How are property taxes determined in Ontario?

What are property taxes?

Property taxes are annual fees charged by municipal governments to fund local public services including garbage collection and education. The amount of tax owed is based on the assessed value of the property and the operating budget of the municipality.

They are the largest source of municipal revenue, accounting for 40% of the revenue collected by municipalities in Ontario in 2018.

They are a regressive tax in relation to income, meaning lower-income homeowners pay proportionately more of their income for property taxes than their higher-income counterparts. This is underlined by the property tax rebate or relief programs that many municipalities provide low-income homeowners, particularly seniors.

How are property taxes calculated?

The annual property tax owed on a property is calculated by multiplying the Assessed Value by the Tax Ratio and the Total Property Tax Rate:

Annual Property Taxes Owed = Assessed Value x Tax Ratio x Total Property Tax Rate

• Assessed Value: Determined by Ontario’s Municipal Property Assessment Corporation (MPAC) Current Value Assessment (CVA) process as per the Assessment Act. It is not determined by the municipality. The value can be found on your Property Assessment Notice, at AboutMyProperty.ca or by inspecting the municipality’s assessment roll.
• Tax Ratio: Equal to 1 for residential properties. For non-residential properties, it is set by the municipality within upper and lower limits set by the province in Allowable Ranges for Tax Ratios (O. Reg. 386/98).
• Property Tax Rate: Municipal Tax Rate + Education Tax Rate
  • Municipal Tax Rate: Set by the municipal government to cover the costs of their annual budget to fund the services municipalities are responsible for and other projects.
  • Education Tax Rate: Set by the provincial government in Ontario Regulation 400/98 under the Education Act. Funds are sent to the local school board you support to help fund elementary and secondary schools. All residential properties in Ontario are subject to the same education tax rate, but different rates for business education taxes (BET) across municipalities.

Do property taxes increase if the value of my home increases?

It depends. An increase in the value of your property does not automatically mean your property tax will increase.

First, your property taxes are based on its assessed value according to MPAC (see below), not the latest price a property on your street sold for.

Second, the most important factor is not how much the assessed value has changed, but how much the assessed value has changed relative to the average change for the same property type in the municipality.

If all property values increase by the same amount, this would not cause any change in property tax owed (as long as there have been no changes to the property), as each owner would pay the same proportion of the overall property tax collected.

Example

Assuming the municipality’s budget, tax rates and tax ratios all stay the same, if the increase in your property’s value is:

• Higher than the average of all residential properties, your share of the property taxes will increase.
• Average of all residential properties, your share of the property taxes will stay the same and your increase will be the same as percentage increase announced by council.
• Less than the average of all residential properties, your share of the property taxes will decrease.

When overall assessment values increase, a municipality will adjust the tax rates downward to account for it and collect the necessary revenue.

What makes property taxes increase?

1. Inflation – Increase in the prices of goods, services and bids a municipality purchases.
2. Collective agreements – Agreed-upon increases to staff salaries and benefits.
3. New or expanded tax-supported service levels or programs – Municipality spends more money (inflation-adjusted) to provide services to residents.

According a study of 2019 FIR data by Fraser Institute, the share of municipal spending by category across 26 GHTA municipalities was:

Do more houses/population increase property taxes?

More houses means more population and more property taxes revenue, but it also means more infrastructure to maintain (roads, water, sewers, parks, bridges, etc.).

Whether or not this increases or decreases each homeowner’s property taxes depends on what kind of housing is built, and where it is built.

A 2021 report for the City of Ottawa found that to serve new low-density detached homes built on undeveloped land it costs $465 per capita, per year more than the City receives back in property taxes and water bills (increasing/upward pressure on property taxes), while high-density infill development (eg. apartment buildings) pays for itself and produces a surplus of $606 per capita, per year (decreasing/downward pressure on property taxes).

Intensification via development in higher-density urban areas is, on average, the most cost-efficient for the [City of Ottawa], while urban greenfield development and low density rural development are likely costing the City more than is returned in taxes and service rate fees.

A key reason is that urban development is more dense so requires less infrastructure per household. Moreover, urban properties typically have higher real-estate value, so taxes are higher.

