August 2016

NCIA Ponders MGA Policy Decisions

With the Municipal Government Act (MGA) review now in our rear view mirror, many people are wondering what lies ahead and in some cases what actually happened.

As one of the largest pieces of legislation in Alberta, the MGA impacts individuals, businesses and communities alike. It is essentially the guide to how our province’s municipalities operate so it is important that it remains relevant.

Earlier this year, the Alberta Government wrapped up their multi-stakeholder review of the legislation. The process, which began in February 2014 explored issues around:

  1. Planning and development
  2. Governance and administration
  3. Assessment and taxation.

During the review, NCIA took every opportunity to clearly articulate industry’s unique position on a number of issues. In an effort not to bog everyone down with too many details, we’ve provided a summary of specific MGA policy questions, our position, the subsequent decisions, and what they may mean.

POLICY ISSUE: STREAMLINED INDUSTRIAL ASSESSMENT (CENTRALIZATION)

Question: Should all industrial property be centrally assessed?

Recognizing that Alberta is currently the only province without a centralized assessment authority, NCIA pressed for the establishment of an independent body that would be governed by the province.

Our view is that policy should continue to be set by the province, while assessment would be better if left to a tripartite commission comprised of provincial, municipal and industry representatives. This change would not only help promote trust, transparency and accountability, it would ensure consistency between  Machinery and Equipment (M&E) property assessment.

Decision: All industrial property assessment has now been centralized within Municipal Affairs. We understand that establishing this new system will take time, with many details to be worked through so we will continue to watch this space.

POLICY ISSUE: INDUSTRIAL PROPERTY: STATUTORY ASSESSMENT LEVEL

Question: Should the 23% assessment reduction on M&E property continue?

NCIA advocated for existing legislation to remain unchanged.  A 23% reduction was put in place in the 1960s to recognize that municipalities provide little to no services to M&E properties. NCIA argued that this continues to be true today and as such, no change was required.

Decision: No changes to the legislation will be made in respect of this issue, including the fixed and immediate depreciation of 25% and the 40% floor. NCIA is quite pleased with this outcome.

POLICY ISSUE: SHARING OF PROVINCIAL REVENUES

Question: Should the province commit to legislated revenue sharing with municipalities?

NCIA asked the province to maintain status quo. Our position was that any decisions must carefully consider the total aggregate tax burden as well as continued economic competitiveness. We were concerned about how changes to provincial funding of municipalities would ripple into local taxation decisions.

Decision: We were pleased to see that no changes to the legislation will be made in respect to this issue.

POLICY ISSUE: LINKING RESIDENTIAL AND NON-RESIDENTIAL TAX RATES

Question: Should there be a legislated maximum ratio for property tax rates between non-residential properties and residential properties?

NCIA suggested a link of 2.00:1, as the appropriate rate ratio. This would have been an increase on the formerly legislated rate of 1.33. Going in, we knew that this would be a delicate issue. We also knew that given varying rate ratios across the province, the solution would have a few components.

In light of the current economic challenges, NCIA hoped to freeze rate ratios above the threshold.  We also asked that measures be put in place so that rural and specialized municipalities would need to consult with and gain approval from non-residential property owners representing the majority of the assessment base value in the region prior to raising their tax ratios.

Decision: Establish a maximum ratio of 5:1 between non-residential and residential municipal property tax rates. Municipalities with ratios beyond 5:1 will be grandfathered, but will only be allowed to increase any tax rates above the ratio if they increase their tax rates below the ratio by the same percentage.

This maximum ratio applies to the highest non-residential rate compared to the lowest residential rate. There will be no forced reduction of the split for those above the maximum rate. If they choose to lower the rate, then that becomes their new maximum.

NCIA recognizes that this decision may have a significant impact if Heartland municipalities decide to implement the maximum ratio cap. To date, competitive positioning appears to be guiding ratio decisions so we hope this trend continues.

POLICY ISSUE: SPLITTING THE NON-RESIDENTIAL PROPERTY CLASS

Question: Should municipalities be permitted to establish and set different property tax rates for sub-classes of improved non-residential property within an established guideline?

NCIA’s position was that a single tax rate applied to a broad base is the most equitable and efficient approach to municipal taxation. Our view is that subclass authorities not only add complexity in the tax and assessment systems, they have the potential to diminish regional competitiveness. As you can imagine, this was one of the more involved and contentious topics we explored with reviewers.

Decision: Allow the non-residential property class to be split into subclasses and taxed at different rates as defined in regulation. These tax rates will be subject to the maximum ratio limitations on all tax rates. The subclass categories will be defined by regulation.

Naturally, NCIA is disappointed with this outcome. It means municipalities can collect less tax from commercial businesses and instead, shift the burden to M&E property owners.

POLICY ISSUE: EDUCATION TAX ON INDUSTRIAL PROPERTIES

Question: Should education tax be levied against all industrial property?

In this case, NCIA felt strongly that the status quo should remain. Our position was that as it stands, the property tax framework for the energy sector contains substantial competitive inequities relative to other provinces and tax inequities within our own province.

Decision: We were happy to learn that no changes were made to the legislation.

POLICY ISSUE: INDUSTRIAL PROPERTY – PROGRESSIVE ASSESSMENT

Question: Should regulated industrial property be subject to progressive assessment?

NCIA advocated strongly against progressive assessment.  Our concern was that the practice could have a negative impact on project economics. There are a few issues here; (1) this practice would not match what is going on in other provinces; (2) it seems unfair for industry to pay additional upfront costs, well before a property has an opportunity to generate revenue; and (3) given the value of money over time, additional up front costs disproportionately worsen a project’s economic viability compared to costs incurred later in the project lifecycle.

Decision: For the most part this policy remains unchanged. The only modification going forward is that linear property will also now be subject to supplemental assessment once it is completed and in use.

NCIA appreciates that on the whole this is very positive.  Although some linear property will now be subject to supplementary assessments, progressive assessments were not introduced on Linear or M&E so that is good news.

POLICY ISSUE: INDUSTRIAL PROPERTY: VALUATION METHODOLOGY

Question: Should the buildings and structures and land at sites that are predominantly regulated industrial property be assessed using regulated rates and procedures? Should all railway property be assessed using a standard regulated rate methodology?

Our position was that wherever possible, the market value approach should be used to value properties (including Linear and M&E). Where this approach may not be appropriate, clearly defined alternative methodology would be selected to approximate market value. Of course, rates used to determine a market value proxy would need to be updated annually, including reviewing all tax policy in the assessment process.

Decision: Status Quo – with the exception of railway, which will now be assessed by the province using regulated rates. Honestly, we’re not sure exactly how this one will pan out. If a regulated model like the one in place today is used, instead of market value, then it could be positive.

Throughout the MGA process, we shared our expertise, conveyed relevant data and voiced concerns. We did our best to advocate for industry and to support a sustainable and vibrant region. Although some of the decisions did not go our way, for the most part it looks like the new legislative landscape won’t present too many challenges.