High Taxes Impeding Commercial Real Estate Investment In Canada

A latest international study on real estate investment says that the high taxes imposed by the Canadian government are hindering the flow of investment into the country's commercial real estate business. The report prepared by Taxand, a tax advisory service based in Luxemburg, said that the owners of commercial real estate in Canada pay the maximum taxes anywhere in the world. In fact, the recently released report points out that tax in Canada is a whopping 53 per cent of the rents on commercial property.

Reacting to the Taxand report, property tax services firm Cushman & Wakefield vice-president Gerry Divaris opined that he believed the system has clearly broken down and there seems to be no one who has the strength to stand up and mend it.

The Taxand report noted that though the commercial property tax rate is the second highest in the neighboring United States at 41 per cent, but it is much healthy and 12 per cent lower than that in Canada. Meanwhile, Taxand head of real estate, Keith O'Donnell said that for the most part, the distressingly high overall tax rate for Canada is the cumulative result of the high levels of tax, including income as well as real estate taxes.

According to the report released by Taxand, the third highest rate of tax on commercial property worldwide is in Norway at 36 per cent, while Finland has imposed the lowest tax on income from commercial rental anywhere across the globe. The tax rate in Finland is as low as 8.99 per cent.

Gerry Divaris is of the view that the high rates of tax on commercial rental in Canada has actually proved to be discouraging factor for the commercial real estate investors. Citing an instance, Divaris said that the property taxes are at one per cent in the Toronto real estate market, while the tax on commercial property is 4 per cent!

Describing the home owners as the 'sacred cow', Divaris pointed out that people in general are concerned that they would not have enough money to pay taxes on their property provided the taxes go up further. According to him, the main problem is in case the high taxes drive away all the businesses, in the very first place, there would be hardly anyone to provide for the jobs that one would require to pay for their homes.

Divaris further said that the findings of the Taxand study does not appear to be a astonishing because the investors have been making loud and hard protests against the expensiveness to doing business in Canada. He, however, said that luckily they have plenty of other things happening for them which would help Canada an appealing place to do business. The high rate of taxes on commercial property rents is definitely not among them, Divaris added.

Nevertheless, the study undertaken by Taxand has come under severe criticism from the industry itself, such as from their associates at Gowlings, a tax law firm based in Canada. Members at Gowlings said that Taxand might have exaggerated the issue by quoting that the tax rate on commercial property in Canada was at 53 per cent. According to David Stevens, a partner at Gowlings who is an expert in business law, the figure quoted by Taxand in its study is likely to be far above the ground realities and, hence, they have sought clarification regarding the process by which they calculated this number. Another partner with Gowlings national tax group, Vince Imerti said that usually the clients may complain regarding the high taxes, but the fact remains that corporate tax has been declining over the years in Canada.

Many believe that one aspect that may be responsible for twisting the figures upwards is the fact that in the city of Toronto one is required to pay a second land transfer tax, which is besides the provincial land transfer tax. This second land transfer tax was approved by the authorities in 2007.

Meanwhile, David Stevens has said that as far as he is aware, among all the municipalities in Canada, Toronto has a unique property tax system. On the other hand, Gerry Divaris is of the view that since the federal as well as the provincial governments in Canada have transferred additional responsibilities on the municipalities over the years, the property taxes have virtually turned out to be the only means by which the municipalities are able to garner additional revenues.

It may be noted that the issue was to be dealt with by passing the City of Toronto Act. This Act permitted the Toronto municipality to charge fees like the much detested $60 vehicle registration tax. Sensing the public mood, the next mayor of the city Rob Ford has already announced his intention to scrap the City of Toronto Act when he assumes power.

According to Divaris, the main problem is that till the municipalities find another way to generate revenue, the owners of commercial property in Canada would continue to be affected. However, the situation can change if someone is able to find out new ways and means to raise additional money for the municipalities. As of now, the situation is simply not palatable politically, he concluded.

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