Comparative Municipal Fiscal Impact Analysis for the City of Ottawa by Henson Consulting (2021) a brief update to the 2013 in-depth report (summary)

How are properties assessed?

Current Value is the measure of a property’s value as defined by the Assessment Act and is determined by MPAC, which conducts a province-wide reassessment every 4 years to update the assessed value of all Ontario properties.

The last assessment was carried out in 2016, in which all property owners received a Property Assessment Notice. The assessed property value is then phased in over the four-year cycle, with the last cycle being 2017 to 2020. The Ontario government has postponed the planned reassessment that was scheduled in 2020 to 2023.

This means that assessments for the 2022 and 2023 taxation years will continue to be based on the same valuation in effect for the 2021 taxation year unless there have been any physical changes to the property.

Other factors considered under the three approaches include the highest and best use of the property and market rents.

Residential

Residential properties are assessed using the sales approach which compares the value of the subject property to the sale prices of similar
and surrounding properties.

In addition to sale prices, MPAC looks at up to 200 factors when assessing residential properties, however 5 factors account for approximately 85% of the value:

• Location
• Lot dimensions
• Living area
• Age of the property
• Adjusted for any major renovations or additions
• Quality of construction

More: Valuing Residential Properties in Ontario (2016) – MPAC, How we assess residential properties

Commercial

Properties such as rental apartments, retail centres, and office buildings are valued using the income approach, which capitalizes an income stream using a standardized rate of return to produce an estimate of the value of the property.

• Commercial Property Assessments
• Airports
• Commercial Properties
• Hotels
• Motels
• Marinas
• Office Buildings
• Shopping Centres

Industrial

Industrial properties are valued using the cost approach, where much of the value is on improvements to the land, involves estimating the cost of
replacing the improvements on a property (less any depreciation that has occurred) and adding the land value.

• Industrial Properties
• Industrial Fact Sheet

Other

• Casinos
• Entertainment Attractions
• Farms
• Golf Courses
• Grain Elevators
• Retirement Homes
• Landfills
• Mining Properties
• Sports Stadiums
• Sawmills
• Seasonal Campgrounds
• Long-Term Care Homes
• Lands in Transition
• Special Purpose Properties

Properties exempt from assessment and taxes

Section 3 of the Assessment Act exempts the following properties in Ontario from assessment and taxation:

• Crown lands (land owned by Canada or any province)
• Cemeteries, burial sites, and crematoriums, as well as land owned by a religious organization or municipality for “bereavement related activities”
• Churches (and associated land)
• Schools, colleges, and universities
• Non‐profit philanthropic, religious, and education seminaries (up to 50 acres)
• Public hospitals
• Children’s treatment centres that receive Provincial aid (owner‐occupied portions only)
• Care homes with charitable status
• Highways and toll highways
• Municipal property
• Boy Scouts and Girl Guides property
• Houses of refuge
• Charities
• Children’s aid
• Societies
• Scientific, literary, agricultural, and horticultural institutions
• Battle sites
• Exhibition buildings of companies
• Machinery and equipment
• One acre of forestry for every ten acres of farmland up to 20 acres (and subject to several other conditions)
• Mineral land, minerals, and associated machinery and equipment
• Certain property of telephone and telegraph companies
• Improvements on land with residential units for seniors and persons with disabilities (subject to conditions)
• Additional residential units for seniors (subject to conditions)
• Amusement rides
• Airports
• Conservation land
• Large non‐profit theatres (subject to conditions)
• Hydro‐electric
• Generating stations
• Poles and wires
• International bridges and tunnels (including duty‐free stores)
• Land owned by religious organizations used for recreation
• Land owned by the Navy League of Canada
• Land used by veterans

Payment in lieu of taxes (PILT) programs

While legally exempt from paying property taxes, some property classifications make payments in lieu of taxes discretionally or as required by other laws.

