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Fundamentals of the Property Taxation System

Property taxation is the process of applying a tax rate to an assessed value of property to generate revenue to fund the delivery of services. The assessment of property serves as the framework to allocate property taxes among property owners. In Alberta, those property taxes are used to fund services delivered by municipal governments and regional and provincial programs such as K-12 education.

Municipalities are the authorities responsible to collect property taxes. The municipal tax portion is managed by the municipality to fund local operations and the education tax portion is transferred to the province to fund the Alberta School Foundation Fund.

Property taxes are not a fee for service, but a method of distributing the cost for local government services and education taxes fairly throughout a municipality.

Municipal property taxation

Each year, municipal councils will determine the amount of money they need to operate the municipality. From this amount, sources of revenue other than property tax, such as user fees and provincial grants, are subtracted. The remainder is the amount of money the municipality needs to collect through property taxes in order to provide services for the year.

Tax rates by assessment class and sub-class

The Municipal Government Act sets out the following classes of property and allows for sub-classes to be created for Classes 1-3:

  • Class 1 – residential
  • Class 2 – non-residential
  • Class 3 – farmland
  • Class 4 – machinery and equipment

A council may set different tax rates for each assessment class and/or sub-class with the exception of Class 4, machinery and equipment, which must be equal to the rate set for Class 2, non-residential.

Calculation of municipal tax rates

Once a municipality has determined the amount of property tax revenue it needs to operate for the year, the municipality uses that amount to calculate the tax rates. The following example will be used to explain the calculation of municipal tax rates.

Cost to operate municipality $ 1,000,000
Less: Revenue from fees and grants (300,000)
Property taxes required $ 700,000

The municipality has budgeted to collect $1,000,000 in revenue in the year. $300,000 of the revenue is budgeted to come from fees and grants, which means $700,000 must be collected from property taxes in order to operate the municipality.

In order to calculate the tax rates for each class, the municipality needs to determine what portion of the $700,000 tax requirement will be paid by each assessment class (residential, farm land, non-residential or machinery and equipment property). As the following formula demonstrates, municipal property tax rates are influenced by two factors: the amount of tax dollars required and the size of the assessment base that the tax dollars are spread over.

Municipal property tax rate = Tax requirement ÷ Assessment base (total value of taxable property)

For this example, the municipality’s assessment base consists of $65 million of taxable residential and farm land property and $15 million of taxable non-residential property.

    Residential and farm land property Non-residential and machinery and equipment property Total
Portion of tax requirement A $500,000 $200,000 $700,000
Value of taxable property in the municipality B $65,000,000 $15,000,000 $80,000,000
Municipal tax rates A÷B 0.00769 0.01333  
Mill rate   7.69 13.33  

If the municipality decided that residential and farm land property owners will pay $500,000 of the total tax requirement, then the municipality’s residential property tax rate will be 0.0077 (or 7.69 mills). The non-residential property owners will be responsible for the remaining $200,000 in taxes resulting in a non-residential tax rate of 0.0133 (or 13.33 mills).

Variance in municipal tax rates

Municipal tax rates vary between each municipality in the province. This can be attributed to a number of factors:

  • Most commonly, the variance of, and total value of differing property types within each municipality. For instance, a municipality with a small amount of non-residential assessment will typically require a higher residential tax rate in order to support the municipality’s operations. Alternatively, a municipality with extensive commercial, industrial, or linear assessment may allow it to maintain lower residential or non-residential tax rates.
  • Municipal councils may apply differing approaches to taxation strategy. Some councils may place a larger portion of the tax burden on residential properties in order to keep commercial taxes low to stimulate new business development in the community. On the other hand, some councils may place a larger portion of the tax burden on non-residential properties based on political preferences or because of the cost to service those properties.
  • Some municipal councils choose to set tax rates on vacant land at a higher rate to encourage owners of vacant property to either develop the property or sell the land which may result in the development of the property under new ownership.
  • The differences in services provided or how cost efficient one municipality is compared to another in the provision of services will cause variances in the required levels of taxation and subsequent tax rates. For example, the presence of a swimming pool will often demand higher levels of taxation due to the cost-intensive nature to operate a municipal pool.

