How to Calculate Commercial Property Tax

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How to Calculate Commercial Property Tax

Commercial property tax in Canada is calculated differently from residential property tax. Read on for a closer look at commercial property tax and how it applies across the country.

What are commercial property tax rates?

Commercial property tax varies from coast to coast. It’s one of the main sources of revenue for cities. The funds are used for everything from infrastructure to education.

Canadian commercial property tax rates are considered high. They can be almost three times higher than residential tax rates, and many businesses have trouble paying them. Some cities, such as Toronto, are trying to reduce the rates.

The 2018 Canadian Property Tax Rate Benchmark Report, by real estate experts Altus Group, lists commercial and residential tax rates in major urban centres. The commercial property tax rate the report uses is an amount per $1,000 of a property’s assessment value.

In 2018, the average commercial property tax rate was $24.21 per $1,000 of property value. Cities east of Toronto tend toward higher rates. Montreal and Quebec City rates are particularly high.

Although commercial property values in Montreal are going up, property tax rates remain high and are increasing. Commercial rates in Vancouver and Toronto are going down, though they remain the highest overall.

Calgary showed the highest increase in rates for the second year in a row. Commercial rates rose by 11.36 percent in 2017, only to increase again in 2018 by 9.48 percent. Calgary’s downtown office market has been on the decline.

In Regina, Edmonton, and Saskatoon, commercial tax rates rose, but only modestly. Rates in those cities remain relatively low. Here are the Altus report’s figures for each city surveyed:

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2018 estimated commercial property taxes per $1000 of assessment

Vancouver: $10.85

Saskatoon: $14.91

Regina: $16.55

Calgary: $19.43

Edmonton: $21.22

Toronto: $24.04

Winnipeg: $24.05

Ottawa: $27.72

Halifax: $33.74

Quebec City: $36.09

Montreal: $37.76

These figures reflect municipal averages. In Montreal, each borough levies a different amount of commercial property tax. A non-residential building worth more than $500,000 in Verdun would be taxed $3.08 per $100.  A similar property downtown would pay $2.78.

In a 2017 Globe and Mail article, Cailynn Klingbeil writes that some property tax rates are based “on a property’s best potential use, as opposed to actual use.” Adam Found, a fellow of the C.D. Howe Institute quoted in the article, notes that, “in some cases, the highest and best use is not the current use, so you can end up with a property liable for a tax bill that doesn’t reflect the income stream the property is earning.”

Some regions offer an online calculator to help figure out your commercial property tax rate. You can also check your local rate per $100 of assessed valuation. The information should be readily available on your city’s official website.

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Commercial property tax deductions

Any property taxes you pay on a commercial property you rent out to commercial tenants are deductible. Therefore, quite a few expenses related to owning a commercial property you can deduct on your income tax return.

For rental properties, you can deduct current and capital expenses. Current expenses, also called operating expenses, are for ongoing things such as repairs. They may include anything you regularly pay for to keep your asset in good condition.

Capital expenses provide lasting benefits to your business. Buying, or improving, your commercial property, are both examples. Accordingly, this type of expense is usually deductible over several years as capital cost allowance (CCA).

If you sell a commercial property, you must report the capital gain or loss on your income tax return. In essence, you get a capital gain if you sell for more than your original purchase price plus applicable fees. It’s a capital loss if you sell for less.

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Here is a list, compiled by the CRA, of deductible expenses related to owning a commercial rental property:

  • Advertising
  • Insurance
  • Interest
  • Professional fees (including legal and accounting fees)
  • Repairs and maintenance
  • Management and administration fees
  • Motor vehicle expenses
  • Office expenses
  • Other expenses
  • Prepaid expenses
  • Property taxes
  • Salaries, wages, and benefits (including employer’s contributions)
  • Travel
  • Utilities.

The following expenses are not deductible, as indicated by the CRA:

  • Land transfer tax – add these amounts to the cost of the property
  • Mortgage principal – you may be able to deduct interest, however. See Line 8710 – interest and bank charges
  • Penalties – any that show up on your notice of assessment are not deductible
  • Value of your own labour
  • Personal portion of expenses – you can only deduct expenses related to the parts of the property you rent out for profit.

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What are transfer tax and land transfer tax on commercial property?

Information in this section is from the June 2018 article “Commercial real estate in Canada: overview” by partners in the law firm Stikeman Elliott LLP, C. Mario Paura, Stefan Fews, Michael L. Dyck and Rachel V. Hutton.

Transfer tax on real estate is levied at the provincial or territorial level once the transfer is entered into the local land registry. Sometimes land transfer tax applies as well. Land transfer tax on commercial property varies from region to region.

