Metro Vancouver Region

Transcription

1 In The December Metro Vancouver Region December

2 Prepared for the Planning, Policy and Environment Department of Metro Vancouver by: Mark Robbins - KM Consulting Kathleen Zimmerman - AgResults Consulting Howard Joynt 2

3 Executive Summary A key strategy identified in Metro Vancouver 2040: Shaping our Future is to Protect the supply of agricultural land and promote agricultural viability with an emphasis on food production. This report investigates the role that farmland taxation policy can play in supporting the goals of Metro 2040 and local government aspirations. This report investigates tax policy options and also explores other farm property tax considerations that may contribute to greater use of farmland or may discourage non-farm use in the ALR. A Report by Colliers International titled, Property Tax Scenario Analysis for Agriculture and Industrial Land, provides a detailed analysis of the current application of farmland taxation policy. The report identified three areas for further investigation where policy change may help encourage more farming activity and discourage non-farm use. These three areas are: 1. Higher mil rates for residential only use of land in the Agricultural Land Reserve (ALR); 2. Claw back of farm classification benefits on exclusion and rezoning; and 3. Adjustment of the production income threshold for qualification for farm classification. The study team investigated four additional farmland taxation policy considerations: 4. Value Land as if in appropriate zone for classification. How is land that is associated with non-farm uses in the ALR valued? 5. School Tax Exemption only for land with farm classification. 6. Eliminate split classification on leased farmland. 7. Consistent assessment of non-farm uses. As a policy instrument, classifying land as farm creates a monetary incentive to encourage landowners to farm land zoned for agriculture. When evaluating the policy options the key question is: What difference will the policy option make in the property tax bill between farming the land and not farming the land?, or How much will the policy reduce the property tax benefit from conducting the non-farm use on farmland as compared to land specifically zoned for that use? The policy options investigated are also evaluated on administrative ease, legislative feasibility and equity within the property tax system. Before considering the policy options it is important to recognize three characteristics of the farm property tax system: 3

4 Farm classification (Class 9) is only about land. Big house, small house it does not matter. The benefit from classification of the land as farm is the same. Buildings are important when considering non-farm use. When does a farm building stop being part of a farm operation and start being a non-farm use? Changes in the property tax paid by a specific landowner do not impact local government finances. It is a shift in the property tax burden from one group of landowners to another group of landowners. The following table summarizes the evaluation of the seven farmland taxation policy options. The financial incentive reflects the impact on individual land owners of the different policy options. Financial incentive is green if it increases and red if it decreases the financial incentive to farm land. Low, medium and high reflect the relative size of the financial incentive. Y (yes) and N (no) reflect whether a policy can be adopted within the current administrative and legislative system, or if it is equitable based on the current property tax system. 1 2 Higher Mil Rates for Residential Class Land in ALR Claw Back of Benefits at Rezoning Financial Incentive Equity Administrative Ease Legislative Feasibility Med N Y? High Y N N 3 Increase Production Threshold NA Y Y N Value Land as if in Appropriate Zone for Classification School Tax Exemption for Farm Class Only Eliminate Split Class on Leased Farm Land Consistency in Assessment High Y Y Y Med Y Y N Low Y Y Y High Y Y Y Specific case studies were used to demonstrate how each policy would impact specific properties in Metro Vancouver. The following property tax policies increase the financial incentive to farm farmland. They are ranked in order of preference: 1. Change the School Tax exemption to only apply to land in the ALR that is classified farm. 2. Classify the entire parcel of land leased by farmers as farm - do not split classify (provided a specific proportion of the land is farmed). 3. Value land used strictly for residential purposes as if it were in an area zoned for residential use. 4. Increase the mil rate specifically on land classified residential in the ALR (if permitted by legislation). 4

5 The following farmland tax policy options eliminate or reduce the financial incentive to use farmland for farming: Claw back of farm classification benefits on re-zoning (eliminates the incentive). Change in the production threshold required for land classified as farm (reduces the incentive). The following farmland tax policies will decrease the incentive to use farmland for non-farm purposes and help improve the consistency of the application of farmland taxation policy for nonfarm uses. 1. Value all land in the ALR not classified farm as if it were located in the nearest appropriately zoned area. 2. Consider using the Farm Practices Protection Act definition of a farm operation as the basis for determining if a non-farm use is considered part of a farm operation. 3. Develop a quantitative method to determine when a building is no longer a farm building and becomes a non-farm use. There are two key findings that emerged during this investigation that are worth noting. Currently 96% of the benefit of the School Tax exemption is received by landowners in the ALR that do not farm the land. In Metro Vancouver that amounts to a shift of $5.5 million of property tax from other residential uses to landowners in the ALR that do not farm the land. If the School Tax exemption only applied to land classified as farm it would increase the property tax benefits, and thus the incentive, for farming that land by 25% over the current level. There is a large property tax incentive for non-farm businesses to establish in the ALR. The difference in property tax is the result of the way land under non-farm businesses is valued. Currently BC Assessment values the land under non-farm businesses at the market value of farmland rather than the market value of land in an appropriately zoned area for the business. A consequence of this approach is that similar businesses in a community are operating under different property tax structures. 5

6 Table of Contents Executive Summary Introduction Property Tax Basics What are the Property Use Categories? How is Property Value Assessed? What is the Mil Rate? How is the Mil Rate Determined for a Use Class? What Other Agency Charges are Added to the Property Tax Bill? Property Taxes Collected from the Farming Area Classifying Land as a Farm Types of Primary Agriculture Production Required Gross Income from Primary Agricultural Production Determining the Farm Value of the Land Benefits of Farm Class Property Tax Policy Options Considered Evaluation Criteria Analysis of the Financial Impact of the Different Policy Options Current Farm Land Taxation Policies Adjusting Mil Rates in the ALR to Encourage More Farming Claw Back of Property Tax Benefits on Rezoning Production Threshold to Qualify for Farm Class Valuing Land in the ALR Taxes Collected for Other Agencies Split Classification Consistency Evaluation of the Farmland Taxation Policy Options Discussion Adjusted Mil Rates Claw Back at Rezoning

7 7.3 Production Threshold to Qualify for Farm Class Value Non-Farm Use Classes in the ALR as if They Were on Land with the Appropriate Zoning Taxes Collected for Other Agencies Split Classification Consistent Assessment of Non-Farm Uses Conclusion Areas for Further Consideration Appendix Aerial Photos of Case Study Properties Prescribed Rates for Valuing Farmland in Metro Vancouver Weighted Average Property Tax Calculation Property Tax Information Used in Case Studies

8 List of Tables Table Metro Vancouver Mil Rates Table 2. Re-allocation of Class 1,5,6 Property Tax Revenue to the Rural Area Pitt Meadows Table 3. Property Tax for a 4 ha (10 Acre) Property with $150,000 in Improvements Table 4. Example of Land Assessment on Small ALR Lot With and Without Farm Class Table 5. Example of Property Taxes on Small ALR Lot With and Without Farm Class Table 6. Example of Land Assessment on Large Lot in the ALR With and Without Farm Class Table 7. Example of Property Taxes on Large Lot in the ALR With and Without Farm Class Table 8. Impact on Property Tax of Doubling the Existing Residential Mil Rate on Land Classed Residential in the ALR 4ha (10 acres) Table 9. Impact on the Example Properties of Doubling the Mil Rate on Land in the ALR Classified Residential Table 10. The Impact of Rezoning One Acre of Farmland to Industrial Zoned Land Table 11. Impact of Farm Class on Land Potentially Excluded and Rezoned to Industrial Use Table 12. Impact of Losing Farm Class on Property Potentially Rezoned to Industrial Use Table 13. Impact of a Tax Recapture Policy on the Farm Examples from Tables 11 and Table 14. Property Taxes Paid by a Food Packing Firm Located in the ALR and on Industrial Zoned Land 28 Table 15. Example of Two Packing Firms in Richmond One a Non-farm Use on ALR Land and the Other in an Industrial Park Table 16. Comparison of Property Tax Paid by Retail Produce Stores on ALR Land and on Commercially Zoned Land Table 17. School Tax Exemption for ALR Land in Farm or Residential Use (4 ha = 10 acres) Table 17. School Tax Exemption on Example Properties Table 19. Property Tax Owing on Example Properties With and Without Split Class Table 20. Property Taxes Owing on a Packing House with Land Assessed as Farm, Land Assessed as Industrial and Industrial Land Valued as in the Urban Area Table 21. Evaluation of Different Policy Options Table 22. Relative Impact on Property Taxes Paid of Different Policy Options

