PROPERTY TAX IN VANCOUVER 7

Part 7

The Facts About Tax Deductions


It was the Federal tax deduction in the United States which led to a judicial review in one city in Canada as well as questions in others. As we have mentioned, people in one city saw that not only could business deduct the real estate taxes as expenses, from taxes, as well as other items, but so could the homeowner. Then and now business in the United States could deduct property or real estate taxes among other expenses or laying out funds with a view to producing an income.

[United States Tax Code; Internal Revenue Service; Department of the Treasury Publication 530 (2003)"What you can and cannot Deduct"]

In a current publication the following is stated with regard to the homeowner:

"...most state and local governments charge an annual tax on the value of real
property. This is called a real estate tax. You can deduct the tax if it is
based on the assessed value of the real property and the taxing authority
charges a uniform rate on all property in its jurisdiction. The tax must be for
the welfare of the general public and not be a payment for a special privilege
granted or service rendered to you."



The position is very different in Canada. Business could make its deductions just as in the United States [Income Tax Act, Section 18[ but the homeowner could not with respect to residential property. So, business could deduct the whole property tax, showing that as a cost of doing business. It could and does pay no property tax at all in result and its receipt of the tax from its customers will not be considered income for taxation. Since the tax LEVY of business or its share in 2005 was about $239 million in Vancouver, we can say that is the amount that business did not ultimately pay. It was initially paid by business, but was part of their expenses added to the amount paid to them by their customers as part of the total price of the good or service, and then was deducted from taxes on their income payable to the Federal government. So, business property property tax is intended to flow through to their customers. It is paid by business customers which in most cases are also people who pay the residential property tax except for those business owners who live outside the City and who will doubtless pay property tax to some other taxing authority.

Against this reality the business claim that the property tax is an unfair burden on them is irrational. They do not pay it at all. They also benefit, as does the homeowner,described below, who uses a part of their home for the operation of a business. There are deductions from the income of such business for not only property tax, but also mortgage interest, maintenance, operating expense, depreciation, all proportionate to the amount of the property that is used.


But the homeowner does pay, and the homeowner in Canada unlike 280 million Americans, who have a very similar economic system and can make a variety of property related deductions, the Canadian homeowner cannot unless it based on a business.



This fact is mentioned very briefly by the consultant KPMG, and the small group of people representing residents on the advisory committee to Council which considered the property tax in 1995. This group all said they opposed the shifting of the property tax in favor of business from 1995 as business was demanding (these were 5 of the 12 persons on the Committee) but it seems no heed was paid to them by the pro business majority making the recommendation that the "burden" on business should be lightened.

[Report to Council; Standing Committee on CS&B dated April 13, 1995; Page 3,4]
[and see City of Vancouver; Task Force on Property Tax; Report 1995; at p;age 19]




In one City in Atlantic Canada, as we have mentioned, after the 1944 review, the response of the Municipal Council was to let the business rate drift upward. In other words, follow a policy of higher contribution rates for business. This pattern is to be found all across Canada today, in the big cities as in the small centers. The contribution share for the business class in Toronto is much higher than for Vancouver, and that for Calgary seems a little more, due to the combination of a business tax as well as the property tax (as of 2001). One of the publications of the Vancouver Board of Trade we have mentioned has an attached schedule of municipal tax shares which shows tax rate ratios which vary from levels of more than 7 to 1 down to 1 to 1 for 150 Municipalities in BC. Paradoxically, in this document, the Board of Trade is calling for a "level playing field" though it is not clear how that is to be achieved with such a spread, nor does it take into account the difference between tax share and tax rate. A 1:1 tax share will not produce a 1:1 tax rate as regards residential:business. As is usual in pro business publications, the implication is that any distribution at all which is greater than 1 to 1 is unfair to business, so how they settle on any in the range of ratios from more than seven to one on down is not clear. Nor do they explain the fact that business does not pay anything where the full tax is recovered from customers and is, moreover, tax deductible. It is difficult to see now even a tax rate ratio of 1:1 would deliver what business wants since that depends on the numbers of business and the money required from the class as a proportion when set against the total of all property values in the class, that is, the mass of market values for business properties and the stated business share of the tax LEVY.



