High taxes hamper real estate investment in Canada: Study

Posted on 30. Nov, 2010 by in News

By Tony Wong | Mon Nov 29 2010

High taxes are an impediment to commercial real estate investors looking to invest in Canada, says a new global study.

“I think it’s clear that the system is broken and no one has the fortitude to step up to fix it,” said Gerry Divaris, vice president of Cushman & Wakefield property tax services.

Commercial property owners in Canada pay the highest taxes globally, according to a report by Luxemburg-based tax advisory service Taxand.

Taxes are a “massive” 53 per cent of commercial property rents, according to Taxand in the report released Monday.

The U.S. has the second highest tax rate at 41 per cent, but that’s still a healthy 12 points below Canada’s, according to Taxand.

“The alarmingly high total tax rate for Canada is largely the combined result of high levels of tax, “which includes income and real estate taxes, said Keith O’Donnell, head of real estate for Taxand.

Norway is in third place globally at 36 per cent. Finland charges the least tax on commercial rental income at a mere 8.99 per cent.

Divaris said investors are turned off by the high taxes in Canada. In the Toronto market, for example, annual property taxes are at 1 per cent while commercial properties are taxed at 4 per cent, said Divaris.

“Home owners are the sacred cow,” said Divaris. “And people are worried that they can’t afford to pay for their property if taxes go up. The problem is, if you chase away all the businesses, who will provide for those jobs that you will need to pay for your home in the first place?”

Divaris says the Taxand study is no surprise, since investors have been complaining loud and hard that Canada is an expensive place to do businesses.

“Fortunately we have a lot of other things going for us that make us an attractive place to do business, but taxes are not one of them.”

However, the Taxand study has attracted some backlash from the industry, including from their Canada-based associates at tax law firm Gowlings, who say the 53 per cent figure may be overstated.

“That figure may be high and we’ve asked for clarification on how they came at those numbers,” said David Stevens, a partner with Gowlings specializing in business law.

Vince Imerti, a partner with Gowlings national tax group, said clients may typically complain about high taxes, but Canadian corporate tax has actually been falling over the years.

One thing that may have skewed the figure upwards is that the city of Toronto has a second land transfer tax that is in addition to the provincial land transfer tax. That tax was approved in 2007.

“As far as I know, Toronto is unique among municipalities in Canada to have such a tax,” said Stevens.

Because federal and provincial governments have over the years downloaded more responsibility on municipalities, property taxes are virtually the only way they can get revenue, said Divaris.

The City of Toronto Act was supposed to address that issue by allowing Toronto to charge fees such as the unpopular $60 vehicle registration tax. Incoming mayor Rob Ford says he already plans to scrap it.

“The problem is, if you’re not able to raise money any other way, then commercial property owners will continue to get hit until someone figures out a way. Right now it’s just politically unpalatable.”

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