9 1. Introduction A key strategy identified in Metro Vancouver 2040: Shaping our Future 1, (Metro 2040) the regional growth strategy for Metro Vancouver, is to Protect the supply of agricultural land and promote agricultural viability with an emphasis on food production. Strategy 2.3 describes the roles for local governments including: To identify and pursue strategies and actions to increase actively farmed agricultural land and to emphasize food production, and To discourage non-farm uses that do not complement agriculture. This report investigates the role that farmland taxation policy can play in supporting the goals of Metro 2040 and local government intentions to protect agriculture land and promote farming. In 2013, Metro Vancouver retained Colliers International to document how property tax is applied to farmland in Metro Vancouver. Their report 2, titled Property Tax Scenario Analysis for Agricultural and Industrial Land, provides a detailed analysis of how different properties with different levels of improvements are taxed across different municipalities when the land is classified as farm and when it is not. The report identified three areas where policy change may help encourage more farming activity and discourage non-farm use. These three areas are: Adjusted mil rates for different land uses in the Agricultural Land Reserve (ALR); Recapture of farm classification benefits on rezoning; and Adjustment of the production income threshold for qualification for farm classification. This report investigates these tax policy options and also explores other farm property tax considerations that may contribute to greater use of farmland or may discourage non-farm use in the ALR. Property tax policy has two main goals to provide financial resources to support local government services and to encourage socially desired outcomes. One socially desired outcome, identified in Metro 2040, is the greater use of agricultural land for food production. As a policy instrument, taxation creates a monetary incentive to encourage the desired behavior. In this investigation, each policy option will be evaluated using one of the following questions: What difference will the policy option make in the property tax bill between farming the land and not farming the land?, or 1 Located at: : 2 Located at: _Analysis_for_Agricultural_and_Industrial_Lands.pdf 9

10 How much will the policy reduce the property tax benefit from conducting the non-farm use on farmland as compared to land specifically zoned for that use? To understand how a tax policy change will impact a landowner s property tax bill, it is important to understand how the property tax system works. It is also important to recognize that changes in farm property tax policy will not affect local government budgets. Changes in farm property tax policy only shifts the tax burden from land that is farmed to land and improvements that are not farmed. The report starts with a review of how property tax bills are calculated in BC and how farmland classification is determined. Section 3 outlines the property tax options being considered, and Section 4 outlines the criteria by which the different options will be evaluated. Section 5 provides examples, using both the general case and examples of property tax bills from individual case study properties in Metro Vancouver, to demonstrate the financial impact of the different options. Section 6 provides an evaluation of the farmland taxation policies based on the criteria in Section 4. Section 7 discusses each policy option reviewed. Section 8 is the conclusion and Section 9 describes area for future investigation. The Appendix provides support material. BC Assessment uses acres in their work and therefore most of the examples provided in this report use the acre measurement unit. However, whether hectares (ha) or acres is used, the alternative conversion unit is provided in parenthesis (1 ha = 2.47 acres or 1 acre = 0.4 ha). Also note that all examples referring to Langley are from the Township of Langley. 2. Property Tax Basics Every spring, landowners receive a Property Assessment Notice from BC Assessment followed by a Property Tax Notice from their local government. The property assessment and local government budget decisions impact the final amount of property tax paid by each landowner. To understand the potential impact of different tax policies, it is important to understand how the property tax amount, for each landowner, is calculated. There are five steps in determining the property taxes owed for a specific lot: 1. Land and improvements (e.g. buildings) are classified according to how they are used. 2. The market value of the land and buildings are estimated. 3. The local government determines their budget revenue target and how to allocate it amongst the different property use classes. 4. Different mil rates are established for each use class to cover the local government s budget needs. 5. Charges from other agencies are added to the local government taxes to make up the final property taxes owing that appear on the Property Tax Notice. 10

11 What are the Property Use Categories? The BC Assessment Act Regulations 3 identify nine possible use classes under which all land and improvements are classified: 1. Residential 2. Utilities 3. Supportive Housing 4. Major Industry 5. Light Industry 6. Business and Other 7. Managed Forest Land 8. Recreational Property/Non-profit 9. Farm In areas zoned for residential or industrial development, where only one use is permitted, it is straightforward to allocate the land and improvements to the appropriate use. In areas such as business and farming, where multiple uses are permitted, BC Assessment will split a property by uses, and assess different uses to different portions of the property. The major improvements on farmland are residential buildings or farm buildings. Both are classified as residential (Class 1) and assessed at market value. If the land under the farm buildings is classified as farm, 87.5% of the assessed value of the farm buildings is exempt from taxation. How is Property Value Assessed? BC Assessment (BCA) is an independent, provincial Crown Corporation that determines the value of all properties in BC. For most properties, the assessed value is the current market value 4 as of July 1 of the year of assessment. When establishing the market value, BC Assessment follows the principle of highest and best use of the land and improvements. They also consider factors such as size, layout, age, condition, location, neighbourhood and the value of recent sales of similar properties. Not all properties and improvements are valued based on market value. BC Assessment Act Regulations describe specifically how some types of property and improvements are to be valued. Farmland is an example of where the land value is not based on market value. Section 2.2 of the report explains how farmland is assessed and valued. 3 Located at: 4 The BC Assessment Act (Section 19 (13)) states that Land and improvements must be assessed at their actual value. 11

12 What is the Mil Rate? The Municipal Assessment Authority provides the follow description of the mil rate 5. Each year, council, during its budgetary process, approves the amount of revenue required to operate the municipality. From this amount they subtract the known revenues, such as grants, licenses and permits. The remainder represents the amount of money to be raised by property taxes. The amount to be raised is divided by the total value off all the property in the municipality and multiplied by 1,000 to decide the tax rate - also known as the mil rate. The calculation is expressed as an equation as follows: amount to be raised total taxable assessment X 1,000 = Mil Rate The word mil is derived from the Latin word for one thousand (1,000). In tax terms, one mil is equal to 1/1000 of a dollar or one dollar ($1.00) in tax for every one thousand dollars ($1,000) of assessment. How is the Mil Rate Determined for a Use Class? Local governments determine what portion of the budget they choose to collect from each use class. That amount, divided by the total of all assessed land and improvements in that use class (multiplied by $1,000), determines the mil rate for that use class. Mil rates vary between local governments depending on how much each local government wishes to collect from each use class and the total assessed value in that use class. Table 1 illustrates the mil rates for major use classes in Metro Vancouver. Class two Utilities is included to show how high mil rates can be established for some use classes. 5 Located at: 12

13 Table Metro Vancouver Mil Rates Mil Rates for Different Use Classes Local Government Light Residential Utilities Industry Business Farm Langley Maple Ridge Pitt Meadows Surrey Delta Richmond Coquitlam Burnaby Vancouver Pink ALR predominantly in upland areas with small lot sizes (Langley, Maple Ridge) Green ALR predominantly in lowland areas with larger lot sizes (Pitt Meadows, Surrey, Delta, Richmond) Grey Local governments with very small ALR areas (Coquitlam, Burnaby, Vancouver) What Other Agency Charges are Added to the Property Tax Bill? The property tax notice includes charges from other agencies. These include school tax for the Province, Hospital tax, Metro Vancouver fees, Translink fees, BC Assessment fees, Municipal Finance Authority fees and sometimes utility fees for water and sewer. The taxing authorities determine the amount payable and the local government collects these fees on their behalf. 2.1 Property Taxes Collected from the Farming Area Local governments are aware of how much tax revenue is collected from each of the nine use classes. The major use classes are typically assumed to be associated with zoning designations. Class 1 residential taxes are thought to originate from the residential zone, Class 6 business taxes are from the commercial zone, Class 5 industrial taxes are from the industrial zone, and Class 9 farm taxes are from the agricultural zone. This is very misleading in the farming area where all residential buildings are classified as residential. Farm buildings are classified as either residential or industrial or commercial use, all of which can be permitted as part of a farm operation. The taxes received from just the land that is classified as farm can be very low, while the tax revenues from residential, industrial and business uses located in the farming area can be substantial. A study of the Direct Financial Contribution of Farming Areas to Local Governments in British Columbia 7, completed by the Ministry of Agriculture in 2007, included an analysis of the actual taxes received from the farming area (ALR). On the surface, farm (Class 9) contributed 4% of the 6 From local government web sites. 7 Located at: 13

