Could ‘upzoning’ mean higher property taxes for B.C. homeowners?

B.C. Assessment taxes properties based on highest and best use. Experts question whether that will apply to single-family lots where up to six units can be built.

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Tax and housing experts are concerned that sweeping housing reforms proposed by the B.C. NDP, which would force higher density in single-family neighbourhoods and around transit hubs, could leave homeowners and small businesses on the hook for inflated property taxes that are based on the “highest and best use” of the land.

Paul Sullivan, a Vancouver-based property tax expert, said there could be major unintended consequences related to two pieces of legislation introduced by Housing Minister Ravi Kahlon.

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The government’s small-scale multi-unit housing bill, which if passed will force municipalities to approve up to six units on a single-family lot, could result in such lots being taxed at the rate of a multi-unit townhouse.

That is because according to B.C. Assessment rules, properties are taxed not on their current use, but based on “highest and best use.”

Sullivan, a principal at Ryan, a global tax services and software provider, pointed to a clause in the Assessment Act which states if a home is the owner’s principal residence and the owner has lived there for 10 years or more, the assessor will value the property only on the actual use and not its development potential. However, there is no such exemption for those who have owned their home for less than 10 years.

“Whether or not land values will increase on single-family lots has yet to be proven,” Sullivan said. “But if the risk in building four-plexes and six-plexes is reduced because they are swiftly approved (by local planning departments), there may be an appetite from builders to build this ‘missing middle’ housing. And if that becomes the case, a market will get created for them, the demand will increase, and then (property) values will rise.”

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These concerns are shared by Burnaby Mayor Mike Hurley, who worries residents in his city will be struggling to pay ballooning property taxes.

“B.C. Assessment assesses a single-family lot on the highest and best use. So what happens to the taxes? I can never get an answer to that question,” he said. “We’re trying to get to affordability, but is that really what we’re doing?”

Asked by Postmedia on Thursday about the impact on residential land values, Kahlon said evidence from other jurisdictions shows that the “land lift” will not be significant because the policy will apply across the province as opposed to isolated geographic areas.

“Given that we’ve rezoned such a large area of the province, we don’t expect the land lift to be that high,” Kahlon said.

B.C. Assessment spokesman Tim Morrison said property assessments are based on market value and, “We have yet to see how the market will respond to these proposed changes.”

“There are a variety of influences that are considered every year when determining a property’s assessed value. Ultimately, the market will determine the value and (B.C. Assessment) reports as of July 1 each year,” Morrison said.

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Sullivan pointed out that “one sale makes a market.”

“If you get an area in Kitsilano where there’s one or two sales reflective of this new (multi-unit) housing form, all the properties that have the same potential will now be assessed at that new value,” he said.

Even more concerning for Sullivan is housing legislation introduced Wednesday that, if passed, will increase the allowable density around transit hubs. He is certain it will revive the problem of the “air tax” that Vancouver small businesses have been fighting for years.

By cranking up the allowable density within 800 metres of rapid transit hubs such as SkyTrain stations and within 400 metres of major bus exchanges, he said business owners in low-rise commercial units will eventually be on the hook for taxes based on the highest and best use — essentially the empty air above their buildings.

“Sound the alarm bells for small business in these locations,” Sullivan said.

Several Vancouver business owners raised concerns about the air tax in 2021 after they learned both their property taxes and the province’s speculation and vacancy tax would be calculated based on a property’s development potential.

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The owner of West End retailer Chocolate Mousse, for example, blamed a tax bill that ballooned by about 400 per cent over three years for the closure of the business in 2019.

To address business owners’ concerns, the province agreed to a lower tax rate for the development potential in the airspace above commercial properties. However, Sullivan said the proposed housing reforms will mean jurisdictions across the Lower Mainland “with certainty” will now face the same problem.

Sullivan understands that the aim of the government’s housing policy is to saturate the market with density in order to calm the hot real estate market.

“But, I’m sorry, you cannot double the potential of something and not have it cause this type of change. Land values will go up.”

Andy Yan, director of the City Program at Simon Fraser University, said these issues point to a clumsiness in the government’s one-size-fits-all housing reforms which he said amounts to “surgery by chainsaw, not scalpel.”

The urban planner said he also hasn’t been able to get an answer as to whether the air tax problem faced by Vancouver small business owners will now extend to all residential areas.

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Yan also worries the carte blanche approval of highrises near transit stations could put historic neighbourhoods such as Chinatown and Gastown at risk by overriding the height limits on buildings in those heritage-protected areas.

“I get what the theory is … but the actual implementation is pretty problematic,” he said.

B.C. United leader Kevin Falcon, touting his past experience with real estate developer and private equity firm Anthem Capital, said “there’s no question” that both residential and commercial property values will rise as a result of increased assessments based on the highest and best use principle.

He pointed to the experience in Auckland, New Zealand, a pioneer in upzoning for “missing middle” housing, and cited reports that showed property values rose as much as 12 per cent on average and that the appreciation was more acute in single-family neighbourhoods most impacted by upzoning.

“What I’m concerned about is an NDP government, none of whom have any experience in housing, not considering the unintended consequences of the policies they’re putting forward,” said Falcon, who represents the riding of Vancouver-Quilchena. “And this is a classic example.”

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