Federal Payments in Lieu of Taxes Program

While the federal government is exempt from paying taxes levied by local and provincial levels of government – including property taxes – Public Services and Procurement Canada distributes $560 million in payments annually in lieu of property taxes to over 1,100 taxing authorities across the country for about 14,000 federally-owned properties including office buildings, harbours, prisons, national parks to recognize the benefits of the services provided by municipalities. Payments are reported annually. For example, in 2022 the City of Belleville, Ontario received $701,432.78. These payments are optional and made at the discretion of the Minister of Public Services and Procurement.

Hydro companies in Ontario

In addition to paying regular property taxes, Hydro One Inc., Ontario Power Generation Inc., each of these companies’ subsidiaries, and every municipal electricity utility make extra payments to the province for the lands they own (“payments in lieu of additional municipal and school taxes”), which goes towards paying down the remaining stranded debt of the former Ontario Hydro.

Airports

Airport authorities in Ontario must make a payment in lieu of taxes to the municipality in which they are located as per O. Reg. 397/17 under the Assessment Act. Mississauga had to lobby the provincial government to temporarily remove caps on PILT payments raised from Toronto Pearson International Airport.

How is the municipal tax rate determined?

Every year, municipal councils review and approve their municipality’s operating and capital budgets that set the expected spending (expenses) to pay for local services and programs.

Municipalities are required to balance their operating budget every year, which means they must have revenues equal to the spending they approve.

Revenues from non-tax sources include user fees, reserve funds, solar panels and government grants. These are subtracted from the total expenses and the difference must be covered by property taxes – the largest source of revenue for a municipality.

The total property tax required to balance the budget is then divided by the total assessed property value of all properties in each property tax class to determine the property tax rates. It effectively spreads out the property tax bill across properties in the municipalities in proportion with their assessed value, factoring in tax class rates.

Tax rates are established for each class of property (residential, multi-residential, commercial, industrial, etc.) and are expressed as a multiple of the residential tax rate known as “tax ratios”.

Example: Belleville (2023)

• Total spending approved: $147.9 million
• Non-tax revenues: $30 million
• Property Tax Levy needed = total spending approved – secondary revenues = $117.9 million
• Total residential Current Value Assessment (MPAC): $3.02 billion
• Residential municipal tax rate = residential portion of spending ($48.3 million) / total residential Current Value Assessment = 0.01598746

Source, final rates

In general, larger urban centers can offer lower property tax rates due to a larger pool of taxpayers and higher real estate prices.

A municipality decides which spending and programs to approve while keeping in mind how much of an impact it will have on property taxes during budget discussion council meetings.

Tax classes

Each class is defined in O. Reg. 282/98 under the Assessment Act.

Area ratings: urban vs rural property tax rates

In general, taxes are to be levied on all property equally:

All taxes shall, unless expressly provided otherwise, be levied upon the whole of the assessment for real property or other assessments made under the Assessment Act according to the amounts assessed and not upon one or more kinds of property or assessment or in different proportions.

Section 307 (1) of the Municipal Act

Exceptions

• Service provided one one area, but not others – A surcharge can be imposed for a service that is provided in one area of the municipality but not others, but they must provide a way to measure the cost of the service. For example, in Napanee, Loyalist imposes a 2% surcharge on Amherstview residents for transit which is only available in Amherstview. Section 326 of the Municipal Act
• Grants from general funds – A municipality may make grants to any person, group or body, including a fund, within or outside the boundaries of the municipality for any purpose that council considers to be in the interests of the municipality. Section 107 of the Municipal Act
• Restructuring orders when changing a municipality’s boundaries – A restructuring order may impose different rates when a municipality’s geography is changed, such as when a rural and urban municipality are combined. Sections 171 to 173 of the Municipal Act

What is vacant land?

Vacant land is land that has no buildings or structures and is not being used.

1. (1) The following land, if it is not being used, is vacant land for the purposes of this Regulation:

1.  Land that has no buildings or structures on it.

2.  Land upon which a building or structure is being built.

3.  Land upon which a building or structure has been built if no part of the building or structure has yet been used.

4.  Land upon which a building or structure has been built if the building or structure is substantially unusable.  O. Reg. 282/98, s. 1 (1).