14 tax revenues in Pitt Meadows. However, when taxes received from the residential, industrial and business class improvements on the farmland were reallocated to farmland, the farming area actually contributed 13.6% of the taxes in Pitt Meadows. The table below summarizes the findings Table 2. Re-allocation of Class 1,5,6 Property Tax Revenue to the Rural Area Pitt Meadows Land Use Class The study determined that the farming area, when all property tax revenues were considered and the cost of services deducted, provided a net contribution to the local government. This analysis was done prior to the increase in tax exemption for farm buildings/improvements that was changed in the 2013 Assessment Roll. 2.2 Classifying Land as a Farm Farm property assessment in British Columbia is the responsibility of BC Assessment. BC Regulation 411/95, Classification of Land as a Farm 8 provides the framework for BC Assessment to carry out this role. There are three main criteria for determining if land is classified as farm and what the farm value is: Pitt Meadows Property Tax Re-Allocation to ALR ($,000) Standard BC Re-allocation Assessment Allocation to Farming (ALR) $ % $ % Residential $4, % $ 4, % Utility $ % $ % Industry $ % $ % Business $1, % $ 1, % Rec/Non-Profit $ % $ % Farmland / ALR $ % $ % Total $7, % $ 7, % The type of primary agriculture production, The required gross income from that production, and The farmland value of the land (based on soil capability class 9 ). Land used for farming and meeting the production threshold requirements can be classified as farm whether it is in or out of the ALR. 8 Located at: 9 Located at: 14

15 Types of Primary Agriculture Production Many types of primary agriculture production qualify for farm class. Crops that produce food such as fruits and vegetables, animals for slaughter and the crops that feed the animals are common examples. Crops or trees that produce fiber or for human enjoyment such as shrubs, nursery plants, flowers, seeds are also acceptable. Animals for human enjoyment, rather than production, are harder to evaluate for BC Assessment. For example not all horse farms qualify for farm class. Only breeding and adding value to horses is considered agriculture production. Required Gross Income from Primary Agricultural Production Once the primary agricultural product is deemed acceptable, then the farm will be required to meet a value of production threshold. This amount of product produced is multiplied by the value (as a primary product) to determine gross income. The value is for the raw (not a processed) product. The gross income must meet or exceed the value of production threshold for any given property. Depending on the farm size, the regulation states that the farm must sell a minimum of: $2,500 if the area of land is between 8,000m 2 (2 acres) and 4 ha (10 acres); $2,500 plus 5% of the farmland value of the land for farm purposes in excess of 4 ha (10 acres), if the land is in excess of 4 ha (10 acres); $10,000 if the total area of land is less than 8,000m 2 (2 acres). Once a farm meets this threshold it can receive farm property tax status. As an example, a hypothetical 14 ha (34 acres) farm in Richmond that is located on Class 3 soils (with a farmland value of $1,003.60/ha 10 ) would have to have a minimum gross farm income threshold of $2,500 for the first 4 ha (10 acres), plus 5% of the prescribed value of the remaining 10 ha. $2,500 + (10 X $1, X 5%) = $3, This 14 ha (34 acre) farm must have a minimum annual gross farm income of $3, This same formula applies to leased land. For example, if the farm above decides to lease an additional 6 ha (15 acres) from the neighbour with the same farmland value, the 6 ha are added to the farmer s own land. The farm is considered to be the combination of the farmer s owned land and the leased land. The production threshold required becomes $3, Source: Farmland Valuation Schedule: 11-2 has a value of $2,480/acre for Land Capability Class 3 cultivable land in Richmond. 15

16 $2,500 + (16 X $1, X 5%) = $3, The farm must continue to produce and sell each year to maintain farm classification. BC Assessment allows some discretion for a lack of income when establishing long term perennial crops or for new farmers. New farmers must first develop a business plan that shows their potential to produce a gross income sufficient to meet the threshold requirements of the leased land. The business plan must be submitted to BC Assessment. New farmers are then allowed up to six years to reach the threshold. Determining the Farm Value of the Land BC farms are located on a vast variety of land and landscapes. The fair market value of these lands varies tremendously depending on location. Producers may grow a similar food crop in different locations on land with different fair market values. For example, there will be a considerable difference in the fair market value of their respective properties of an apple orchard in Langley compared to one in Grand Forks. To create a level playing field for farmers, and to honour the preferential treatment of farms that produce agricultural products, BC Assessment implemented a legislated rate for valuing land that is classified as farm. The rate is based on what can be produced on a given piece of land based on soil capability classes. Land with good soil, good sun, and access to good water, a good climate is capable of growing a more valuable crop than land that is suitable only for forage or pasture. BC Assessment uses this prescribed rate, based on what can be produced, to determine the farmland valuation 11. Benefits of Farm Class Once a property has farm classification, the landowner 12 is eligible for other privileges. These privileges include: Lower property tax No sales tax on specific farm items Reduction in fuel tax Farm vehicle licensing Protection from nuisance complaints under the Farm Practices Protection Act The prescribed rates for farmland in Metro Vancouver is in Appendix The land is classified as to use and the land owner usually a farmer receives the benefits. 13 The nuisance protection for farms extends outside the ALR, however, the oversight of bylaws affecting the farming area only applies in the ALR. Farm operations on agriculturally zoned land in the ALR are protected from both nuisance lawsuits brought by individuals, and from local government nuisance and other bylaws if they are following normal farm practices. Farm operations on agriculturally zoned land outside of the ALR are only protected from nuisance lawsuits brought by individuals if they are following normal farm practices. 16

17 Qualification for some government programs such as the Environmental Farm Plan Program 3. Property Tax Policy Options Considered The Colliers International report offered three farmland taxation policy options for further consideration: 1. Higher Mil Rates for Residential Class Land in the ALR. Adjust mil rates to discourage nonfarm uses (in particular rural residential use) in the ALR and to encourage more farm use. 2. Claw Back at Rezoning. Recapture farm classification benefits received by a landowner if the land is excluded and rezoned for non-farm uses. 3. Increase the Production Threshold. Revisit the income production threshold required to qualify land for farm classification. Other policy options and issues considered in the report are: 4. Value Land as if in the Appropriate Zone for Classification. Improvements on ALR land that are not part of a farm operation, as well as the land underneath the improvements, are classified as to their use. While the land may be classified as industrial or commercial it is valued as if it were used as farmland. The result is a significant reduction in property tax paid. This is a major incentive to locate non-farm uses in the ALR. 5. School Tax Exemption for Farm Classification Only. Local governments collect taxes for other agencies. All land in the ALR, whether farmed or not, receives a 50% School Tax exemption. Other agencies have provided a similar exemption for land in the ALR. Examples include: o Hospital taxes o BC Assessment fees o Regional District fees o Translink fees 6. Eliminate Split Class on Leased Land. When the land owner is a farmer and the land is classified as farm then all land, including the land under the residence, is classified farm. When land in the farming area is leased to a farmer, the land leased is classified as farm, however, sometimes the land under the residence is split off and classified as residential use for the non-farming owner. This is termed split class classification on a lot. It is unclear how occupancy influences the determination of use. A property leased to a farmer that is split class will pay more tax than a property where all of the land is classified farm. 7. Consistency in Assessment. BC Assessment has regulations and policies for determining when a building is used to operate a farm. If these are not applied consistently, and in a timely way for buildings that are no longer used to operate a farm (but continue as another use), a landowner can receive substantial property tax benefits. 17

18 4. Evaluation Criteria The different farmland taxation policies considered will be evaluated according to the following criteria: The financial incentive for landowners o The intention of this investigation is to increase farming on agricultural land. The property tax saving from having land classified as farmland by BC Assessment is the major incentive to farm land or lease land to farmers and therefore the impact of the policy option on the magnitude of the financial incentive becomes the key evaluation criteria. The balance of criteria measure feasibility of implementing the policy. Equity within the broader property tax system o Property tax policy needs to be seen as being a fair way to share the tax burden among the different property uses in the local government area. Administrative ease o Is the policy easy to administer? Can it use existing information and procedures or does it require a new administrative structure? Legislative feasibility o Can the policy be adopted within current legislation, or does a Provincial Act or Regulation or a local government bylaw need to be changed? 5. Analysis of the Financial Impact of the Different Policy Options Analysis of the different policy options includes a general example using information provided in the Colliers International report and case studies to show how these policies would impact individual properties in Metro Vancouver. The case studies use actual property tax notices for properties in Metro Vancouver. Two neighbouring properties in Langley and two neighbouring properties in Richmond are used for much of the analysis because their close proximity means the market value of the land will be similar and in both cases the improvements are similar but not identical. Aerial photos of the case study properties are located in the Appendix Langley and Richmond are at the low end and high end of market value for farmland in Metro Vancouver, respectively. The Colliers report information was used to develop a weighted average over all of Metro Vancouver. This helps provide a better measure of the regional impact of the tax policy options. 18