Calculation of a property’s tax bill

The calculation of each property’s tax bill is performed in three steps:

  1. The municipal property tax portion is calculated by taking the municipal tax rate that is assigned to that type of property (i.e. residential, non-residential) and multiplying it by the assessed value of the property.
  2. The education property tax portion is calculated by multiplying the appropriate education tax rate to the assessed value of the property.
  3. Add the municipal tax and the education tax amounts together to determine the total property tax bill.

Example

         Municipal property tax =      $300,000 x 0.0070  ($2,100)

      + Education property tax =     $300,000 x 0.0025   (750)

            = Property tax bill             $2,850

 

Minimum property tax

A municipality may levy, by bylaw, a minimum amount of tax on each property. The minimum property tax is not a fixed surcharge; it is a tax floor amount. The minimum tax only applies to a property if the calculated tax rate multiplied by the assessed value of the property is lower than the amount set as the minimum tax.

Example

Council approves a property tax bylaw with a minimum tax payable of $100. The municipal residential property tax rate is set at 0.0025. A property is valued at $30,000 which when calculated ($30,000 x 0.0025) equals a tax bill of $75. Since this amount is less than the minimum tax of $100, the property owner would receive a tax notice of $100 owing.  

The minimum property tax is only applicable to the municipal portion of the total property tax payable.

Factors that may impact property taxes

When property owners see a significant increase in their property tax bill they often ask why. The reason can be attributed to many different factors.

Increases in municipal spending
A municipality may increase its spending for any number of reasons which may include new services, higher service levels, changes to employee compensation, or possibly the decision to fund major infrastructure investments through increased taxes.

Increases in the amount of education tax that the province requisitions from municipalities
The province may increase the amount of education tax that is requisitioned from municipalities. The increased requisition amount will have a direct impact on most property owners. 

Reductions in revenue from grants or fees
Reductions in grants from provincial or federal governments may require municipalities to increase property taxes to fund the shortfall in revenue. An increase in property taxes could also be a result of forecasted reductions in fee revenue or because a council has chosen to reduce the rates of user fees and has shifted the revenue needs onto property taxes.

Changes in the taxable assessment base
A reduction in the taxable assessment base means the cost of municipal operations needs to be spread over a smaller number of property owners, thereby increasing taxes for the remaining property owners. For example, if a shopping mall was destroyed by fire, that would reduce the municipality’s taxation revenue and would cause that lost tax revenue to be allocated across the remaining property owners in the municipality.

Changes in property value compared to the average change in values
Changes in the market may increase the value of particular properties more than others based on their characteristics or location. If a property’s value increases at a higher rate than the average change in property values for the municipality, then the property taxes will likely increase for that particular property. For example, if the average increase in property values is 2 per cent but one property increased by 5 per cent then that property will likely incur higher property taxes.

Changes in how taxes are allocated to each property type
A municipal council may choose to shift the tax burden from one type of property to another. For instance, if a council wants to stimulate economic development in the community, it may choose to reduce the non-residential tax and shift that tax burden onto the residential properties in the municipality. 

Tax notices
Tax notices are mailed to each property owner in April or May of each year, which indicate the amount of taxes owed to the municipality. Tax notices include the same information as the assessment notice as well as:

  • The tax rate and amount of each tax imposed;
  • The total amount of taxes imposed including any requisitions;
  • The amount of tax arrears, if any; and
  • A notation if the property is subject to a tax agreement.

Property taxes cover the calendar year of January 1 to December 31 and must be paid by the last business day of June of each year. 

Non-payment of property taxes
If a property owners fails to pay its property taxes by the June deadline, the municipality may impose a penalty on any unpaid balance. The penalty rate for late payment of taxes varies by municipality as it is set by bylaw. The June payment deadline does not apply to property owners that participate in a tax installment payment plan.

The terms ‘taxes in arrears’ and ‘unpaid taxes’ are often used inter-changeably; however, there is a key distinction between the two. For taxes on land, the MGA defines tax arrears as taxes that remain unpaid after December 31 of the year in which they were imposed. Between July 1 and December 31, taxes may be unpaid and subject to penalties but are not considered in arrears. This distinction is important as it relates to the tax recovery process.