Another argument contended against in the foregoing pro business material was the claim that business had a greater ability to pay, or that business is better able to afford it. But both of these arguments is a misdirection. Businesses are being taxed on property, wealth, whether or not they have the greater ability to pay, not depending on whether or not they are better able to afford it, than someone else. If it were otherwise there would have to be a separate class for property owners whose income was limited to the CPP or th OAP (Canada Pension Plan; Old Age Pension). In some cases that is not enough to maintain the grounds around some homes, let alone pay the taxes on long owned and clear title homes. The owners are being taxed on the basis of the market value of their property after the city has determined the total financial tax LEVY it requires to operate for the current year and made a division as to what share of that levy will be paid by each of the property classes. The result is based on that market value and has noting whatever to do with ability to pay or success of a particular business, just as the incomes of individuals is not relevant. It stands to reason that if the property is the site of a business at all then that business is going about its operations to produce a good or service and collecting, in its pricing for the normal costs of operation and profit, then such property tax will be recovered as sales progress and will not be recovered if sales do not progress. But that case is no basis at all for special relief as it is not for relief for the residential share. Of course, it is usually the case that advocates of both shares will often seek relief for their interest, but since that is not a justification for the residential side, it is even less so on the business side due to the severely regressive features of the property tax. Indeed, where a particular business pays a lot more among business property owners, that is simply a reflection of wealth and the absolute size of what is in fact a subsidy. In other words, the other side of tax regresivity is a subsidy.


There are other large bonuses for business.The chief business advocate against the property tax is the Vancouver Board of Trade and that body usually publishes its broadsides at dinners in hotels where the event is set up by one of their allies, such as the Downtown Vancouver Business Improvement Association. We have noted elsewhere in this study how this organization operates with assistance from the City, which collects membership fees for it, gives the whole thing the appearance of a required municipal payment by setting out the fees in the yearly Tax Notice ,then hands over all the money with no deduction for collection cost to the resulting wholly Artificial DVBIA. A subsidy within a subsidy, one might say.

[Letter from City of Vancouver Financial Planning, dated February 28,2006;l response to inquiries as to the financing of DVBIA].


Another free rider is the hotels. Here the City collects a hotel tax then pays every dollar of it to Tourism Vancouver and other business apparently without deduction of one cent for this extraordinary service. Tourism accounts for about 5% of the GDP Gross Domestic Product of the Province, and that has been the high number for decades, often settling below that figure, so there is no reasonable justification for this gift to the free rider hotels. All jobs in a field of commerce or industry are valuable, but why such a gift to this particular interest? Tourism rose to just over 5% of GDP in the year of Expo 86, a successful trade fair or exhibition which lasted six months, after which it gradually drifted back down to 3.9% where it stayed for years and only inched up to nearly 5% by 2001 with the low Canadian dollar period. Since the decline of the American dollar, clearly a long run trend with the Canadian dollar now near parity, the bonus due to a very low Canadian dollar has very nearly disappeared, so we can expect a decline to historical levels again in tourism. The only reasonable conclusion is that Vancouver's gift to the Hotels has not really been of much public benefit at all.

[See Tourism industry publications of BC Stats and StatsCan. The author is preparing as study of the Tourism Industry in BC but that will not be posted till about Fall,2007]




Since a tourist is defined as someone who travels more than 80 kilometers from their home and is away from home for up to a year, there is no effective separation between business and tourism as most people would understand it. As the term is used in the "industry" it will also include large numbers of people who come into the airport or across the border on their way to somewhere other than Vancouver or BC. In general it is clear there is no such thing as a tourist "industry" really since tourism is an activity with features involving many occupations and numbers need to be plucked out of many fields or industries like accommodation, travel, and restaurants with resulting lack of testability. It is very hard to regard a continuous stream of consultants heading for one of the three Prince George Pulp mills as tourists in any rational sense of the word, though that is a big item in plane travel to and from Prince George, but there it is.