19 5.1 Current Farm Land Taxation Policies The following table is a summary, across all municipalities, of the property tax bill for a 4 ha (10 acre) property in the ALR with $150,000 in improvements 14. The table compares the same size property under three different scenarios: all of the land in farm classification, split farm/residential classification, and no farm classification on the land. 15 The first three local government areas (shaded) have small areas of ALR land that is used for farming, so are not included in the weighted average calculation. Table 3. Property Tax for a 4 ha (10 Acre) Property with $150,000 in Improvements Farm Class 16 Split Farm/Res 17 Difference Farm Class Split Class No Farm Class 18 Difference Farm Class - No Farm Class Burnaby $ 973 $2,652 $1,679 $17,566 $16,593 Port Coquitlam $1,576 $2,365 $789 $8,297 $6,721 Coquitlam $1,312 $1,772 $460 $5,862 $4,550 Richmond $1,025 $1,985 $960 $10,511 $9,486 Delta $1,369 $2,091 $722 $8,500 $7,131 Surrey $ 851 $1,295 $444 $5,239 $4,388 Langley $1,199 $1,591 $392 $5,072 $3,873 Pitt Meadows $1,795 $2,190 $395 $5,699 $3,904 Maple Ridge $1,801 $2,229 $428 $6,035 $4,234 Weighted Average 19 $1,256 $1,764 $ 508 $6,280 $ 5,024 For 4 ha (10 acre) lots with $150,000 in improvements, the annual weighted average tax savings from having land classified as farm as compared to land classified as residential is $5,024. If the land 14 The value of the improvements does not impact how farmland is assessed and valued. The lowest improvement property size category was used because the Colliers International report used this level of improvements for the split class analysis. 15 Land in the ALR for different municipalities from Metro Vancouver Map apofthemonth_statusofmvagriculturallandreservewithrespecttofarming.pdf 16 Colliers International report p Split class was estimated by adding the taxes on 1 acre classed residential and subtracting one acre classed farm. 18 Colliers International report p Weighted by the amount of ALR land available for farming in each municipality. Only 6 municipalities with significant ALR were included. This assumes a similar distribution of lot sizes in each local government area. While this is not the case, the benefits of farm class are tied to per acre assessment values that tend to be lower for large lots and higher for small lots. The assumption provides a good estimate of the impacts of farm class on a regional basis. See the Appendix for the detailed calculation. 19

20 under the (non-farming) residence of each property is split off and classified as residential, the difference in the annual property tax bill, on a weighted average basis, would be $ The impact of farm classification is higher in areas closer to the City of Vancouver where the market value of farmland is higher, and less in areas where the market value of farmland is lower. The examples below of adjacent lots demonstrate the range in taxes that can occur for specific lots 21. Note that the assessed value of improvements is different because they are different properties and the houses are slightly different. The tax benefit of having land classified as farm is derived only from the land. Information is from the 2014 Property Tax Notices for the specific properties. 1. Langley 5 acres (2 ha) and modest home Langley Lot A - 5 acres + modest home no farm class Langley Lot B - 5 acres + modest home farm class BCA 2014 assessment of the land and improvements is: Table 4. Example of Land Assessment on Small ALR Lot With and Without Farm Class Land Assessed Farm Land Assessed Residential Improvements Assessed Residential Total Assessed Value Langley Lot A No Farm Class $ 750,000 $ 463,000 $1,213,000 Langley Lot B Farm Class $ 14,379 $ 413,300 $ 427,679 The resulting 2014 property tax owing is: Table 5. Example of Property Taxes on Small ALR Lot With and Without Farm Class Taxes on Land Assessed Farm Taxes on Land Assessed Residential Taxes on Improvements Assessed Residential Total Municipal Taxes Langley Lot A No Farm Class $ 3,809 $ 2,351 $ 6,160 Langley Lot B Farm Class $ 176 $ 2,103 $ 2,279 The difference in property tax paid is $3,881.The tax savings from having the land classified farm as compared to not farm is $3,633 ($3,809 - $176). The remaining difference ($248) is the difference 20 Specific examples in Tables 6 and Source: Property Inquiry web pages for individual local governments. 20

21 in assessed value of improvements ($49,700) multiplied by the prevailing mil rates for general, school and other taxes. Land in the ALR receives a 50% tax exemption for School, Transit, Regional District fees, BCA fees and others. For the non-farm parcel Langley Lot A, the exemption amounts to a $906 savings over what a similar valued home on a similar valued property would pay if the land was outside the ALR. 2. Richmond 18 acres (7.3 ha) - large home + split farm class Richmond Lot A - 18 acres + large home no farm class Richmond Lot B - 18 acres + large home + 12 acres in farm class Richmond C Lot B with no split class (i.e. farmed by owner) BCA 2014 assessment of the land and improvements is: Table 6. Example of Land Assessment on Large Lot in the ALR With and Without Farm Class Land Assessed Farm Land Assessed Residential Improvements Assessed Residential Total Assessed Value Richmond Lot A No Farm Class $ 4,635,000 $ 4,261,000 $ 8,896,000 Richmond Lot B 12 acres (5 Ha) Leased to Farmer $ 43,306 $ 1,585,000 $ 3,081,000 $ 4,709,306 Richmond C Lot B - No Split Class $ 64,958 $ 3,081,000 $ 3,145,958 The resulting 2014 property tax owing is: Table 7. Example of Property Taxes on Large Lot in the ALR With and Without Farm Class Taxes on Taxes on Taxes on Total Land Land Improvements Municipal Assessed Assessed Assessed Taxes Farm Residential Residential Richmond Lot A No Farm Class $ 15,235 $ 18,430 $ 33,665 Richmond Lot B 12 acres (5 Ha) Leased to Farmer $ 500 $ 5,210 $ 13,456 $ 19,166 Richmond C - No Split Class $ 750 $ 13,456 $ 14,206 The property tax savings as a result of leasing 12 acres to a farmer is $9,525 ($15,235 - $500 - $5,210). If the land was not split class, and all the land was considered farm class, the savings would be $14,485 ($15,235 - $750). 21

22 All land in the ALR receives a 50% exemption on school and other fees. For property Richmond Lot A, the ALR exemption on school and other fees amounts to a $4,800 saving compared to a similarly valued home on a similarly valued property outside the ALR. These examples demonstrate that the major tax benefit received by qualifying for farm classification is in the valuation of the land. Land that is classified farm receives an additional Farm Land Tax Credit of 50% of the school tax owing on the land. The assessed value of farmland is low so the school tax owning on farmland is small. As a result the Farm Land Tax Credit is small. The Farm Land Tax Credit for Langley B is $24.80 and for Richmond B is $ Farm Land Tax Credits will be discussed further in Section Adjusting Mil Rates in the ALR to Encourage More Farming The examples above indicate the tax rate on farmland is very low. There is little opportunity to increase the financial incentive to farm the land by reducing farm taxes. However, there is opportunity to increase the financial incentive to farm the land by increasing the cost of not farming the land. Land classified residential in the ALR can be easily identified and potentially charged a higher mil rate than other land and improvements classified as residential. A different (i.e. higher) mil rate for land classified as residential in the ALR would increase the financial incentive to farm ALR land or lease the land to farmers. Assume that the mil rates for land in the ALR assessed as residential were doubled while the mil rates for improvements assessed as residential remained the same. For the base case 4 ha (10 acres) with no farm class the impact on the property tax bill is demonstrated in Table 8. Table 8. Impact on Property Tax of Doubling the Existing Residential Mil Rate on Land Classed Residential in the ALR 4ha (10 acres) Impact on Property Tax Land at Existing Land at Double Existing Difference Residential Mil Rate Residential Mil Rate Burnaby $ 16,924 $33,848 $ 16,924 Port Coquitlam $7,392 $14,784 $7,392 Coquitlam $5,072 $10,144 $5,072 Richmond $9,886 $19,772 $9,886 Delta $7,669 $15,338 $7,669 Surrey $ 4,548 $9,096 $ 4,548 Langley $4,218 $8,436 $4,218 Pitt Meadows $4,740 $9,480 $4,740 Maple Ridge $5,019 $10,038 $5,019 Weighted Average $5,452 $5,452 22

23 Each 4 ha (10 acre) lot without farm classification would pay, on a weighted average basis, an additional $5,452 (or $1,363/ha) more in property tax. The Metro Vancouver Regional Report, Agricultural Land Use Inventory 22 completed by the Ministry of Agriculture in 2014, identified 17,414 ha (43,012 acres) in Metro Vancouver with no farming activity. Doubling the mil rate for land classified residential in the ALR would shift $23.7 million in property tax from other residential uses to the land in the ALR with residential land classification. It would also increase the weighted average taxes paid on the residential portion of all land in split classification by $508 per lot. BC Assessment estimated there are 1,540 lots in Metro with leases. If all had homes and were all split classed farm/residential land 23 it would result in $782,000 in property tax shifted from other residential uses to farmland with split classification. In the specific cases described above, both properties in Richmond and Langley with no farm class would be affected as indicated in Table 9. Table 9. Impact on the Example Properties of Doubling the Mil Rate on Land in the ALR Classified Residential Richmond Lot A Langley Lot A Land Class No farm class 18 acres No farm class 5 acres Tax Benefit from Farm Class with Existing Mil Rate Tax Benefit from Farm Class with Double the Mil Rate % Increase in Tax Benefit with Farm Class $ 9,525 $ 19, % $ 3,633 $ 7, % Doubling the mil rate on land in the ALR classified as residential increases the financial incentive to use the land for farming by 103% to 105% 24 and the higher the value the land, the greater the financial incentive. 5.3 Claw Back of Property Tax Benefits on Rezoning Individuals holding farmland while speculating on future exclusion and rezoning to a different (more valued) use can reduce property taxes paid by leasing the land to farmers. The estimated weighted average benefit of farm class on 4 ha (10 acres) is $5,024 or $502 per acre. The assessed value of commercial/industrial land in Metro Vancouver varies. The following table compares the increase in land value when rezoning from farm classification to industrial classification and the property tax saving from leasing land for farm classification in comparison to the increased value of rezoning. 22 Located at: 23 From BC Assessment 24 This is more than 100% because the taxes on the land classified farm remain the same. 23

