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Do residential tenants pay property tax? Of course they do

Just about everyone believes that residential rental property owners pay the property tax as part of their operating costs. It’s a universal misperception that politicians and municipalities exploit to the detriment of landlords.

Every tenant in every municipality in Ontario pays property tax as part of their rent. These property taxes are a “hidden” part of each tenant’s living expense obligation to their municipality, which provides them with education, police, fire, garbage collection, roads and more.

That means that many residential rental tenants, especially the vulnerable fixed-income and affordable-housing tenants, are paying taxes that are upwards of two times more than the owners of a single-family home or condo.

The misperception derives from the landlord’s obligation to collect and remit this tax on the tenant’s behalf, much like every retail outlet collects GST/HST on behalf of the consumer.

In Ontario, a rent reduction is allowed under section 131 of the Residential Tenancies Act (RTA) when the municipal property taxes for the residential complex have decreased by more than 2.49 per cent from one year to the next. But like many things, this does not apply to public housing.

To calculate the total rent reduction, subtract the current year’s lower property tax amount from the previous year’s higher tax amount and then divide the result into the previous year’s amount. Then multiply that by 20 per cent (seven+ units, or 15per cent for six or less). Multiply the tenant’s monthly rent by this percentage to determine the new reduced rent amount. For example, the 2018 property tax was $19,833.72 and $17,867.59 for 2019. Dividing the difference of $1,966.13 by $19,833.72 = 9.91% x 20% = 1.98%. The tenant’s monthly rent of $1,115.50 x 1.98% = $22.12/month rent reduction.

It doesn’t matter what the property tax rate is. The RTA assumes that the average amount of property tax a landlord pays in a building with seven or more units is 20 per cent of the total rent revenue and 15 per cent for six or fewer units. However, the apartment building tax rate in many municipalities is often notably less than that. The rent reduction is applied almost immediately.

All municipalities then send out a letter (as required by the RTA) directly to every tenant in a building providing legal advice that they are entitled to a rent decrease, and that no permission is required from the Landlord and Tenant Board (LTB).

A landlord can pass on an extraordinary increase, which occurs when the increase is greater than the current rent increase guideline plus 50 per cent of the same guideline. For example, this year the guideline is 1.8 per cent so an extraordinary increase would be 1.8% + 0.9% (50% of 1.8%) = 2.7%. The landlord must then undertake a grueling and complex LTB application called a Rent Increase Above the Guideline (AGI). It takes an average six months to set an LTB hearing date after the application has been submitted, and another six months for the LTB to render its decision. The decision isn’t automatic like it is for tenants, despite the subject matter being exactly the same.

And, although the landlord paid the tenant’s property tax up-front, the landlord must give the tenant a minimum of 90 days’ advance written notice of the rent increase.

And the rent increase cannot occur until the next anniversary date of each tenant’s annual rent increase.

And the tenant has the right to challenge the AGI application at the LTB hearing.

The Municipal Housing Assessment Corporation (MPAC) reassesses a property’s value from time to time, most often when it changes ownership. MPAC doesn’t set the tax rate. It only establishes property value, on which the tax amount is determined. The municipality then sets the property tax rate for each building type. In the City of Oshawa, for example, the rate for single-family homes and condos is 1.41 per cent. Oshawa taxes apartment buildings at 2.48 per cent (2018), almost double.

Based on research conducted in May 2017, all the municipalities of the Region of Durham were in the top 20 “worst offenders” of this tax policy. Oshawa appears to be the third highest in the province, next to Hamilton and Orangeville. Clarington is No. 5, followed by Whitby, Ajax, Pickering and Scugog.

Some municipalities make no distinction between apartment buildings and single-family homes including Barrie, Markham, Vaughan (apartment building property taxes are lower than single-family homes there), Stouffville, Newmarket and Aurora.

It’s unlikely you’ll find any government documentation that explicitly states that residential rental tenants pay property taxes even though it’s common knowledge that every commercial tenant pays their prorated share of the commercial property tax via TMI – taxes, maintenance and insurance.

Do residential rental property tenants pay property tax? Of course they do. It’s built into the RTA. It’s just cleverly disguised to shield government from direct accountability to, and the ire of, residential tenants when property tax negatively impacts tenants.