Are industrial property taxes different from commercial property taxes?

Despite the continuing popularity of television programs like Dragon’s Den and Shark Tank, really good business ideas are not easy to come by. Even when you have a great idea though, either for a new business or to enhance an existing one, careful planning and execution is essential.

Property tax is not often considered a high priority item in such a business plan. More often than not property tax planning amounts to investigating what the property paid last year, and assuming it will continue unchanged. Let’s consider a few reasons why that might be unwise.

Legal technicalities can cost you a fortune. A recent decision of Ontario’s Assessment Review Board held that installation of solar panels on the roofs of barns was justification to move the property tax class from farm to industrial. This despite the government’s announcement “that the assessment and classification of a property will not change due to the addition of a renewable energy installation on the rooftop of a building.” The tax rate on the farm portion increased from 0.31% to 3.65% - an increase of over 1000%!

A new use of a property can trigger a substantial change in property taxes. I recently read about an interesting case from Flathead Lake, Montana[i]. (As an aside – this is a beautiful place – visit it if you can.) On an orchard stand three vacation cabins, which the owners started to rent out through a vacation rental web site. The department of revenue decided that this made the properties “commercial”, and up go the property taxes. This isn’t some rare event - I have had many calls from distressed business owners over the years, shocked that at how much their taxes increased when the assessor declared their business industrial instead of commercial.

Careful planning can save you money. One simple example: Ontario Regulation 282/98 includes the following:

(2) For the 2000 and subsequent taxation years, a building that is used exclusively for storage purposes at the site where manufacturing, production or processing takes place is included in the commercial property class if the building is,

(a) not attached to a building or structure or portion of a building or structure that is included in the industrial property class; or

(b) linked to a building or structure or portion of a building or structure that is included in the industrial property class by means of a minimal connection or corridor constructed only for the purpose of moving material or goods between the buildings.  O. Reg. 356/00, s. 2.

In short, if either (a) or (b) apply, then part of your industrial property could be taxed at the (almost always lower) commercial rate. But what constitutes “minimal connection”? There have been several cases arguing over that point. It is much easier to plan your facility accordingly, than to reconfigure later. Note that the above legislation came into effect for the 2000 tax year. Those whose warehouses are properly configured have been saving money for almost 20 years! Consulting with an expert early can reap big rewards.

It is better to act than to react to property tax matters. So often property tax makes the news as part of large historic appeals, going back years and costing the town millions. While the eventual victory is celebrated by the taxpayer, wouldn’t it have been better to have had that money at their disposal all along? In Canada such refunds are not generally subject to interest, so the money has certainly lost value, even on its most basic level. But for a growing business, what impact could that lost capital have had? With better margins, what opportunities could have been explored. Don’t miss out – investigate your property taxes early!

[i] https://missoulian.com/news/state-and-regional/property-tax-questions-pile-up-on-flathead-orchard/article_0ca72b60-6a73-5d64-9898-fc9981662965.html

Photo by Kristopher Roller on Unsplash