24 Table 10. The Impact of Rezoning One Acre of Farmland to Industrial Zoned Land 25 Assessed Value of One Acre Land in ALR No Farm Class (market value) Assessed Value of One Acre of Industrial Land 26 Increased Value on Exclusion and Rezoning Property Tax Saving on One Acre of ALR in Farm Class 27 Property Tax Saving as % of Increased Value on Rezoning Richmond $240,000 $ 1,440,000 $1,200,000 $948.08% Langley $75,000 $832,500 $ 757,500 $387.05% In the general case, the savings from leasing land to farmers to gain farm class status represents a tiny portion of the potential increase in the value on rezoning. Therefore there is limited incentive for speculators to lease the land for farming rather than attempting to exclude and rezone the land in the short term. The following are two examples of properties likely held for speculation. Richmond This example is a 98 acre (39 ha) farm in Richmond next to a light industrial area and currently leased to a farmer. Table 11. Impact of Farm Class on Land Potentially Excluded and Rezoned to Industrial Use Land Assessed as Farm Land Assessed Industrial Improvements Property Taxes Farm Class - Leased to Farmer Land Assessed as Residential (market value) $260,492 $ 42,200 $4,066 No Farm Class $ m 28 $42,200 $ 64,561 Excluded and Rezoned Industrial $ m The land owner saves $60,495 ($64,561 - $4,066) per year by leasing the land to a farmer. The market value of industrial land in Richmond is $ 1,440,000/acre 29. On exclusion and rezoning to 25 Colliers International Report p.82 and p Colliers International Report up to 5 acre parcels 27 From Colliers International Report page From other assessments in the area the market value of land was estimated at $ 257,500/acre 24

25 industrial, the 98 acre parcel would be worth $ million - an increase of $125.6 million. The $60,495 in annual tax savings represents.05% of the increase in value on rezoning. Langley Eighty acres (32.4 ha) of bare land on the ALR boundary in Langley had farm classification in 2013 but not in Table 12. Impact of Losing Farm Class on Property Potentially Rezoned to Industrial Use Land Assessed Property Taxes as Farm (2013) Bare Land in ALR Langley 30 - Farm Bare Land in ALR Langley - Residential Land Excluded and Rezoned Industrial Land Assessed as Residential (2014) Land Assessed Industrial $ 259,398 $ 3,116 $ m $ 13,483 $ 66.6 m The property tax savings from having farm classification is $10,367/year ($13,483 - $3,116). On rezoning, the market value of 80 acres as industrial is $66.6 million an increase of $63.6 million ($66.6m - $2.96m) over the market value as unfarmed farmland. The annual savings in property tax of $10,367 from having farm classification represents.02% of the potential return on rezoning. One existing example of claw back on rezoning in BC is Managed Forest Lands. Managed Forest Lands are taxed at a rate lower than residential lands to encourage long term participation in the program. An exit fee is assessed for lands that are reclassified. Lands held for more than 15 years in the program are not assessed the exit fee. The fee is the difference between the taxes that would have been paid had the property been classified as residential rather than managed forest. This amount is multiplied by the number of years assessed and an adjustment factor (0.34) 31. If the examples in Tables 11 and 12 were held for 10 years, then rezoned, the method used for Managed Forest Land would result in the following recapture amounts: 30 This property was classed as farm in 2013 and residential in The taxes paid when assessed as farm is for 2013 rather than The adjustment factor is set in regulation. 25

26 Table 13. Impact of a Tax Recapture Policy on the Farm Examples from Tables 11 and 12 Annual Property Tax Savings with Farm Class Amount of savings over 10 years Times Adjustment Factor (.34) Recapture Amount Profit on Rezoning % of Profit from Rezoning Langley $10,367 $103, $ 35,248 $63.6 m.06% Richmond $60,495 $604, $205,683 $125.6 m.16% Claw back of tax benefits on rezoning would not be an effective policy tool to deter future exclusion and rezoning. 5.4 Production Threshold to Qualify for Farm Class The production threshold needed to qualify for farm class is an answer to the question What level of agricultural production should be required to be considered a farm operation? The impact of the answer to this question goes beyond BC Assessment and the payment of property tax. Other agencies and programs frequently use farm classification as a requirement to qualify for programs and benefits. The most important of these is the Farm Practices Protection Act. As described in Section 2.2 other government agencies often use farm classification as a requirement to qualify for programs. Examples include the Environmental Farm Planning Program and the Farm Business Development Programs with the Ministry of Agriculture. The income threshold in Ontario, where there are few small farm parcels, is $7,000. The United States Department of Agriculture (USDA) considers agricultural sales over $1,000 as a farm business. Revenue Canada considers sales of any product with the intent to make a profit as a business. The production thresholds in other jurisdictions are not based on any scientific or production models. Anecdotal evidence suggests the first production threshold in BC ($1,600/year) came from the Agriculture Land Development Act (ALDA). ALDA provided loans to help farmers improve farmland drainage, leveling, etc. $1,600 in revenue was considered the minimum farm gate revenue needed to make payments on the loan. The amount was raised to $2,500 in 1994 and was left at $2,500 after the Farm Assessment Review in Farm class, and the associated reduction in property tax, is intended to encourage farming. The production threshold must balance three concerns: be high enough to require a significant effort by the land owner so as to discourage abuse while; being low enough to enable new farm operations to receive the benefit early in their farming business; and 32 The Farm Assessment Review was a Minister s committee established to review the criteria for farmland classification and report back to the Minister. 26

27 enable traditional farming practices on small parcels to receive farm classification. The 2004 Abbotsford Farm Land Use Report 33 tried to address the concern over abuse of farm classification. Out of approximately 1500 farms in Abbotsford, the survey found 205 farms had sufficient agriculture production occurring on the farm but did not have farm classification, while 65 farms had farm classification but insufficient agriculture production was observed from the road. While there is a lag between what is observed and when it appears on the tax assessment notice, the survey suggests there was no significant problem with abuse of the farm classification provision in Abbotsford at that time. Metro Vancouver has many small farm lots, particularly in Langley and Maple Ridge. The $2,500 threshold already precludes sheep, feeder calves and hay production as farming choices, on small lots, as they will not generate sufficient revenue on lots of less than 5 acres (2 ha), unless other properties are added to the farm operation. Generating $2,500 in annual production takes some effort, particularly on a small parcel less than 2 ha (5 acres). It is unlikely that $2,500 in annual revenue will generate a profit. To provide a financial benefit to the landowner the property tax savings from achieving farm classification would have to exceed the labour cost associated with the farm operation. Individuals with a professional salary would have to dedicate 3 hours or less a week to the farm operation for the property tax benefit to match their hourly pay rate for off-farm work. 34 This may explain in part why there was not widespread abuse of farm classification in Abbotsford in 2004 under the current production threshold. 5.5 Valuing Land in the ALR BC Assessment values land according to its highest and best use. Highest and best use is defined 35 as reasonably probable and legal use of vacant land or improved property that is physically possible, legally permissible, appropriately supported, financially feasible, and that results in the highest and best use. For land where the improvements are classed the same as the land and are consistent with the zoning, this system works well. The market value is an accurate estimation of the highest and best use. Farmland is more complex. Land that is zoned for farming, and is farmed, is valued according to the land s agriculture capability 36. When land in an agriculture zone is used for purposes other than farming, i.e. residential, business or industrial, the land is valued at the highest and best use as farmland - that being the market value for farmland in the area For a professional salary of $30/hr. a $5,000 savings would equate to 166 hours or about 3 hours a week. 35 Appraisal of Real Estate 2 nd Canadian Edition, Schedule in Appendix