(2) For greater certainty, any occupation of a building or structure is a use for the purposes of paragraph 3 of subsection (1) and once a building or structure has been occupied the land upon which the building or structure is located cannot be vacant land unless the building or structure becomes substantially unusable.  O. Reg. 282/98, s. 1 (2).

Section 1 of O. Reg. 282/98 under Assessment Act

What is excess land?

Excess land is land that has not been developed other than having utilities connected to it and is not being used for any purpose other than farming.

A portion of a parcel of land is included in the subclass for excess lands for a class of real property if,

(a)  it has not been developed in any way, other than to service the parcel of land;

(b)  it is not being used other than for farming purposes; and

(c)  it is in excess of the municipal requirement for any existing development elsewhere on the parcel.

Section 21 (3) of O. Reg. 282/98 under Assessment Act

Vacant and excess land discounts

In 2001, the Vacant Unit Rebate Program was introduced and allowed owners of vacant commercial or industrial properties to apply for a temporary property tax reduction, as long as the property remained unoccupied. However, many municipalities have phased out this rebate.

Bill 70 – Building Ontario Up for Everyone Act (Budget Measures), 2016, allow municipalities to make changes to their commercial and industrial vacant and excess land subclass discount program. It gives municipalities the option to make changes to vacant and excess land subclass discounts to ensure all property owners pay their fair share of property taxes.

In 2019, Guelph industrial vacant and excess land owners received 30% discount on their property taxes which amounted to approximately $925,000 annually that all other property classes subsidized.

In Thunder Bay in 2019, a 30% tax rate discount to 384 properties totaling $544,603, which was funded by all other taxpayers.

Optional small business property subclass

Municipalities can create a “small business property” subclass, based on their own eligibility criteria and set the property tax discount to up to 35% for the property class.

Municipalities may choose to include a clause in their by-laws requiring landlords to pass on the tax reduction to their tenants as a condition of eligibility for the subclass.

The tax reduction provided to properties in the subclass can be funded by:

1. Absorbing the cost through a levy decrease
2. Funding it broadly across all property classes, or
3. Funding it within the commercial and/or industrial property class through the adoption of revenue neutral tax ratios.

• Ontario’s Small Business Property Subclass: Considerations for Municipalities – MPAC
• Example: Ottawa’s Small Business Tax Subclass

How is the education tax rates determined?

Determined by the Ontario Ministry of Finance and set in Ontario Regulation 400/98 under the Education Act. Funds are sent to the local school board you support to help fund elementary and secondary schools.

All residential properties in Ontario are subject to the same education tax rate, but different rates for business education taxes (BET) across municipalities.

Tax ratios are the relation between the tax rate of non-residential property classes (multi-residential, commercial and industrial) compared to the tax rate of residential properties, which always have a ratio of 1.

They are used to shift the property tax burden between classes, determining how much of a municipality’s tax burden is paid for by each of the property classes relative to one another.

Municipalities in Ontario have the authority to set and adjust differential taxation rates to different property classes through tax class ratios.

For example, a commercial property with a tax ratio of 2 would two times as much municipal property tax as equally-valued residential property.

• Ratios less than 1 – The property class pays less property tax per dollar of assessed property value than residential property owners. A ratio of 0.75 means the property class’ taxes are 25% lower than the taxes on a similarly valued residential property.
• Ratios greater than 1 – The property class pays more property tax per dollar of assessed property value than residential property owners. A ratio of 2 means the property class’ taxes are 2 times higher than the taxes on a similarly valued residential property.

Single-tier and upper-tier municipalities have the flexibility to adopt optional classes, in addition to the standard property classes, which give municipalities more flexibility in spreading the municipality’s property tax burden within the commercial and industrial property classes.

There is a range of reasonability in legislation that sets parameters and limits on how

What is Weighted Assessment?

Weighted Assessment is a conversion of non-residential assessment to residential assessment and is calculated by multiplying the returned assessment by the tax ratio for that property class.

