professionals called the Kanata Group. He asked Date to brief the Kanata Group's members on the new tax system.
"We obviously have clients who own properties of that nature," Copple says. "Sooner or later I suspect they'll call us and say 'Hey, what's going on here?'"
The region could offset the occupancy tax shortfall by increasing residential taxes. But jacking up homeowners' rates has never been a popular political move for any government.
If the region chooses not to increase commercial landlords' taxes, it will probably charge higher fees for licensing and other business-related services to recoup lost revenue, says Walter Robinson, federal director at the Canadian Taxpayers Federation. In the end, the tax that seemed gone forever is due to make a reappearance somehow.
The business occupancy tax was first introduced in 1904. It now accounts for $1.5 billion annually across Ontario, or 11 per cent of all property taxes province-wide. In 1995, it generated $10.7 million in revenues for the City of Ottawa and $16.6 million for the Regional Municipality of Ottawa-Carleton.
Although the occupancy tax rakes in substantial money for the provincial government, the infamous Who Does What panel set up by the Mike Harris Tory regime recommended the levy be scrapped. The panel ruled the occupancy tax is just too difficult to administer and thus, too hard to collect.
The province and the region are quickly running out of time to decide exactly what the new commercial tax rate will be. The province is currently gathering a set of recommended rates to give to the municipalities. Based on that guideline, the region hopes to finalize its own rates by the end of November so it can work out its budget for the next fiscal year. Regional councillors will have to approve the new rates by the mid-March if they hope to get final assessment notices out to ratepayers some time in May.