Property Taxes and Affordable Housing: Can Assessment and Property Taxation Be Part of the Solution?

The Canada Mortgage and Housing Corporation (CMHC) defines affordable housing as permanent living options costing less than 30% of a household’s before-tax income.^[i] Affordable housing provides an opportunity for Canadians to access the housing market by respecting the financial limitations that serve as an impediment to many. The number of Canadians in need of affordable housing continues to climb, with various organizations pegging the number to be in the millions, and few question the need to create more affordable housing options. Indeed, addressing this issue was a critical part of the federal government’s 2023 Fall Economic Statement, with the announced Canada Housing Action Plan outlining several strategies aimed at increasing housing supply. In addition, the Affordable Housing Fund will receive an influx of $1 billion over three years to support the construction of more than 7,000 units.^[ii] Beyond the requirement for more funding, another important question is whether enough is being done from a taxation standpoint to support such aggressive targets.

Background

In its most effective form, property valuation is objective. It is a data-driven exercise aimed at establishing accurate and equitable representations of market value. In contrast, property taxation is most effective when it reflects the strategic vision of the taxing authority and, by extension, the electorate. Whereas property taxation is a mechanism of political will, valuation is the exercise of professional expertise. By changing valuation parameters applied to two similar properties, one can achieve different estimates of market value. Conversely, by changing the taxation structure, two properties with the same market value can end up having different tax liabilities. Administrators and elected officials should consider whether their current property valuation and tax systems—the various approaches, classes, rates, and rebates—reflect and support their strategic targets.

Using tax policy as a mechanism to adjust the tax liability between two properties of equal value is nothing new; property tax mitigation (or elimination in certain cases) for not-for-profit entities and religious institutions, among others, is commonplace across Canada. In general, property tax reductions or exemptions are often used when:

• A property or use benefits the wider community.
• The unadjusted tax liability proves to be an impediment to the success of a specific use that is desired by the wider community.
• There is desire to incentivize growth in a specific sector (identified by geography, property type, business type, or density, to name a few).

Current State

An oft-repeated valuation approach to affordable housing is to disregard the actual rents paid for this type of property and utilize rents achieved in the wider housing market instead. This is understandable because valuation and/or legislative standards typically require the use of open market or “unencumbered” indicators. Whether through a contractual obligation or by choice, a property owner renting a unit as affordable housing is not renting out the unit at the rate the open market can bear. As such, it can be suggested that the rents are not reflective of market value. Consequently, in some jurisdictions, there is no differentiation between the valuation parameters or approaches utilized for a property rented at market value and one providing affordable housing. Thus, where two identical buildings exist, but one serves as affordable housing, there are jurisdictions in Canada where both properties will have the same tax liability.

Property taxes are an inescapable cost for most businesses operating in Canada. While not-for-profits operating affordable housing assets are often exempt from this type of taxation, many other entities are not. If the assessment of affordable housing disregards the actual capped rents charged and uses open market leases instead, then affordable housing pays far more for property taxes as a percentage of total rent than comparable open market units. This would appear to contradict the fundamental principle of property assessment that the value of real property is a proxy for the taxpayer’s ability to pay tax. Essentially, where affordable housing is assessed and taxed the same as market-rate housing, the tenants in affordable housing are assumed to be able to pay just as much as those in open market rental units, or it is assumed that the owners of affordable housing are willing and able to pay the same level of property taxes as owners of other types of housing earning far higher levels of rental income. The capped rents and disproportionately high tax burdens serve as a deterrent for developers to create more affordable housing, which in turn increases the cost and/or decreases the availability of housing for those who can least afford it.

Regardless of the rents used in deriving a property’s value, the underlying expectation is that the assessment will reflect what the property would sell for on the open market. Where sales data supports the position that affordable housing is worth the same as market housing, the solution rests with the taxation of these assets. However, if the data does not support equitable treatment between the two property types, or there is an absence of data, then the solution may well rest with the valuation approach itself. 

Reframing Affordable Housing

To understand the opportunities that exist for supporting affordable housing from a property valuation perspective, one must reflect on the idea of “market value.” More specifically, it is worth investigating if the players in the market for affordable housing are the same as those involved in market housing, which are discrete elements on the housing continuum. Whether intentional or not, by using the same parameters (e.g., rents, vacancy rates, capitalization rates, sales indicators, etc.), valuators put affordable housing properties and market rent properties in the same “market” for assessment purposes.

In Alberta, households on affordable housing waitlists are prioritized according to the province’s Social Housing Accommodation Regulations (SHAR), which set out a scoring system according to need.^[iii] Similar systems exist in other areas of the country based on the CMHC’s definition of affordable housing. The ability to access affordable housing is contingent on income and other factors; not everyone meets the criteria, making the “market” for this housing sector distinct. Conversely, market housing is open to anyone who can afford it, irrespective of their income level. Owners and operators of affordable housing can differ as well. Affordable housing properties often provide additional services and programs to support their tenants that are not typically available in market housing. The different properties serve different groups with different needs, so it is unsurprising that there is market-specific expertise that extends to site operations. Affordable housing rents are not “below typical” or “non-market”—these terms presuppose that affordable and market housing units compete directly with one another. Whether we are referring to the operators or tenants, we are undoubtedly referring to distinct markets, each operating within the range of housing options available in Canada.

Opportunities Exist

Acknowledging this distinction and adjusting the valuation and/or taxation approaches on affordable housing can be part of possible solutions to support more development. For example, Ontario has communicated an intent to explore changes to its system. In the government’s 2022–2023 Housing Supply Action Plan, it was stated:

“Property tax assessments for affordable rental housing are established using the same approach as regular market units. We will explore potential refinements to the assessment methodology so that it better reflects the reduced rents that affordable housing providers receive.”^[iv]

In other areas, such as British Columbia, tax incentives exist for “social revitalizations” (under which affordable housing is categorized) that are permitted through the Community Charter.^[v] It is clear that when the issues are identified and the political will exists to tackle them, various remedies can be made available to help support affordable housing development through property valuation and taxation.

Final Thoughts

Current availability and the pace of development for affordable housing are below the country’s needs, and it will take a concerted effort from all stakeholders to achieve the desired targets. As evidenced by the municipalities that now require for-profit developers to set aside units for affordable housing, we have arrived at a situation where it will take more than not-for-profit entities and government funding to bridge the housing gap. If there is serious intent on meeting our affordable housing needs, then every opportunity to support these projects should be explored, including how such properties are valued and taxed. Governments at all levels should look at further aligning their tax policy with their affordable housing strategies.

Scott Powell
Director and Team Lead, Property Tax Complex
scott.powell@ryan.com

^[i] “About Affordable Housing in Canada,” Canada Mortgage and Housing Corporation, https://www.cmhc-schl.gc.ca/professionals/industry-innovation-and-leadership/industry-expertise/affordable-housing/about-affordable-housing/affordable-housing-in-canada (June 20, 2024).

^[ii] “Canada’s Housing Action Plan,” Government of Canada, https://www.canada.ca/en/department-finance/news/2023/11/canadas-housing-action-plan.html (June 20, 2024).

^[iii] “Affordable Housing Programs,” Government of Alberta, https://www.alberta.ca/affordable-housing-programs (June 20, 2024).

^[iv] “More Homes Built Faster,” Government of Ontario, https://www.ontario.ca/page/more-homes-built-faster (May 1, 2024).

^[v] “Incentives for Housing,” Government of British Columbia, https://www2.gov.bc.ca/gov/content/housing-tenancy/local-governments-and-housing/policy-and-planning-tools-for-housing/incentives-for-housing (June 20, 2024).