Guide to Property Assessment in Ontario: Part II
- Part II - Preparing Property Assessments
Part II - Preparing Property Assessments
This chapter describes the main features of Ontario’s property assessment system.
The main topics are:
- What is assessed
- How current value assessments are determined
Ontario’s Assessment Act outlines what properties are assessable for taxation. The Act defines real property as:
- Improvements (such as buildings)
This does not include things like furniture, jewellery, automobiles or other personal property.
In accordance with the Act, all properties are assessed, but some are exempt from taxation and many exemptions have conditions associated with them. Some examples are:
- churches, cemeteries, public educational institutions and public hospitals;
- property owned by some non-profit organizations and charitable institutions such as the Boy Scouts, seminaries of learning and the Canadian Red Cross;
- conservation lands;
- property improvements for seniors or individuals with a disability, who would otherwise have to live in other premises where on-site care is provided;
- property owned by municipalities, provincial and federal governments (payment-in-lieu of taxes).
How Current Value Assessments are Determined
Ontario is one of the largest assessment jurisdictions in the world. MPAC assesses more than 4.7 million properties using the most up-to-date technology and tools available in the property assessment industry.
Regardless of the tools used to calculate values, up-to-date property data is key to determining accurate assessments. The following sections explain how MPAC collects this data, how property assessments remain current, how properties are classified and the valuation methods applied for different property types.
MPAC’s property database, which contains over two billion pieces of data, is one of the most detailed in the world. This data is updated regularly using a variety of sources, including:
- land title documents registered at Ontario Land Registry Offices;
- building permits issued by local municipalities;
- discussions and correspondence with property owners and on-site property inspections;
- dedicated re-inspection programs; and
- income and expense information for commercial, industrial and rental properties (such as apartment buildings or hotels);
Under the Assessment Act, a MPAC representative (identified in the Act as an assessor) is permitted to inspect a property and/or request information to assist in preparing the current value assessment. During an on-site inspection, a MPAC representative will observe, record and verify relevant physical details of the property. This may include both an interior and exterior review of the property. MPAC is permitted to conduct a property inspection provided:
- The assessor (MPAC representative) produces proper identification.
- The inspection is at a reasonable time.
The inspection or request for information is for current value assessment purposes.
MPAC is committed to managing the collection, retention and dissemination of personal and non-personal information in a manner which complies with the requirement of the Assessment Act, and the Municipal Freedom of Information and Protection of Privacy Act and all other relevant legislation, regulations and judicial rulings.
The valuation date is the fixed day as of which all properties are valued. For assessment purposes, the value of a property reflects market conditions as of that day. This value is used by municipalities when setting property taxes for the following year. The chart below illustrates the province-wide assessment update cycle since 1997.
|Taxation Year||Year in which assessed value was updated to reflect market change||Valuation Date (Assessed value calculated as of)|
|2012||January 1, 2012|
|2008||January 1, 2008|
|2005||January 1, 2005|
|2003||June 30, 2003|
|2003||2002||June 30, 2001|
|2000||June 30, 1999|
|1997||June 30, 1996|
Beginning in 2009, eligible increases in current value assessments will be phased-in over a four-year span. For example, if a property is assessed at $180,000 on its 2008 assessed value and is increasing to $220,000 on its 2012 assessed value, the property will not be taxed on the value of $220,000 until 2016. The increase will be phased in as follows:
- $190,000 in 2013;
- $200,000 in 2014;
- $210,000 in 2015; and
- $220,000 in 2016.
The phase-in program does not apply to decreases in assessed value, which are applied immediately.
Assessed values are updated to reflect any changes that occur to a property. Otherwise, from 2009-2012, the current value assessment stays the same for each of the taxation years to which the valuation date applies. In the Assessment Act, current value is defined as “in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer.” This means the price a property might reasonably be expected to sell for, in its current condition, on the open market. For assessment purposes, MPAC refers to this estimated value as “current value assessment.”
Key characteristics of current value assessment are:
- it is the estimated value of a property at a specific point in time;
- it is expressed as a dollar value;
- it assumes a transaction between unrelated parties in the open market, with no advantage being taken by either party;
- it assumes the property is being used to its highest potential; and
- any encumbrances, such as a below market lease, are disregarded.
