«Expanded split assessment is necessary, but if this is how they tax that segment, it could be even worse for some small business than the status quo.»
Everybody knows land is expensive in Vancouver. But Brian Wener is getting increasingly worried about new taxes coming to the air above his head.
Wener, who runs Tuesdays Fine Drycleaners in Kitsilano, has struggled to keep up with rising property taxes in recent years, as have local coffee shops, pubs, book stores and many other mom-and-pop businesses across the city. Now, Wener worries the airspace above his West 4th Avenue business will eventually be hit with two new taxes from the B.C. government: the so-called speculation tax and the additional school tax.
“It sounds crazy,” said Wener. “We are already getting squeezed, and now we are going to get these new taxes on us? … You’re getting taxed on air?”
Wener describes himself as a “very typical” Vancouver small-business owner. He’s a commercial tenant who pays “a triple-net lease,” meaning he pays rent, maintenance fees and property taxes to his landlord.
Like other commercial tenants, he has long paid some amount of tax on the airspace above his business. That’s because B.C. properties are assessed — and taxed — based on their “highest and best use.” Effectively, that means older businesses in single-storey buildings, like Tuesdays’, are assessed on their development potential, which could be a multi-storey building with commercial space on the ground floor and residential units above.
Typically, the whole property — both the existing ground-floor business and all the unbuilt residential potential above — would be taxed at the commercial rate, which is about four times higher than the residential rate. Critics have long decried this system as unfair to small businesses. Many say a possible solution could be “split assessments,” meaning those unbuilt condos in the airspace over the property would be taxed at the residential rate instead of taxing the entire property at the much-higher commercial rate.
Tuesdays Fine Drycleaners happens to be one such property that has received a split assessment. That means Wener’s leased property — and others like it — have benefited from some measure of tax relief in recent years. Now, though, that benefit could be negated, when the airspace over their shops gets hit with two new taxes announced last year by the B.C. NDP: a surtax on homes valued above $3 million and a speculation and vacancy tax focused on certain high-cost urban areas and targeting people who own multiple residential properties.
The B.C. Ministry of Finance confirmed in an emailed statement that the additional school tax (or AST) would apply for the airspace above “properties that have had themselves re-classed from commercial to residential.”
The speculation and vacancy tax (SVT) will not apply this year, the ministry’s statement said, as there is “an exemption for vacant residential land to give existing property owners time to take steps to develop their residential property.”
In future years, however, it’s expected that the unbuilt development potential above businesses with split assessments, like Tuesdays’, could be hit with both the SVT and the AST.
“Some landowners have taken steps to have a portion of the airspace above their commercial land rezoned for residential purposes and reclassified for tax purposes,” the ministry’s statement said. “Taxpayers are entitled to arrange their affairs to reduce their tax burdens; however, like any other property owner who has vacant or high-value residential land, they will now be subject to the SVT and AST unless that residential land is put to use.”
The Ministry of Finance didn’t make anyone available for comment Thursday, Friday or Monday. The ministry couldn’t provide the number of commercial properties with split assessments that could be subject to the additional school tax and the speculation tax on their airspace.
But Vancouver property tax consultant Paul Sullivan estimated the new taxes could eventually affect “hundreds” of commercial properties in Metro Vancouver.
Sullivan, a partner at Burgess, Cawley, Sullivan and Associates, has calculated that some commercial properties that get hit with these new taxes on their unbuilt residential potential could face higher overall tax bills than if they had never received split assessments.
The speculation tax and the additional school tax have received fairly widespread support, polling from Research Co. has found. Both have been touted by the government as measures to tackle the housing crisis and stabilize the market.
But applying the tax to the air above some mom-and-pop businesses seems to serve a different purpose, said Sullivan. And, he noted, split assessments have been heralded by many as a possible solution to the problem of businesses, particularly in Vancouver, hammered by soaring property taxes.
“Everybody says split assessments are the answer,” Sullivan said.
In an emailed statement Monday, Vancouver’s director of financial services, Melanie Kerr, said: “To further address challenges faced by small businesses, in particular those affected by tax increases arising from development potential, city staff are working with an intergovernmental working group to identify viable solutions such as split assessment.”
Aaron Aerts, a Vancouver-based economist with the Canadian Federation of Independent Businesses, said news of the province’s approach to taxing these split-assessment properties “seems to be bad news for small business in B.C. who were looking for help — it may be the exact opposite.”
“This is problematic to me because as the province looks to fix the assessment process, more small businesses may fall into this definition,” Aerts said. “Expanded split assessment is necessary, but if this is how they tax that segment, it could be even worse for some small businesses than the status quo.”
CLICK HERE to report a typo.
Is there more to this story? We’d like to hear from you about this or any other stories you think we should know about. Email [email protected].