The Current Value multiplied by the Tax Ratio is the Weighted Assessment:

Tax ratios are limited by ranges of fairness and transition ratios set by the province:

Tax ratios’ allowed ranges

Ranges of fairness are ranges of non-residential tax rates allowed by the Province. With the exception of farms, managed forests, and multi-residential properties, the ranges are generally between 0.60 and 1.10 relative to the residential class ratio as per Allowable Ranges for Tax Ratios (O. Reg. 386/98).

If the property class tax ratio is outside the range of fairness set for that class, the municipality must either maintain the existing tax ratio or adjust the ratio so that it moves closer to the range of fairness. Generally, a municipality cannot move its tax ratios away from the ranges of fairness. However, the Minister of Finance has wide authority to make regulations concerning ratios and has made exceptions.

Transition ratios

The Ontario Minister of Finance prescribes a transition ratio for certain circumstances, such as when a new class is established in a municipality (for example large industrial). The transition ratio represents the maximum tax ratio value the municipality can adopt. Tax ratios can only be equal to or less than transition ratios, unless the transition ratio is below or within the range of fairness.

• Farms: The tax ratio for the farm property class is initially set to 0.25 by 308.1 (3) of the Municipal Act, but can be changed by municipalities. It is a long standing practice in Ontario to give preferential tax treatment to farms/agricultural properties.
• Managed forests: The tax ratio is 0.25 as per the Assessment Act.

Tax ratio limits and levy restrictions are provided in Ontario Regulation 73/03.

Municipalities can set tax ratios based on the prescribed formula set in Ontario Regulation 385/98 which is amended annually to update the applicable tax year.

Tax ratio comparison: Ottawa vs Belleville

Below are the 2023 tax ratios for comparison:

Subclass ratios

Provincial legislation allows municipalities to set the optional and mandatory subclass tax ratios as a percentage of the applicable class tax ratio.

For example, in Ottawa:

How to read a property tax bill?

Class descriptions and types of properties

Example: RT

• (Tax Class) Residential
• (Type) Taxable

Regulatory timeline

2017 – New Multi-Residential Tax Class established

The New Multi-Residential Tax Class was created in a Regulation passed on July 5, 2017, applying to all buildings built after April 20, 2017. The Tax Ratio for the class must be in the range of 1 to 1.1 and applies for a period of 35 years.

1998 – Property tax reforms

The Fairness for Property Taxpayers Act, 1998 introduced:

• Municipalities’ ability to define different classes of property, within limits
• Municipalities’ ability to set tax ratios, within limits
• Transition ratios prescribed by the province for each municipality based on the preexisting relationship in effective tax rates for the various classes of property
• Municipalities’ ability to charge commercial and industrial properties up to 3 different graduated tax rates – based on their assessed value.

In most municipalities, ratios tended to fall outside the prescribed (or target) ranges of fairness. To bring ratios towards and ideally within the ranges of fairness, Section 308 of the Municipal Act provides municipalities with the authority to alter ratios on an annual basis based on a number of rules, including:

• If existing ratios are outside the ranges of fairness, they may only be brought closer to the range and cannot move further away.
• If existing ratios are within the ranges of fairness they may be moved either up or down but not beyond the limits of the ranges.
• If the tax ratio for multi-residential, commercial, and industrial classes exceeds provincially prescribed threshold, municipality cannot increase tax burden on that class.

Pre-1998

In the pre‐reform era there were only two tax rates – residential and commercial – and the residential rate was set at 85% of the commercial rate.

In addition, properties occupied by businesses paid what amounted to a surcharge in the form of a business tax. The surcharge rate varied according to the type of business. As a result, commercially classified properties paid proportionally more taxes than properties subject to the residential rate.

Source

Sources

• Property Taxation in Ontario: A Guide for Municipalities (2012) – Municipal Finance Officers’ Association of Ontario
• Property Taxes in Canada: Current Issues and Future Prospects (2019) – Institute on Municipal Finance & Governance (IMFG)
• A Tale of Two Taxes: Property Tax Reform in Ontario (2012) – Lincoln Institute of Land Policy
• The Never-Ending Story of Property Tax Reform in Ontario, Canada: Lessons for Other Countries? (2009) – Institute on Municipal Finance & Governance (IMFG)
• Tax policy – City of Ottawa