Current Value vs. Sale Price
Current value is the most probable price a property should bring in a competitive and open market under all conditions of a fair sale. While a sale price is a good indication of current value, it is a recognized appraisal principle that a given property can sell at any point within a range of values. This is because the real estate market is not perfect and two identical properties can sell for different amounts depending on such factors as supply and demand of housing in the local real estate market, preferences of buyers and sellers and the negotiation skills of the parties. A selling price represents the price a buyer and a seller agree to in one particular transaction, whereas current value assessment is based on the most probable sale price based on an analysis of all sales transactions from the local real estate market.
In determining the current value assessment of some properties (e.g., farms and managed forests), the Assessment Act requires that the current use of the land be considered, not the potential use of that land in the future. For example, a farm property next to an urban community may sell for future residential subdivision development purposes; however, as long as it is farmed, it will be assessed as a farm.
All property is assigned a classification according to its use. This is an important part of the assessment and taxation process. The property classification determines the tax rate that will be applied to each property by the municipality.
Since some properties may have multiple uses, portions of a property may be assigned to different classifications. For example, a building with an apartment above a retail store would have the upper portion in the residential class and the lower portion in the commercial class.
There are seven major property classes:
- Class 1 — residential
- Class 2 — multi-residential
- Class 3 — commercial
- Class 4 — industrial
- Class 5 — pipeline
- Class 6 — farm
- Class 7 — managed forests
In addition to these major property classes, municipalities may have one or more of the following optional classes or sub-classes:
- new multi-residential
- office building
- shopping centre
- parking lots and vacant land
- large industrial
- professional sports facilities
- farmland awaiting development
Five additional property classes were created by the Province of Ontario to reduce the business education taxes paid by commercial and industrial properties constructed after March 2007.
- Commercial (new construction)
- Office building (new construction)
- Shopping centre (new construction)
- Industrial (new construction)
- Large industrial (new construction)
Approaches to Value
There are three common approaches for determining the current value of any property and for determining current value assessments: the sales comparison approach, the cost approach and the income approach. The following chart outlines the property types commonly valued using each approach.
|Approach||How current value assessment is determined||Examples of property types|
|Sales comparison approach||Sales comparison approach||Single-family residence
|Cost approach||Current value of land + cost of improvements –depreciation = value of property||Manufacturing plant|
|Income approach||Analyzes future benefits (e.g., income-producing potential)||Hotel, Office building, Apartment building|
Sales Comparison Approach
In Ontario, over 90 per cent of properties are valued using the sales comparison approach. This approach provides a dependable indication of current value and is best suited to residential properties and other types of property that sell often on the open market.
The sales comparison approach to value estimates the current value of a subject property by adjusting the sale prices of comparable properties for differences between the comparable properties and the subject property.
In addition to sales, MPAC experts regularly analyze property information through a number of sources, including:
- land title documents;
- building permits;
- on-site property inspections and communication with property owners; and
- income and expense information.
MPAC’s database contains over two billion pieces of data, and is one of the most detailed in the world. Like all assessing authorities, MPAC is able to determine accurate values for large groups of properties based on common data and mass appraisal techniques. In addition to recent sales, MPAC looks at the key features of every property. Although as many as 200 different factors are considered when assessing the value of a residential property, there are five major factors that account for 85% of the value:
- lot dimensions;
- living area;
- age of the property, adjusted for any major renovations or additions; and
- quality of construction.
Other key features that affect value include:
- secondary structures such as garages, boathouses and pools;
- basement area (finished & unfinished);
- type of heating;
- air conditioning;
- number of bathrooms; and
Site features can also increase or decrease the assessed value of your property. These include:
- traffic pattern;
- proximity to a golf course, hydro corridor, railway or green space; and
- whether or not the property is located on a corner lot.
Under Current Value Assessment, recent sales of similar properties are analyzed and used as an indicator of the value of residential properties. Location is the most important factor in determining the assessed value of any property. MPAC analyzes every property and land sale transaction in Ontario. MPAC divides the province into approximately 140 market areas and then further divides each of those areas into neighbourhoods and sub-neighbourhoods to evaluate the degree to which location influences the market area. For waterfront properties MPAC typically looks at the entire lake or a group of similar lakes. For condominiums, each condo plan is typically considered its own neighbourhood.
