Both the COVID-19 pandemic and continued compression of oil prices have put Alberta under considerable strain. While the province operates on an annualized assessment cycle, each municipality is responsible for assessing properties based on market value. During these turbulent times, the city of Calgary continues to see a significant shift in the market value of non-residential properties.
Property Values in Decline
The value of Downtown Calgary office properties continues to decline because of increased vacancy rates as a result of the downsizing of oil and gas companies. In total, it is estimated that $250 million in property tax revenue from the downtown core has been shifted on to other non-residential properties in Calgary. Assessment trends that we see for the current year by asset class are provided below:
Source: City of Calgary Preliminary Information
Phased Tax Program
Beginning in 2017 and through to 2020, Calgary City Council implemented a tax relief program known as the Non-Residential Phased Tax Program (PTP) to help mitigate the increase in non-residential property taxes. Since its introduction, the city of Calgary has spent more than $200 million on the PTP. To date, there has been no indication that Calgary will re-implement this program for the 2021 tax year. As such, properties that received this credit in 2020 may see a significant increase because of the elimination of this program. In the event a similar program is implemented, Ryan does not anticipate the allocated funds to be anywhere near the range seen in previous years. The city is not expected to announce anything specific regarding a potential replacement for the PTP until after March 2021.
Discussions within the Calgary municipal government are ongoing regarding the impact of COVID-19 on property assessment values. At this time, the city has not given any indication that property tax relief will be forthcoming and no specific value adjustments because of the pandemic will be applied. As a result, the only opportunities for adjustment may be with respect to the parameters used under various approaches to valuation and the potential introduction of further property tax relief initiatives. However, any such initiatives are not likely to be known until January 2021.
For commercial property owners looking for another form of assistance, the federal government has provided partial relief through the Canada Emergency Commercial Rent Assistance Program (CECRA).
Tax Burden Distribution
The general premise of municipal tax allocation is to equalize tax revenue distribution towards an ideal target ratio of 48% non-residential to 52% residential use. 2020 is the first year since 2001 where the total tax revenue from non-residential rate payers will be less than that of residential rate payers.
Source: City Council Meeting Minutes – Tax Reform Proposal – March 15, 2009
Non-Residential Tax Rate Trends
Currently, information presented to Calgary City Council forecasts a commercial property tax rate increase of approximately 5% to 6% from 2020 to 2021. The annualized tax rate trends over the last five-year period are outlined in the table below. We have included Ryan’s forecast of the high and low ranges (7.9% and 5.5%, respectively) with respect to an annualized non-residential property tax rate increase for 2021.
Source: City of Calgary Historical Non-Residential Property Tax Rates
Overall, the non-residential property tax rate has increased by approximately 22% between 2016 and 2020.
The asset class that is anticipated to see the most significant jump is large industrial warehouse property. Potential scenarios for the industrial asset class are summarized below:
1) A 15% increase in assessment value combined with an increase in property tax rates will result in an increased tax bill of 21% to 24%.
2) No change in assessment value combined with an increase in property tax rates will result in an increased tax bill of 5% to 7%.
3) A 5% decrease in assessment value combined with an increase in property tax rates will result in an increased tax bill of 0.5% to 1.5%.
Note: Tax estimates above based on assessment value changes.
In the above example, the percentages shown represent the overall annualized tax liability change. Without a Calgary City Council or PTP rebate, the overall liability in 2020 would have been approximately $161,000 higher. These rebates resulted in a much lower 2020 property tax liability. However, with the anticipated loss of both rebates in 2021, the forecasted tax liability in this hypothetical example could increase by at least $161,000 or 24% year over year.
If you have any questions about how any of these property tax developments might impact your organization, please do not hesitate to contact your Ryan representative.