Tourist discussion seems to be infected, as well, by the Dare to be Great School of Business Forecasting, as promoted by the business advocates we have mentioned and Tourism BC, another beneficiary of public subsidy via the Hotel Tax, which has a Board of Governors dominated by hotel "industry" personnel. Where the City has plowed millions into tourist promotion by handing it to business which seems to spend a lot of it in denouncing an "inequitable property tax" or is congratulating themselves on what wonderful people they are at ratepayer paid for dinners, where no discernible public improvement has resulted, it is time to put a stop to such waste. We put quotation marks around the reference "tourist industry" because of its elusive nature, its dubious value in terms of the claims made and its vulnerability to excessive enthusiasm due to the use of severely exaggerated statistics such as the unreasonable multiplication of each dollar spent without rational justification.
(This field is thick with claims based on a technique very like a Pyramid scheme which insiders call "the multiplier"). Our point here is that if Business wishes to spend money as is presently done, and make these claims, let it support the activity with its own money. Here they do not pay it once but they are taking it twice.


[Value of Tourism; Tourism BC; February 2003, pages 5 to 7]


We can note that as of 2005 the collections for business improvement areas and Hotel Tax were $5,469 and $8,657 millions, respectively, or a total of $14,126 million. All of this sum went to these private organizations, a figure which is close to one half of the revenues collected by the Parks Board ($32,969 millions) where the ordinary taxpayer will still have to pay over $4.00 to go to a public swimming pool. These funds are not within the property tax, but may be used to compare the relative value of the remarkable services provided to business by the City, for which business pays not one thin dime. It is a fair conclusion that most of the tax that seems to be "imposed" on business is in fact paid by the same people who pay the residential tax, and over 60% of those are living in houses valued at under $500,000.

[City of Vancouver; 2005 Budget; Revenue details]
[Letter from City of Vancouver February 28,2006; Finance Department; re property tax distribution; response to inquiries.]






So we have business leadership taking the money collected for them gratis by the City and using these funds derived from membership fees squeezed from thousands of small businesses to attack a tax they do not even pay, in the end, and complaining about how they are mistreated. We say"squeezed" because it appears the membership fees collected by the city show up as an item on the property tax statement, so that it would be a bold small businessman who would quarrel about that.





It is interesting to see how the people behind some of these organizations think. One person was a representative of Point Grey Village BIA, one of the 18 Business Improvement Associations in Vancouver and one that has a business address not even in the four blocks of the "Point Grey Village" on 10th Avenue (its address miles away from Point Grey). He spoke at a dinner meeting about the business tax costs for a building in downtown Vancouver which was being converted from offices to residential. He said that the building as an office building was assessed at $20 million but would be worth $47 million as a residential building. The present property tax of $576,000 would be changed to $310,850. He said that was a $260,000 difference that would have to be made up somewhere, and he thought that it would be business that would pay. Why the speaker believed the public should be forced to give this business a huge double subsidy is not explained.

[Vancouver Board of Trade; Event Summary; dated March 16,2005; Speech of Point Grey Village Representative, page 1]




What is most noteworthy about these remarks is that the speaker must have known that the City of Vancouver does not define property classes into residential and business. The Province of BC does that in the Assessment Act. And it is the Provincial Assessment Authority under that act (not controlled or influenced by the City under its Provincial legislative act the Vancouver Charter) that sets the value of properties. The senior government, the Province, sets the market value of properties, not the City.

