Most taxes in Canada are paid at the federal and provincial level, but local governments need revenue too – for snow removal, garbage collection, fire departments and police departments, and so forth. So taxation also exists at the municipal level, as homeowners know all too well, because it comes mainly in the form of property taxes. Municipal governments are mainly funded through property taxes on residential properties, industrial properties, and commercial properties. These combined property taxes account for ten percent of total taxation in Canada.1
Property is taxed in two different ways: the first way is a yearly tax on the assessed value of the property according to the real estate market (that’s the value of both the land and the buildings on it). Property tax is “levied on the full value of the property, not the owner’s equity.”3 The second way is a land transfer tax which is levied on the sale price of the property. (All provinces except for Alberta, Saskatchewan and rural Nova Scotia levy this land transfer tax.)1
In Canada, the standard property tax (vs. the land transfer tax) differs from other forms of taxation such as income tax and sales tax because it is a tax on an asset rather than a flow of money. This also means that they are not based on the owner’s ability to pay, which means that property tax can be a great burden to some property owners. Property taxes are also regressive. A progressive tax like income tax means that the more money you make, the larger percentage of your income goes to taxes. But property taxes are regressive, and for these taxes the more money you make, the smaller the percentage of your income goes to paying property tax, because the property tax is irrespective of your income.
The standard property tax differs from other forms of taxation such as income tax and sales tax because it is a tax on an asset rather than a flow of money. This also means that they are not based on the owner’s ability to pay, which means that property tax can be a great burden to some property owners. Property taxes are also regressive. A progressive tax like income tax means that the more money you make, the larger percentage of your income goes to taxes. But property taxes are regressive, and for these taxes the more money you make, the smaller the percentage of your income goes to paying property tax, because the property tax is irrespective of your income.
Properties are assessed for their real estate value and the amount due in taxes is based on this assessed value, so it’s important for property owners to pay close attention to how their property is being valued and whether the assessment is accurate. Assessors base the value on sales of similar properties and they factor in all the same things that a real estate agent or prospective buyer would. But it’s not always 100% of the property’s value that is taxed. For example, in Saskatoon, property taxes are levied on only 70% of a property’s value.4
The second part of calculating the amount due in property taxes on a specific property is the tax rate, also known as the “mill rate” from the Latin for “thousandth”, because it is a rate centered on dollars due in tax per every $1000 of property value. The mill rate is based on the financial needs of the local taxing jurisdiction and usually varies depending upon whether it is a residential or non-residential property. For example, in Ontario the residential rate is 85% of the non-residential rate. 3
While property taxes are hardly something that a homeowner could shrug off, they are on average far less of a tax burden than income tax. Rates vary greatly one might say that for most Canadians, an average of 21% of their income goes towards income taxes, and only around 3% to property taxes. Quebec, Ontario, and Manitoba are three provinces where property taxes due each year are a larger percentage of income than the national average. Here is a list of cities with the lowest taxes.
Another form of local taxation is in licensing. The Constitution Act, 1867 allows for “Shop, Saloon, Tavern, Auctioneer, and other Licences in order to raise Revenue for Provincial, Local, or Municipal Purposes”. 2
Although local governments bring in a lot of revenue through these forms of taxation, they also hand down grants and subsidies from the provincial governments in order to make their budgets. Some cities need more money than others, some make more money than others through higher property values. These are all things to consider when contemplating a move to a new city, and it’s always important to be educated about the taxes you are paying so that you know you are paying only your fair and legal amount.