The approach to recover taxes will vary depending on whether the taxes relate to land, a designated manufactured home, or taxes not related to land such as a well drilling equipment tax. Legislation provides municipalities with the tools and authority to collect unpaid taxes, which, if needed, may involve the forced sale of property at a public auction in order to collect amounts owing. For a detailed explanation of tax recovery processes, refer to Tax Recovery: A Guide for Alberta Municipalities

Example of the tax recovery process for 2016 taxes on land

January 1, 2016 Taxes are considered imposed as of Jan. 1 in the year that tax notices are sent.
January 1, 2017 Any unpaid 2016 taxes are classified as in arrears.
March 31, 2018: Any unpaid 2016 taxes have now been in arrears for more than one year. The municipality adds the property to the tax arrears list. The tax arrears list is posted publically and sent to the Land Titles Office.
August 1, 2018 The property owner is notified that if taxes are not paid by March 31, 2019 then the property will be offered for sale at a public auction.
March 31, 2019 If taxes remain unpaid and no agreement is reached, the municipality must offer the property for sale at a public auction.

Penalty versus interest on unpaid taxes
It is important that municipalities do not refer to the penalty on unpaid taxes as “interest”. While the penalty is calculated based on a percentage, ratepayers should understand that the municipality is not offering a loan with interest on unpaid taxes. Instead the ratepayer should understand that they are being penalized for not paying their taxes. This clarification is important to ensure that ratepayers do not perceive municipalities as a source of financing.

Tax assistance for seniors
The Government of Alberta offers the Seniors Property Tax Deferral Program which enables eligible senior homeowners to defer all or part of their property taxes through a low-interest home equity loan with the Alberta government. Participants of the program authorize the Government of Alberta to pay the participant’s residential property taxes directly to the municipality on their behalf and they will re-pay the loan, with interest, when they move or sell the property, or sooner if they wish.

Exemption from property tax
There are certain types of properties that are assessed but exempt from taxation as they are deemed to support collective social values and offer a significant public benefit. Examples of properties that are assessed but receive a partial or full exemption from taxation include:

  • Most farm residences and improvements
  • Environmental, municipal and school reserves
  • Hospitals, libraries, schools, colleges and universities
  • Churches and cemeteries
  • Property owned by some non-profit organizations
  • Hostels

More information can be found in the Government of Alberta document: A Guide to Property Tax Exemptions in Alberta.

Education property taxes
Education property taxes are determined by the Government of Alberta and municipalities are responsible to collect the education tax dollars from property owners and remit the funds to the province to help fund primary and secondary (K-12) education programs across the province. In some instances, the municipality is responsible to remit education taxes directly to a separate school board instead of it being remitted to the province and then transferred to the separate school board. 

Education property taxes are pooled in the Alberta School Foundation Fund (ASFF) and are distributed to public and separate school boards based on an equal per-student funding formula. Education property taxes help to pay for teachers’ salaries, textbooks, and other classroom resources. They are not used to fund government operations, school construction or renovation, or teachers’ pensions.

Process to determine and collect education property taxes
Each year the province calculates the amount that each municipality must contribute towards the education system. The calculation is based on a formula that involves the equalized assessment in each municipality and the provincial uniform education property tax rate. The requisition amounts for each municipality are separated between residential and non-residential properties.

Each municipality’s local education tax rates are calculated by:

Residential  education tax rate = Residential requisition amount required by province ÷ Total taxable residential assessment

Non-residential  education tax rate = Non-residential requisition amount required by province ÷ Total taxable non-residential assessment

The municipality then applies those education tax rates to the assessed value of each property to determine the amount of education taxes each property owner is required to pay for the year. The education property tax is included on the property owner’s annual property tax bill.

Machinery and equipment property is exempt from education tax.

School support declarations for education tax
Canada’s constitution establishes that citizens of Roman Catholic faith maintain minority rights to a separate education system. Therefore, municipalities are required to ask property owners to declare their faith in municipalities where a separate school jurisdiction has been established.