In some provinces, including Quebec and Ontario, municipalities levy land transfer tax in addition to the provincial tax. Often, the buyer pays the land transfer tax. In Quebec, in the case of a false transfer of duties declaration, the seller may also have to pay.

Commercial property investors in search of tax relief might consider the fact that land transfer tax does not apply to the transfer of shares of a corporation that owns real estate. In Ontario, however, tax law is structured to prevent people from taking advantage of such potential loopholes.

In BC, investors sometimes set up a bare trust to serve as the owner of a property. For instance, a nominee company holds the legal or registered title. Then property buyers receive shares in the company so that no one has to pay a transfer tax.

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Do commercial tenants pay property tax?

Commercial tenants sometimes pay property tax. That is to say, it depends on what type of commercial lease you have. Innovation, Science and Economic Development Canada provides a list of common types of commercial lease:

  • Percentage rent lease – rent is a set amount plus retail sales
  • Gross rent lease – rent is a set amount plus agreed-upon operating expenses
  • Net lease – rent is a set amount plus certain taxes
  • Net-net lease – rent is a set amount plus taxes and landlord’s insurance costs
  • Triple net lease (net-net-net) – rent is a set amount plus taxes and operating and maintenance costs.
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Commercial lease terms

There is no standard commercial lease in Canada. Rather, they vary from one place to the next. You will need to work out every clause with your landlord.

It’s best to consult a lawyer or notary before signing a commercial lease, Make sure the clauses are fair and the landlord is respecting the law. Clauses in the lease should provide clarity on potential areas of conflict such as the following:

  • Term – a lease for a fixed period of time, whether for a month or years. What are your renewal options? How much notice do you need to give before leaving?
  • Rent – set amount plus, in some cases, other amounts, depending on the type of lease
  • Space – does the square footage indicated on the lease match your measurements? Does it include any common spaces, such as washrooms or the lobby?
  • Service – what about parking, heating, ventilation and air conditioning, cleaning, security, outdoor maintenance? The devil’s in the details.
  • Optimization – does the building have LEED or other certification, how is the air quality, is it near public transportation? Keep your own wellbeing, and that of your clients and employees, in mind.
  • Types of business permitted to operate on the premises – is there anything that might hamper your business activity? What if the nature of your activity changes?
  • Repairs – which ones are you responsible for, and which are the landlord’s?
  • Leasehold improvements
  • Subletting
  • Insurance – make sure you know what is covered and what is not.
  • Taxes – who pays property taxes, you or your landlord? What about municipal taxes?
  • Utilities – the lease should cover the full list of utilities you have to pay for, metered or otherwise.
  • First refusal options if more space becomes available
  • Building rules
  • Signage rules
  • Damage or destruction
  • What happens if the building is condemned
  • Escape clause.

Commercial lease rules

The laws that govern commercial leases vary from region to region. Commercial leases are different from residential ones. In Quebec, for example, the Régie du logement, a resource for residential landlords and tenants, has no jurisdiction over commercial leases. Consult the land registry if you need help drawing up your lease.

Most commercial leases in Quebec are signed for a period of 3 to 10 years. Usually, before signing, either the tenant or the landlord draws up a formal offer to lease, specifying clauses such as:

  • A description of the property
  • Rent
  • Term
  • Conditions for renewal or lease assignment
  • Amount for leasehold improvements
  • Additional fees such as property tax, school tax or business tax
  • Exclusivity rights – the landlord agrees not to rent space in the same building to another tenant operating an identical business
  • Non-competition – the tenant agrees not to operate an identical business within an agreed-upon radius.

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What’s the difference between commercial and residential property tax?

Commercial property taxes are higher than residential ones. Whether commercial or residential, property taxes help various levels of government fund a wide range of public services. The latest Altus report questions the fairness of obliging commercial property owners and tenants to pay more.

The following figures show commercial-to-residential property tax ratios. If the figure is 2.5, that means the commercial tax rate is 2.5 times the residential tax rate. To illustrate, if a commercial property and a residential property were sold for the same price, property taxes on the commercial property would be 2.5 times higher.

2018 Commercial-to-Residential Property Tax Ratios

Vancouver: 4.40

Calgary: 3.06

Edmonton: 2.44

Saskatoon: 1.72

Regina: 1.74

Winnipeg: 1.98

Toronto: 3.78

Ottawa: 2.59

Montreal: 3.78

Quebec City: 3.57

Halifax: 2.80

Rebecca Rustin

Rebecca is a Montreal freelance writer and translator specializing in the humanities and finance. An upcoming academic project will focus on performing arts in Quebec.

MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.

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