28 The market value for farmland is much lower than the market value for land zoned for residential, business and industrial. The highest and best use approach, used by BC Assessment to value land under non-farm uses in areas zoned for farming, results in a large property tax difference between non-farm uses located on farmland and those located in other areas with appropriate zoning. The following is the general case comparison of the taxes paid by a food packaging firm in the urban industrial zoned area and a packaging firm in the ALR with industrial assessment. Information is from the Colliers International report and local tax assessment notices. The assumptions for Table 14 are 3 acres (1.2 ha) in Richmond with a 50,000 sq.ft. building. Table 14. Property Taxes Paid by a Food Packing Firm Located in the ALR and on Industrial Zoned Land 37 Industrial Land Valued as in Industrial Zone Industrial Land Valued as in ALR Lot Size 3 acres (1.2 ha) 3 acres (1.2 ha) Assessed Land Value Building Size Building Assessed Value Mil rate (Class5) Property Taxes Paid $ 4,800,000 50,000 $5.25M $ 147,233 $ 775,000 50,000 $5.25M $ 88,266 A berry packing facility in Richmond is an example of when land and improvements in the ALR are classified as business and other (Class 6). The following table compares their actual assessment and resulting property tax bill with a comparable facility in the nearby industrial park. Table 15. Example of Two Packing Firms in Richmond One a Non-farm Use on ALR Land and the Other in an Industrial Park Berry Packing Facility Non-Farm Use on ALR Land Fruit Packing Facility - Industrial Park Lot Size 8.7 acres (3.5 ha) 2.4 acres (1.0 ha) Assessed Land Value Assessed Improvements Property Taxes $ 1,712,000 $ 2,285,000 $ 60,021 $ 3,238,000 $ 2,698,000 $ 89,213 The difference in the assessed value of the land ($1,526,000) multiplied by the mil rate (14.65) results in a $22,356 annual property tax saving by the packing plant located on ALR land rather than industrial zoned land Data from Colliers International Report, page 84 28

29 A specific example in Surrey involves comparing a farm produce stand on ALR land, a produce stand on ALR land that has expanded beyond consideration as a farm operation, and a similarly sized fresh produce store in a nearby commercial area. This example shows why locating non-farm commercial enterprises on ALR land provides significant property tax benefits because of the assessed value of the land under the commercial/industrial building. Table 16. Comparison of Property Tax Paid by Retail Produce Stores on ALR Land and on Commercially Zoned Land Surrey Commercial Surrey ALR Farm Surrey ALR Non-Farm Lot Size 0.7 acres (0.3 ha) 10.8 acres (4.4 ha) 13.2 acres (5.4 ha) Assessed Value Land Farm Business Residential Assessed Value Improvements Property Taxes Paid $1,315,000 $ 46,300 $ 20,351 $ 26,407 $ 74,000 $ 672 $ 19,694 $ 200,000 $ 810,000 $ 11,033 The land under the large produce stand on ALR land was valued at $1,115,000 less ($1,315,000 - $200,000) than the produce store in the commercial zone. A mil rate of 7.0 results in annual savings of $7,805 in property tax for the large produce stand in the ALR. 5.6 Taxes Collected for Other Agencies When the ALR was established in 1973 the Provincial government, as part of a compensation package for lost property development rights, gave every property in the ALR a 50% exemption on provincial school taxes. By referencing the School Act 39, other agencies such as BC Assessment, Metro Vancouver and hospitals have adopted a similar 50% exemption for ALR land. This exemption is in place for all land in the ALR classified residential (even if it is not also farmed) or classified as farm. The provincial Farm Land Tax Credit provides a further tax credit of 50% of school taxes owing on land assessed farm. The assessed value of land classified farm is low and as a result the school tax owing on farmland is low. A further 50% reduction through the Farm Land Tax Credit is a small amount for each farm parcel. Below is the general case showing the impact of the School Tax (and associated agencies) exemption on land in the ALR compared to similarly valued property in the urban area. 38 Only land assessed farm or residential in the ALR receives the other tax exemptions. 39 Section 130 of School Act provides a 50% exemption for farm and residential classed land in the ALR. 29

30 Table 17. School Tax Exemption for ALR Land in Farm or Residential Use (4 ha = 10 acres) 4 ha (10 acres), Langley Assessed Value Land Mil Rate Taxes 50% Exemption School Tax $750, $ 1, $ Metro Vancouver $750, Fees $ $ Municipal Finance $750, Authority $.15 $.08 Transit Fees $750, $ $ BC Assessment $750, $ $ Total $ ha (10 acres), Delta Assessed Value Land Mil Rate Taxes 50% Exemption School Tax $1,400, $ 2, $ 1, Metro Vancouver $1,400, Fees $ $ Municipal Finance $1,400, Authority $.28 $.14 Transit Fees $1,400, $ $ BC Assessment $1,400, $ $ Total $ 1, The property tax savings resulting from the School Tax exemption are shown for the example properties in Richmond and Langley that were previously discussed in Tables 4 and 6. Table 18. School Tax Exemption on Example Properties Assessed Land Value Property Tax Saving from 50% School Tax Exemption Richmond Lot A $ 4,635,000 $ 4,800 Langley Lot A $750,000 $ Split Classification BC Assessment classifies land and improvements according to one of the nine use classes. If there is more than one use class on a lot, the assessor will split the parcel into the different use components. For example a commercial development that has retail stores on the ground floor and residential above would be split into a business component (Class 6) and a residential component (Class 1). 30

31 Many farm properties have more than one use class. Farm buildings are classified as residential (Class1) while farm land is classified as farm (Class 9). When a parcel of land in the ALR is classified as farm, all the land, including the land under the residence, is classified as farm. When a landowner in the ALR leases land to a farmer it is common in some areas for assessors to only classify the land that is farmed as farm and split off the land under the residence (of the non-farming owner) and classify it as residential. There is no directive in Regulation 411/95 indicating this should be done. It is not clear how occupancy influences the determination of use. In the general case described in Table 3, the weighted average impact of splitting the (non-farming owner s) residential part of leased land is $508 per year in additional property tax compared to what would be paid if all the land was classified as farm. In our specific cases in Richmond and Langley, the impact of split class on leased land is shown below. The Richmond case is an extreme example because 6 acres is split into residential use class. In Table 3 only one acre was considered for the residential portion. Table 19. Property Tax Owing on Example Properties With and Without Split Class Richmond Lot B 40 Taxes on Land Difference Farm Residential With Split Class (12 $500 $5,210 acres farm 6 acres residential) $ 4,960 No Split Class $750 Langley Lot A 41 Taxes on Land Farm Residential With Split Class (4 acres farm 1 acre residential) $142 $427 No Split Class $176 Difference $ Consistency Farms in Metro Vancouver are growing and expanding the types of businesses being conducted on the farm. Retail sales directly from the farm, packing and further processing of products, wineries, and agriculture tourism are some examples. When a non-farm activity is conducted on farmland, the activity pays substantially less property taxes than a similar activity in an area specifically zoned for that activity. The increase in property tax exemption for farm buildings in 2010 has greatly increased the property tax differential 40 From the actual tax notice so is different from general estimate in Section A combination of actual tax notice plus estimate based on Colliers International Report value of land 31

32 between large retail and packing facilities on farm as compared to competitors operating in areas specifically zoned for that activity. The Classification of Land as a Farm (Regulation 411/95) provides the following interpretation (p.24) related to packing houses. Land used for packing houses as part of a farm operation will be classed as farm if the land is zoned to allow for farming and more than 50% of the qualifying agricultural products packed in the facility are grown or raised on that farm operation. Packing houses on farmland will be classified as Class 1. Packing houses on land that does not meet the criteria for farm class will be classified as Class 5 or Class 6. BC Assessment uses a similar approach for on-farm retail 42 sales. How consistently this regulation is applied, and how it responds to changes on the farm, can have a large impact on the taxes paid by farmers compared to the property taxes paid by similar businesses in industrial or commercial zoned areas. The following example shows how the application of the regulation can change the property tax paid by a packing house on a berry farm in Metro Vancouver. An aerial photo of the property is in Appendix Land: 80 acres (32.4 ha) Building: Assessed improvement value - $1,836,000 Residence Assessed improvement value $ 589,000 Area used for packing house 3 acres (1.2 ha) Value of land as farm - $2,500/acre (for 77 acres) Market Value of land in the farming area - $ 75,000/acre Market Value of land in industrial zone - $ 925,000/acre (for 3 acres) Business mil Rate Residential Mil Rate They do permit 10% of sales to be from non-farm products, but the 50% from the farm rule applies. 32