Once a separate school jurisdiction is formed in a municipality, property owners can declare they are of the Roman Catholic faith so their education tax dollars can be directed to those separate school boards. This supports the municipal process of providing education funding directly to separate school boards that have opted out of the Alberta School Foundation Fund. All other property owners who support the public school system will have their education taxes remitted directly to the Alberta School Foundation Fund.

Since all school boards across the province are funded on an equitable per-student funding formula, the declaration does not actually affect the level of funding of any public or separate school board. If a separate school board has opted out of the ASFF and the local requisition per student is less than the ASFF payment, the difference will be paid from the ASFF. If the local requisition is more than the ASFF payment, the difference must be paid into the ASFF.

Property owners may change their school support declaration at any time. A filed school support notice will become effective in the year following the date in which it is filed.

Responsibility for education tax
All property owners, residential and non-residential, are required to pay education property taxes. This includes those without children in school and senior citizens. The reasons for this approach is that the education system supports the development of a skilled workforce, contributes to the growth in the economy, and supports the social well-being of individuals and the province as a whole. These benefits reach all Albertans, regardless of their age, marital status, or whether they have children.

Adding non-tax amounts owing to the tax roll
There are a number of scenarios where a municipality has the ability to add non-tax amounts owed to the municipality to the property tax roll. Once a municipality adds those unpaid amounts to the tax roll, those dollars are subject to the same rules that allow municipalities to take action to recover unpaid taxes. Examples include unpaid amounts for:

  • service connections of a municipal public utility
  • water and wastewater utility services
  • violation of a bylaw
  • costs associated with tax recovery proceedings

Tax rate versus a mill rate

The terms ‘tax rate’ and ‘mill rate’ are often used interchangeably but one should be wary of the interpretation. The tax rate is the number that is multiplied by each property’s assessed value to determine its property taxes. It is usually expressed in four to six decimal places such as 0.008437. Due to the number of decimal places, municipalities often communicate tax rates as a mill rate.

A mill rate is achieved by multiplying the tax rate by 1,000. For example, a tax rate of 0.008437 would be presented as 8.44 in mill rate terms. This can simplify the communication process as municipalities can state, “the 2017 residential rate is 8.44” instead of 0.008437.

Other taxes

In addition to general property taxation, municipalities may generate revenue through other forms of tax.

Supplementary tax

A municipality may pass a bylaw that allows it to assess improvements added to land after the December 31 condition date, and collect property taxes on a pro-rated basis for the remainder of the tax year. Supplementary tax can only be collected on the value of new improvements that are completed in the year. An example would be a homeowner that constructs a house on his or her vacant land and completes it in August. The municipality may levy a supplementary tax for the remaining five months in the tax year.

The tax rate for supplementary assessment must be the same as the rates set for other assessment classes and include the education tax.

Business tax

A municipality may impose, by bylaw, a business tax on a business operating within its boundaries. The tax is payable by the person who operates the business, not the property owner. If the property owner also operates a business on the property, then the owner would pay both property and business taxes.

A municipality must choose a method on how to calculate the business assessment. The options are:

  • A percentage of the gross rental value of the building;
  • A percentage of the net rental value of the building;
  • The storage capacity of the building occupied by the assessed business;
  • The floor space occupied by the business; or
  • A percentage of the property assessment.

Example

The City of Calgary employs the use of a business tax but has approved a plan to phase out the business tax by 2019 through incremental increases to its non-residential tax.

Business revitalization zone tax

A business revitalization zone tax may be used in cases where business owners wish to improve the area in which they do business. This may involve constructing improvements, installing decorative lighting, plantings, boulevards, parking or other improvements that will beautify the area. Upon request from at least 25 per cent of the affected businesses, a municipality may establish a business revitalization zone (BRZ) in which all improvements will be made. The businesses operating within that zone will receive a business tax notice reflecting the BRZ taxes, which are due each year in which the BRZ is in effect.

Example

The City of Edmonton has numerous business revitalization zones within its boundaries.

Local improvement tax

A municipality may impose a local improvement tax that is levied on properties within a specific area to fund an improvement that is applicable to that area only. Examples of local improvements may include sidewalks, lane lighting, or paving of roads or alleys. Local improvement taxes are applied to the property owners within the defined area and are charged annually over a set number of years. This tax model offers flexibility to levy a tax on a specific area of properties and/or tax property owners based on factors other than property value. 

