B.C. GOVERNMENT RIGHT TO RAISE PROPERTY TAX
Vancouver’s taxes are actually much lower than Toronto’s,
You would never know it from the anxious talk about property taxes in B.C., but rates are actually unusually low throughout the province — particularly in Vancouver — and this helps fuel the current housing crisis.
The City of Vancouver has among the lowest property-tax rates in Canada. Even the additional provincial school tax on properties over $3 million barely moves the needle.
The annual residential property tax rate in Vancouver — including municipal, regional and provincial portions — is a quarter of one per cent of assessed value. That’s less than half the rate in Toronto and the eight other major Canadian cities compared in a recent report by Altus Group. Rates in Vancouver suburbs are also lower than in these cities.
In concrete terms, property taxes on a $1-million property in Toronto were approximately $4,673 in 2017, while in Vancouver they were $2,555. After you factor in B.C.’s generous Home Owner Grant, the bill in Vancouver falls to $1,985.
The story is similar for a $4-million property, which in B.C. could be subject to a surtax on the provincial portion of property tax (known as the “school tax”). The change announced in February’s provincial budget adds a 0.2-percent surtax on the value between $3 million and $4 million, and 0.4 per cent on value above $4 million. Adding new brackets at the high end is something the Canadian Centre for Policy Alternatives has long recommended to make the tax system more fair.
In Vancouver, property taxes on a $4-million property were about $10,220 in 2017. With the surtax, this would rise to $12,220. The taxes on a $4-million property in Toronto are much higher at $18,693. Even after incorporating B.C.’s new surtax on high-end properties, taxes on a $4-million property are still more than 50-per-cent higher in Toronto.
Some will insist that property taxes should be compared not on actual property values, but instead, different values across cities should be used since typical prices are so much higher in places like Vancouver.
One little-discussed effect of having low property tax rates is that it encourages holding residential real estate as an investment. Most investments have a “carrying cost,” and low taxes mean the carrying cost for property investment in Vancouver is very low, making investing in property attractive compared to holding other types of assets.
For example, if you invest in mutual funds in Canada, you will typically pay a carrying cost of about two per cent annually in investment-management fees. Compare that to the nearly eight-times-smaller 0.26 per cent carrying cost of property taxes in Vancouver. Residential property values have risen steadily in Vancouver — almost tripling since 2005. When you combine very high investment returns and very low carrying costs, it’s clear why this is an enticing investment.
Vancouver’s property-tax rate is so low, in part, because of a quirk of how property taxes are levied. Rather than locking in a tax rate (or set of rates) as we do with income tax or sales tax, property tax rates change every year.
A municipality determines its annual budget, and then propertytax rates are set for the year at a level that will raise precisely this amount of money.
When property values rise, the property tax rate (or “mill rate”) actually decreases to ensure revenues don’t exceed the city’s planned spending. For example, the tax rate in Vancouver has fallen by more than half between 2000 and 2017 (from 0.63 per cent of assessed value to 0.26 per cent). This steadily decreases the carrying cost of property, making Vancouver property an ever more attractive investment. Increasing demand puts upward pressure on prices, which leads to further declines in the tax rate, and so on.
In other words, as the tax base of property wealth grows, property tax rates paradoxically decrease, meaning a continually smaller proportion of that wealth is taxed. This also means a smaller proportion of property wealth is harnessed for the public good (even though public investments like transit, schools, parks and basic infrastructure give urban land much of its value).
Some argue that property taxes should be compared using “typical” properties in each city (even if they are of very different value) rather than comparing properties of the same value.
This approach is also informative, but ignores the huge growth of property wealth in cities like Vancouver and overlooks the incentives created by low carrying costs to hold real estate as an investment.
Even by this measure, though, Vancouver’s property taxes are low.
In a recent Vancouver Sun op-ed, Elizabeth Murphy claimed — incorrectly — that Vancouver has the highest property taxes in the country by this measure. The chart she published suffers from a glaring methodological flaw, however. Instead of using the overall benchmark price for properties in each city, her chart uses the benchmark for only the most expensive sub-segment of the market: single-family homes.
When the overall benchmark is used, typical property tax bills for Vancouver are among the lowest of the cities she compared. After subtracting the Home Owner Grant, Vancouver has the lowest of the group at $2,155, which is more than $1,200 lower than Toronto.
As a thought experiment, imagine instead of continuing with perpetual rate decreases, Vancouver’s residential property tax rate was frozen at the 2015 level of 0.35 per cent (or even the 2000 level of 0.63 per cent, which would still be lower than Toronto today).
The result would be a mix of additional government revenue and lower property prices because the increased carrying cost would make real estate a less attractive investment, decreasing demand.
These are both desirable outcomes and would ensure a larger share of the “land wealth rush” is captured for the public good, something that hasn’t happened to date in Vancouver.
With additional revenue, the city or province could budget for the creation of hundreds or even thousands of new social and co-op housing units each year.
Property tax rates should be structured progressively so that those at the highest end of the market pay the highest rate, as the Canadian Centre for Policy Alternatives has recommended.
It’s time we faced up to the reality that low property taxes are helping to fuel our housing crisis.
It’s time we faced up to the reality that low property taxes are helping to fuel our housing crisis.