The real lowdown on government downloading

It’s municipal budget time. Councils, like most employers everywhere, are facing rising costs. For example, the government of British Columbia is eliminating health care premiums, replacing them with a new employer’s health care tax. However, the province continues to charge residents half of the previous rate during the “phasing out” period -—in other words, double-taxation.

This health care tax on employers started January 1, 2019 and applies to contractors too, of course. Wearing their employer’s hat, municipalities complain the new tax is a form of downloading by the province. In their search for new revenue to cover the new premiums, they are saying property taxes must be increased. For them, it’s an easy fix.

Municipalities are employers too. So when employer costs get downloaded, they turn to taxpayers to make up the shortfall.

Municipalities are flush with cash from various fees
In fact, municipalities should be the last to complain about downloading. As revealed in their annual deliberations, municipal budgets often show enormous revenue derived from residential construction in the form of building permits, development fees, development cost charges, and in Toronto, a Land Transfer Tax.

The province of Ontario collects almost $3 billion in property transfer taxes. Toronto collects $800 million. A provincial Property Transfer Tax also exists in B.C. — the province collects about $2 billion, and amount that has doubled in the past 6 years due to the rising cost of land and construction.

Most municipalities in Canada cannot charge a Land Transfer Tax like Toronto can. Instead, many charge building permit fees that resemble land tax taxes more than fees. This type of tax may potentially be charged multiple times during the development of a single home — A developer buys from a landowner and the tax is paid; the tax is paid a second time when a builder buys a lot in a subdivision from a developer; the tax is paid a third time when the home is built and sold. Of course, all three transfer taxes add to the cost of the new home for the buyer.

Municipalities are charging fees for construction values, not fees for service
Fees normally have some connection to the cost of providing a service, and should be charged under the common law principle of reciprocity, eg. fair market fee for reciprocal service. However, many municipalities calculate their fees based on the “value of construction”, just like a Land Transfer Tax. That makes them a tax based on market value with no relationship to the actual cost of doing the land transfer. The calculation of “value of construction” often includes the contractor’s profit, workers’ compensation, liability insurance, employment insurance and other factors not related to the cost of delivering actual building inspection services.

As the housing market costs rise, including materials costs such as lumber due to forest fires, many municipalities generate ever-increasing amounts of revenue that further drive up the cost of the home for the purchaser. Yet municipal costs to inspect the home remain the same. The result is that building departments post enormous surpluses for the municipality, often hundreds of thousands of dollars.

Home buyers as cash machines
Municipal surpluses were highlighted in a recent article by William B.P. Robson, C.D. Howe Institute – Canada’s Cities are Richer than We Think . Robson says, “Their liabilities are much smaller than their assets. And local governments are adding to their net worth with ongoing surpluses.”  Big contributors to those surpluses are building permit fees — another example of homebuyers being used as a cash machine by government. A more transparent and legitimate calculation of permit fees would be based on the real cost of inspections, such as trips to the site.

Municipalities are also not shy about adding even more costs to housing through other means, including Development Cost Charges (DCC). The B.C. government has a Best Practices Guide that says DCC’s must be applied with “fairness and equity, accountability, and certainty.” Despite the guide’s assertion, some municipalities in the province have recently raised their DCC’s by triple digits, a big shock to builders and homebuyers. One multi-family developer told a municipal council the resultant cost would increase from $980 to $7000 per unit.

The published numbers are proof of surpluses
In addition, DCC’s are often used to fund new parks. However, this does not prevent municipalities from asking developers to set aside green spaces during a rezoning while still charging the DCC’s.  So much for fairness, equity, accountability, certainty….and housing affordability!

As much as elected officials might claim to support affordability at election time, the numbers don’t lie. It’s time for municipalities to stop crying wolf — the real lowdown on downloading is clearly evident in their own financial reports.

Casey Edge is CEO of the Victoria Residential Builders Association and a passionate advocate for the home building industry in Canada.