If a building owner is playing a card game with other owners where all have contributed a start up pot of $10 each for 10 players, and one decides to leave and take his $10 with him, then the rest will have to come up with a further contribution of $1./11 to make up the same pot (plus one cent), but that is not because the City (to leave the analogy) has set the class definition of a class or the value of each members' property. In fact, if any member decided to leave the "business" game and go over to the "residential" game, taking his pot (building) with him as he renovates it and switches the class it belongs to in result, he will simply find a different "pot" rule in place. That is an investment decision taken by a single member in a completely voluntary way. All the City did was to say there would be different pots for each class and the members of each class must each one contribute their proportionate amount to the total money that constitutes that class share and pay in the relation that it stands to the total values of all the "member" (property values). That normally leads to a contribution by a business that derives from a tax rate that is a number of times the residential rate. The Board of Trade is not even claiming that the ratio should end, only that it should be smaller than 5:1 and they a talk about (sometimes) 3:1.


Since there is no suggestion by the speaker that the converted building is not valued properly at a much higher figure in residential use than was the case in commercial use, it is hard to see what the complaint is here. Should the player who leaves the business class game still be responsible to leave his pot (tax rate and value) when he leaves? Should he be entitled to enter the next (residential) game subsidized by all the others members in that class by having to pay in a much smaller pot than the other players in that game have had to pay in? Further, unless the City starts giving the business class a tax rate that produces a ratio of considerably less than 1:1 the same result in general will happen whenever a use changes in this way. The argument here seems even more unreasonable than the usual ones.


As to the tax being so high it will scare off business, the fact is that the property tax is a very small amount against the scale of any genuine business located on the property and the property tax itself is such a small burden that studies have not found any substantial evidence that the property tax makes any difference at all as to their choice of what location to operate in. If a business could not afford the property tax, unlikely as that seems since the tax was based simply upon the market value of the property, the property could readily be sold and some other location found where the business could operate. If that cannot be done, then either there is no economic future for that business or there is some reason why the community should totally subsidize that small businessman (or that big businessman such as is claimed for sports stadiums, convention centers and other money losing white elephants and the like). It is not at all unlikely that this may seem reasonable to someone who would like to operate such a business, but that is not the usual economic posture (so far as what they will say openly) that one sees in the fulminations of the Canadian Tax Foundation, the Board of Trade, the CFIB and their front men.


Another argument made by business is the claim that while business can deduct the property tax from income, the homeowner has a similar benefit since he is not taxed on rent that he would have to pay if he lived elsewhere, or that he would earn if he did not live at home. This is called imputed rent.

It is one of those debater's points about which one can say there is far less here than meets the eye. Net rental income from rental property is not large. From the gross the landlord will deduct property tax, other operating expenses, depreciation and mortgage interest ( all of which business can and does do now). Then there is the large administrative cost for the nation of requiring many millions of people to do this and document it on their tax returns, with no objective measure of what the costs and returns should be, and checks to see it has been done, by Revenue Canada. The total costs of this must be set against the a extra amount collected, to evaluate the usefulness of this whole scheme. Depreciation alone can be 20% of the rent and property tax would eat up much of the rest while even a reasonable amount of renovation wold easily use up much of the rest of the "rent". Repair and maintenance would leave little for Ottawa. If taxpayers have to do this you can bet they are going to be "aggressive" in their cost estimations. Then if there is a substantial mortgage on the property, likely if the owner is actually renting it or being compared to someone who does, there may even be a negative quantity (another deduction) at the end of the reckoning. The imaginary "renter" may wind up with a further deduction for some of his expenses of various kinds from his tax otherwise payable (that is, tax not calculated from rent income).





Anyhow, the property tax is based on the market value and that must be taken to include , since it is a measure of wealth the capitalized value of future imputed rental income. In other words, the property tax is already a tax on this imputed rent since it is tax on wealth as measured by the market. So this claim for imputed rent is misconceived and may well be far more trouble than it is worth to collect it. It could even be a negative quantity in many cases. One suspects that experienced tax specialists within government have long since reviewed the likely yield from a tax on imputed rent and reached this conclusion, so that is why we do not hear of it except in academic writing.



[Comment on article"Income Tax Concessions for Owner Occupied Housing"; John C., Weicher; Hudson Institute; Housing Policy Debate; Volume 11, Issue No. 3; Fannie May Foundation 2000].



Part 8 to come