33 Table 20. Property Taxes Owing on a Packing House with Land Assessed as Farm, Land Assessed as Industrial and Industrial Land Valued as in the Urban Area Taxes on Land Assessed Taxes on Land Improvements Assessed Improvements Farm Industrial 43 Farm Industrial Residential Industrial Residential Industrial Total Taxes Farm $187,561 $2,291 $2,425,000 $4, $ 7,008 Industrial Valued as Farmland Industrial Valued as Industrial Zoned Land $180,527 $225,000 $2,205 $ 3,780 $ 589,000 $1,836,000 $ 3,394 $30,846 $ 40,225 $180,527 $ 2,775, $2,205 $46,621 $ 589,000 $1,836,000 $3,394 $30,846 $ 83,066 The property tax impact on this farm, when the packing house moves from being considered a farm building to being considered a non-farm commercial building is $33,217. Part of this is because the building loses the farm building exemption ($9,250) and the balance because the improvements and land underneath are considered commercial - which has a higher mil rate. If the packing house was not considered a farm building, and the land underneath the facility was valued as if in an industrial area, the property taxes would increase by an additional $42,841. The difference in property tax owing between the packing house being considered a farm building and the packing house being considered an industrial building on industrial land valued as if in an appropriately zoned area is $76,058 ($83,066 - $ 7,008). 6.0 Evaluation of the Farmland Taxation Policy Options The following table provides a summary of the evaluation of the different policy options and provides the basis for discussion in the next section. The financial incentive reflects the impact on individual land owners of the different policy options. The size of the financial incentive to landowners is graded as low, medium or high. It is green if it increases and red if it decreases the incentive to farm the land. In the table Y indicates the policy meets the evaluation criteria described in Section 4, N indicates it doesn t. 43 Assume 3 acres for the packing house and access area. 44 This is low because the assessed value of the building ($1,836,000) is 87.5% exempt from property tax as per changes to the BC Assessment Act in Colliers International report, page 82 33

34 Table 21. Evaluation of Different Policy Options Financial Impact Higher Mil Rates for 1 Residential Class Land in ALR Claw Back at 2 Rezoning Increase Production 3 Threshold Value Land as if in 4 Appropriate Zone for Classification School Tax 5 Exemption for Farm Class Only Eliminate Split Class 6 on Leased Land Consistency in 7 Assessment Equity Administrative Ease Legislative Feasibility Med N Y? High Y N N NA Y Y N High Y Y Y Med Y Y N Low Y Y Y High Y Y Y 7.0 Discussion The following is a discussion of the seven farm taxation policy options. The discussion is based on how the options meet the policy objectives of: Increasing the financial incentive to farm land designated for farming. Decreasing the financial incentive for non-farm uses on farmland. It may be helpful to revisit three key concepts regarding farm taxation policy previously mentioned in the test. Farm class (Class 9) is only about land. The buildings (improvements) do not come into play. Whether there is a big house, small house, big farm buildings, no farm buildings none of this matters when considering taxation of farmland. Buildings are important when considering non-farm use. When does a farm building stop being classified as part of a farm operation and start being classified as a non-farm use? When is a packing facility no longer part of a farm operation but rather an industrial building on a farm? The amount of revenue a local government receives is based on the budget they approve. Changes in the property tax paid by a specific landowner do not impact the local government s financial situation. It is a shift in the share of the local government budget covered by that property owner to or from other property owners All of the policies, except the claw back option, use information that is currently available and administrative systems that are currently in place. 34

35 7.1 Adjusted Mil Rates The property tax benefit from having land classified as farm compared to land classified as residential is the difference in the assessed value of the land multiplied by the prevailing residential mil rate. If the mil rate for land in the ALR classified as residential is doubled, the financial benefit from having land classified as farm doubles. There is a direct relationship between the relative increase in the mil rate, on land in the ALR classified residential, and the relative increase in the financial incentive to farm the land. It is not clear if this policy is equitable or if Section 197(3)(b) of the Community Charter provides the authority to have higher mil rates for a specific use class in a specific zoned area. Section 197(3)(b) permits local governments to apply: Separate rates for revenue to be raised for different purposes but, in this case, the relationship between the different property class rates must be the same for all purposes. This clause enables local governments to apply local area improvement fees. Raising the mil rate of one rate class as an incentive to change behavior may not be considered a purpose and it is being applied differently to different use classes. The Colliers International report suggested this clause may provide legal authority to have different mil rates within a rate class, however, a legal opinion is required before moving forward with this policy option. When tax policy is used to achieve a social benefit it is normally by reducing the tax cost in the desired area. Increasing the mil rate for residential class land in the ALR over residential class land in a residential zone is not supported by the need for, or delivery of, more services. This approach tries to achieve the social goal by increasing taxes in the desired area rather than decreasing taxes. In essence it is a penalty on rural residential landowners rather than an incentive to farm the land. If the issue is that the total tax bill for residential class land in the ALR is lower because the market value of the land is based on farmland value rather than residential land value then the valuation process (option 4, Section 5.5) should be considered. Changing the valuation process would increase the share of taxes paid by people not farming the land but it would be seen as more equitable than increased mil rates, as it is the result of a more consistent interpretation of current taxation policy. Provided the legal authority is confirmed, and the concern for equity among affected landowners does not arise, this policy option will increase the financial incentive to farm land in the ALR. 7.2 Claw Back at Rezoning Rather than creating an incentive to farm land, the claw back approach actually removes the current incentives in place. 35

36 While this approach may be considered as a tool to reduce speculation on redevelopment of agriculture land, the disincentive is very small relative to the potential profit on rezoning. A claw back provision similar the one for Managed Forest Land would require legislative change, is a cumbersome tool and does little to discourage speculation. Abbotsford s City in the Country plan, adopted in 2005, sought a block exclusion of ALR land for industrial purposes. They proposed a $20,000/acre rezoning fee to go to a fund to support agriculture. The ALC gave conditional approval to remove 440 acres for industrial use. Few acres have been rezoned, and instead there has been redevelopment in the established industrial lands. It is not clear to what degree the economic downturn in 2009 or the surcharge on rezoning has limited uptake of the new industrial lands in Abbotsford. The advantage of a re-zoning fee is that it reduces the incentive to speculate but leaves the incentive to lease the land for farming. As a tool to increase farm use of farmland, a claw back approach is not a desirable policy option. A rezoning fee, such as a community amenity contribution, may be a better approach to discouraging speculation in the ALR. 7.3 Production Threshold to Qualify for Farm Class Farm class designation is used by other legislation and agencies as the definition of what is a farm. This connection means pressing for any change would need to involve a wide group of stakeholders. Increasing the production threshold for farm class would be a disincentive to farm more farmland. It would make it harder for new farmers leasing land to generate sufficient revenue per acre to meet farmland classification for the lessor. It would also decrease the types of agricultural production that could meet the revenue threshold on small acreages As a tool to increase farm use of farmland, changing the production threshold for farm class is not a recommended policy option. 7.4 Value Non-Farm Use Classes in the ALR as if They Were on Land with the Appropriate Zoning The large financial incentive to use farmland for non-farm uses comes from the BC Assessment policy, and most importantly their interpretation, of valuing land at the highest and best use. Currently landowners who have been permitted to operate non-farm uses on ALR land gain a substantial property tax benefit over competing firms in the industrial or commercial zones nearby. The benefit is in how BC Assessment values land in the ALR that is assessed as Class 5 or Class 6. The BC Assessment interpretation of the highest and best use is based almost entirely on zoning rather than use. Implied in this approach is the assumption that a non-farm use, often a large building, when no longer needed for the approved use would be demolished and the land used for farming. 36

37 This assumption is inconsistent with another pillar of highest and best use. That is the requirement that it be reasonably probable. Decision makers are very reluctant to require a landowner to demolish a building that had been a permitted use. They most often allow the building to be repurposed to another non-farm use and give it legal non-conforming status. A clear example of this situation is the non-farm berry packing plant in Richmond. The plant and parking lots cover the parcel. It is in, but on the edge of the ALR. It is hard to imagine a scenario that would result in the building being demolished and the land returned to farming. If the berry packing operation moves out, it will most likely be re-purposed and that will probably be accompanied with an application for exclusion from the ALR. While operating as a commercial business in the ALR, the business receives a $22,000 tax benefit annually over competitors in the urban area, and if the land is excluded the land owner stands to make an additional $10,292, windfall. Large buildings on farmland for value added activities such as packing, retail sales, feed mills and others is a relatively new phenomenon. It will likely grow in the Metro Vancouver area as agriculture continues to intensify and add-value to primary production on the farm. In the past, the BC Assessment interpretation of highest and best use for Class 5 and Class 6 land in the ALR may have been a reasonable approach. Currently, it is leading to large property tax differences between non-farm uses in the ALR and their competitors in the nearby urban area and providing a strong incentive for landowners to engage in more non-farm uses. 47 This argument can also be applied to rural residential use of farmland. A recent Ipsos Reid 48 survey for Metro Vancouver found that many people using land in the ALR for strictly residential purposes have no interest in farming. They are treating farmland like a large residential lot yet the land is being valued as farmland. The BC Assessment interpretation of highest and best use may be appropriate in this case, as often when a property is sold the new owner of the land uses it for farming. Unfortunately, some residential improvements are so extensive, they may dramatically reduce the property s potential for farming. Valuing land in the ALR classified as industrial and commercial similar industrial and commercial land in the nearby urban area is equitable, easy to administer and will eliminate the property tax incentive for non-farm activities to locate in the ALR. 46 The increase from market value ($257,000) to industrial value ($1,440,000) is $1.183m/acre times 8.7 acres. 47 This is not an endorsement of non-farm uses if the taxes are the same as in an appropriately zoned area. Farm uses can grow into non-farm uses and be fully authorized by the ALC and local government. The argument here is that once the use grows past being a farm use and becomes a non-farm use, the building should start paying taxes similar to other non-farm uses in the industrial zoned areas. 48 Located at: LandownerSurveyReportJan2013.pdf 37