Example

When the Village of Longview needed to upgrade its lagoon, Council determined that all property owners should equally share in the cost, including owners of vacant land as they would benefit from sewer services at some point in the future. In order to facilitate this approach, the Village approved a 36 year local improvement tax that is split equally among all property owners.

Special tax

A municipality may levy, through an annual bylaw, a special tax to provide or construct a special service that will benefit a defined area within a municipality. Examples of special services or constructions include waterworks, sewers, boulevards, drainage ditches, dust treatment, fire protection or recreation services. Special taxes are only paid by the property owners within the defined area.

Example

The City of Calgary uses special taxes on residential property to fund enhanced landscape and boulevard maintenance services for numerous communities in the city.

Community aggregate payment levy

A municipality may approve a community aggregate payment levy bylaw to impose a levy on all sand and gravel businesses operating in the municipality. The levy is intended to help fund the cost of infrastructure in the municipality. The levy is payable by the sand and gravel operators based on the quantity of tonnage shipped. The municipality can set any rate per tonne up to the limit specified in the Community Aggregate Payment Levy Regulation.

Well drilling equipment tax

A municipality may approve a well drilling equipment tax bylaw which will impose a one-time tax on any new oil and gas wells that are drilled within the municipality. The amount of tax collected is dependent on the depth of the well and is intended to fund the cost of infrastructure such as roads that support the transport of drilling equipment. The tax is payable by the person/business who holds a license for the well.

Grants in place of taxes and payments in lieu of taxes

Property that is owned by the Government of Alberta or the Government of Canada is exempt from taxation. The programs of Grants in Place of Taxes (provincial) and Payments in Lieu of Taxes (federal) provide municipalities with the opportunity to apply for a grant equal to the amount it would have collected in property taxes if the property was owned by a party other than the government. Municipalities must apply for the grant on an annual basis. The Grants in Place of Taxes program is also known as ‘grant in lieu of tax’.

Educating property owners about property taxes

Understanding the property taxation system can be challenging. Efforts to educate property owners about property taxes can be an important step to maintain a positive relationship with taxpayers. The following list summarizes the types of information that can be beneficial to communicate to property owners through the property assessment or tax notice:

Assessment notice

  • Clarify what the property owner should do with their assessment notice
  • Explain how the property assessment value is determined
  • Explain the how the valuation and condition dates apply to the property’s assessed value
  • Explain how a change in assessment value may impact property taxes
  • Clearly state the deadline to file an appeal
  • Provide a timeline of the assessment and tax process

Tax notice

  • Demonstrate how the total tax bill is allocated to municipal services versus provincial education and other organizations
  • Break down how each tax dollar is used to fund each type of municipal service
  • Explain how the tax is a relationship between the property’s assessed value and the approved budget
  • Explain the purpose and use of each property tax rate
  • Clarify that property taxes are based on a calendar year of January 1 to December 31
  • Clearly state the deadline for taxes to be paid
  • State the penalty rate for unpaid taxes in both percentage and dollar terms to make it easier for taxpayers to understand (i.e. a 7% penalty rate is equivalent to a $70 penalty for every $1,000 in unpaid taxes)
  • How to join a tax installment payment plan (if available)
  • Clarify that taxes are due even if an assessment complaint has been filed
  • Options for how to make payment
  • Outline the Seniors Property Tax Deferral program as an option for seniors
  • Provide detail on the use of any other taxation tool that is being used (i.e. local improvement tax)

Examples of municipal education tools

Brochures

  • Property tax brochure, Strathcona County
  • Property tax brochure, City of Calgary
  • Residential assessment brochure, City of Edmonton
  • Non-residential and multi-residential property assessment brochure, City of Edmonton
  • Supplementary assessment brochure, City of Edmonton

Videos

Online tools

Interactive webpage that explains each section of a tax notice, City of Edmonton
Some municipalities offer online tools for the public and taxpayers to review assessment information, compare properties and generate comparison assessment reports of properties within the municipality

Resources