The cost approach is based on the theory that an informed purchaser would not pay more for a property than it would cost to produce a substitute of equal utility, assuming no costly delay in construction. It is often referred to as the “bricks and mortar” approach and includes several steps.
- First, a current value for unimproved land is determined using the sales comparison approach.
- Then, the replacement cost of fully functional modern improvements comparable to existing buildings is calculated. MPAC uses its up-to-date construction cost database together with the physical property information, such as building size and construction materials, to determine a replacement cost.
- Next, all accrued depreciation to the existing property is determined from physical, functional and economic conditions, both within and external to the property.
- Finally, the land value is added to the building cost and depreciation is deducted, resulting in a current value assessment for the property.
- As a final check, the calculations are compared to actual sales to ensure the accuracy and quality of the overall product.
The cost approach is a long-established technique, which can be applied to properties that are structurally diverse (e.g., industrial buildings), where rental data is typically not available, or as a supplement to other approaches to value.
The income approach presumes the value of certain properties can be determined by estimating the present value of all future benefits. Future benefits typically include net income generated by the property and the proceeds from the sale at the end of the investment.
Income valuation techniques vary by property type but, in simplest terms, they generally include the same fundamental steps.
- First, market rents are determined to establish the potential revenue generation of theproperty.
- Then, vacancy and legitimate expenses incurred to maintain the property are deducted from the rent to calculate net operating income.
- Finally, the net operating income is converted into an estimate of value using a market capitalization rate. The capitalization rate is determined from an analysis of market transactions and a variety of other market and financial information.
The income approach is ideally suited for larger investment types of properties such as office buildings, shopping centres, hotels and apartment buildings. MPAC determines current value assessments for these properties using the same techniques practiced by vendors, purchasers and their financial advisors.
Some types of properties are difficult to assess using the three approaches to value because:
- they seldom trade in the marketplace;
- when they do trade, the sale price usually includes non-assessable items that are difficult to separate from the sale price;
- they cross municipal boundaries; and/or
- they are of a unique nature.
To arrive at assessed values for these types of properties, regulated rates may be assigned by the Province of Ontario. Types of regulated properties include power generating stations and linear properties such as railways.
Generally, linear properties include distribution lines or other facilities that travel across municipal boundaries. Some examples include: railway rights-of-way, gas pipelines and electricity transmission or distribution rights-of-way.
The Province of Ontario also determines regulated rates to be used for determining the assessments of managed forest properties.
Accurate farmland values in Ontario are determined by extensive analysis, using only farmer-to-farmer sales as legislated by section 19(5) of the Assessment Act. Farm values are based on the land’s productive capability and other factors such as climate and location. It’s important to note that the value of a farm is not based on the land’s potential use (e.g., development).
Properties that are used farmed by the owner and/or tenant are valued using bona fide farmer-to-farmer sales. The primary factors used in determining a farm’s current value assessment include the following:
|Farmland||Farmland is assessed according to its productivity value; that is, the ability of the land to produce crops and/or maintain livestock. Productivity rates are established by considering such factors as soil texture, topography, drainage an depth to bedrock.|
|Residence||The value of the residential structure is determined by establishing a replacement cost of the improvement(s) less any depreciation.|
|Residence site||If a farm residence is occupied by the person(s) farming the property, a one-acre parcel of land is valued at the farmland rate. The farm residence and one-acre parcel is classified in the residential tax class. If the residence is occupied by someone other than the person(s) farming the property, it is considered a non-farm residence and any land, not being farming is valued at residential land values.
If the residence is occupied by someone other than the person(s) farming the property, it is considered a non-farm residence. In this case, one acre of land is valued at the rural residential rate.
|Farm outbuildings||A farm outbuilding is any improvement, other than a residence, that is used for farming operations (e.g., barn, silo, grain bin). Outbuildings are valued based on their design, quality of construction and size.|
All other buildings (e.g. retail store) not used in the farm operation are valued based on their design and quality of construction and size. Other buildings are classified according to their use.
Although MPAC may assess a property as a farm, it is taxed at the residential rate unless placed in the Farm Property Tax Class by the Ministry of Agriculture, Food and Rural Affairs (OMAFRA). Additional information about the Farm Property Tax Class is available at http://www.omafra.gov.on.ca or by contacting the Ministry of Agriculture, Food and Rural Affairs (OMAFRA) at 1 800 469-2285.