38 7.5 Taxes Collected for Other Agencies Local governments collect taxes for other agencies that are based on assessed property values. They include School Taxes, Hospital taxes, Translink fees, Regional District fees, BC Assessment fees and Municipal Finance Authority fees. The fees are based on mil rates established by the agencies. The decision to provide a 50% exemption for school taxes was put in place to compensate landowners who had their properties included in the ALR. It is a shift of the tax burden from landowners in the ALR to landowners outside the ALR. In Metro Vancouver the shift in tax burden amounts to approximately $ million. Of this amount, $5.270 million (96%) is from land with residential classification and $0.221 million is from land classified as farm. From an economic perspective, people who purchased ALR land after 1973 paid a market price based on the property rights that exist under ALR regulations, not before. They are receiving compensation for a loss they did not experience or pay for. From an equity perspective, by continuing the School Tax exemption for all landowners that purchased land after 1973, the School Tax exemption is not equitable. Eliminating the School Tax exemption 49 for property in the ALR that is classed as residential 50, would increase the financial incentive to farm that land by approximately 25%. 7.6 Split Classification When a farmer leases land from another landowner in some situations only the land leased is given farm classification and the land under the residence is given residential classification. The examples in Table 19 show that in some cases, where the land value is very high and the area used for residential purposes is large, this can have a significant impact on the property tax payable. However, Table 3 demonstrates that on a weighted average basis across Metro Vancouver, it amounts to $508 in extra property taxes per lot compared to classifying the entire lot as farmland. Regulation 411/95 does not specify that land leased for farming must be split class. Split class of land leased for farming establishes use based on occupancy. The reasoning behind this approach is not clear. Split classing leased farmland may act as a disincentive to bringing more farmland into production because it decreases the financial incentive to lease land by approximately 10%. Eliminating split class on leased farm land is equitable because the policy of reducing property taxes for farming land is already in place. This simply extends the full benefit of farming land to lease arrangements. If the policy of increasing mil rates for residential class land in the ALR is adopted, the impact on of split class of leased land would reduce the incentive to lease land more. 49 Section 130 in the School Act provides the authority for a 50% tax exemption for ALR land. 50 The School Tax Exemption only applies to Class 9 and Class 1 property in the ALR. 38

39 7.7 Consistent Assessment of Non-Farm Uses Many non-farm uses start out as part of the farm operation but expand beyond the scope of the farm operation. Alternatively the property may be sold and the non-farm part of the operation continues while the farm operation changes or diminishes. This leads to cases where the tax benefits available for farm buildings are extended when the building no longer qualifies as part of a farm operation. Packing houses and farm retail must use or sell a prescribed amount of products produced on the farm. There is no formal process for determining if the prescribed amount of product is used or sold (50%), so assessors must rely on the word of the farmer when making the determination if a building qualifies as part of a farm operation. BC Assessment receives notice of all building permits so are aware of buildings being built or expanded. Section 5.8 shows the tax implications of assessing a building as farm or as commercial. If large buildings used for commercial or industrial purposes grow beyond what is used for as part of a farm operation they no longer meet the requirements of Reg. 411/95. If the buildings are not reassessed the situation results in a shift of tax burden from non-farm businesses in the farming area to similar businesses in the appropriately zoned areas. It results in different property taxes rates for competing businesses in the community. More importantly, it encourages non-farm use. Without a clear process for determining if a farm building qualifies as part of a farm operation it is very hard for assessors to enforce the percentage use or sale provisions of Reg. 411/95. While Reg. 411/95 is currently consistent with the definition of a Farm Operation in the Farm Practices Protection Act (FPPA) a more robust approach would be for Reg. 411/95 to refer directly to the FPPA. The ALC Act uses the FPPA definition and if other agencies also referred to this definition any changes or evolution of the definition would be adopted simultaneously by all agencies. 39

40 8.0 Conclusion This report investigated farmland taxation policy in an effort to identify changes in current policy that would increase the use of farmland in Metro Vancouver. The following policies increase the financial incentive to farm farmland. They are ranked in order of preference: 1. Change the School Tax exemption to only apply to land in the ALR that is classified farm. 2. Classify the entire parcel of land leased by farmers as farm - do not split classify (provided a specific proportion of the land is farmed). 3. Value land used strictly for residential purposes as if it were in an area zoned for residential use. 4. Increase the mil rate specifically on land classified residential in the ALR (if permitted by legislation). The following farmland tax policy options eliminate or reduce the financial incentive to use farmland for farming: Claw back of farm classification benefits on re-zoning (eliminates the incentive). Change in the production threshold required for land classified as farm (reduces the incentive). The specific examples in the report show how the value of ALR properties in Metro Vancouver can vary. Representing the financial impact as a percentage of the current property tax benefits of farm classification gives an estimate of the relative impact of the policy options considered. The relative financial impact of these options, on a weighted average basis for a 4 ha (10 acre) property, would be: Table 22. Relative Impact on Property Taxes Paid of Different Policy Options Policy Option Tax Incentive % impact Current Status $ 5, School Tax Exemption only on Farm Class + $1, % Eliminate Split Class +$ % Mil Rate on Residential Land in ALR Increase 20% 54 + $1, % 51 From Table 3 52 From Table 16. The weighted average was estimated as the average of Langley and Delta 53 From Table 3 54 Arbitrarily selected 20% for showing the different impacts. Could be any amount. 55 This is 20% of the current weighted average property tax saving of $5,

41 The following farmland tax policies will decrease the incentive to use farmland for non-farm purposes and help improve the consistency of application of farmland taxation policy. 1. Value all land in the ALR not classified farm as if it were located in the nearest appropriately zoned area. 2. Consider using the Farm Practices Protection Act definition of a farm operation as the basis for determining if a non-farm use is considered part of a farm operation. 3. Develop a quantitative method to determine when a building is no longer a farm building and is an industrial or commercial building on a farm. 9.0 Areas for Further Consideration Local governments play a major role in property taxation. They set mil rates and they can appeal classification decisions by BC Assessment. The classification of farm uses such as packing houses and farm retail stores that have grown beyond the definition of needed to operate a farm, have not received close scrutiny by BC Assessment or local governments. The School Tax exemption is probably the most inequitable property tax policy found in this investigation. The main beneficiaries of this policy are ALR landowners that do not farm the land. This is because once land is classified farm the land value is low so the benefit of the exemption is small. Elimination of residential classification from the School Tax exemption in Section 30 of the School Act would require a change in provincial legislation. BC Assessment does not have a good quantitative method for determining when a farm building is necessary to operate a farm. A quantitative tool needs to be developed to better apply Reg 411/95 to potential non-farm uses. The biggest incentive to conduct non-farm business on farmland comes from the way BC Assessment values the land under these businesses. If BC Assessment valued this land (that will likely never be farmed again) similarly to land in the nearby area zoned for that business activity, it would eliminate a major incentive for non-farm businesses to locate on farmland. This does not require any legislative change, simply a clarification in the interpretation of highest and best use. 41

42 10. Appendix 10.1 Aerial Photos of Case Study Properties Richmond Lot A 18.4 Acres Large Home No Farm Class 42

43 Richmond Lot B 18.1 Acres Large Home Split Class 43

44 Richmond 8.7 Acres - Berry Packing House Non-Farm Use in the ALR Richmond 2.4 Acres - Fruit Packing House Industrial Park 44

45 Richmond 98 Acres - Tax Claw Back Option if Excluded and Rezoned to Industrial 45

46 Surrey 10.8 Acres Farm Retail Stand in the ALR Surrey 13.2 acres Commercial Retail Stand in the ALR 46

47 Surrey 0.69 acres Produce Store in Commercial Zone Langley Lot A 5 Acres Modest Home + No Farm Class in the ALR 47

48 Langley Lot B 5 Acres Modest Home + Farm Class in the ALR 48

49 Langley 80 Acres Bare Land 49

50 Pitt Meadows 38.8 Acres - Berry Packing Facility ALR - Building is classified commercial (Class 6) Pitt Meadows 40.2 Acres - Berry Packing Facility ALR - Building considered farm building as part of a very large farm operation 50

51 Langley Packing plant used as example in Section