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Tax Increment Financing: The Canadian Experience
Simply put, tax increment financing (TIF) is a financing mechanism that uses the increase in property tax revenues generated by the redevelopment of a property or area to pay for the costs associated with redeveloping that property or area.
The use of TIF to spur the redevelopment of brownfields is not a new phenomenon. Certainly, in the U.S., numerous municipalities have successfully utilized TIF to promote brownfield redevelopment for many years.
However, the use of TIF is a relatively new concept in Canada, currently only being used in the Province of Ontario. Most provinces in Canada, including Ontario, have what is commonly referred to as “anti-bonusing” laws that prevent municipalities from providing financial incentives to any industrial or commercial enterprise.
In Ontario, there is an exception to this anti-bonusing provision for municipalities that prepare and adopt a community improvement plan under Section 28 of the Planning Act. Once such a plan is approved by the Province of Ontario, the municipality may offer TIF, grants, loans and other financial incentives to property owners, tenants or their assignees within the geographic area covered by the community improvement plan (i.e., the community improvement project area). Several municipalities have taken advantage of this exception to offer TIF to promote brownfield redevelopment.
The Ontario TIF Model
TIF, as practiced in the U.S., is quite different than TIF in Ontario. This
is largely a result of the different legislative frameworks. The structure of
TIF in the U.S. follows what has been called the “municipal investment
model.” State legislation gives municipalities the authority to designate
areas that meet certain conditions, such as blighted areas, as TIF districts.
The municipality or a separate TIF authority can then issue debentures to raise
funds that may be used to invest in infrastructure and services and provide
grants, loans and tax abatement to finance developer land acquisition, remediation
and construction costs. The debt obligation of the TIF authority is then retired
using the tax increment that is generated as a result of development in the
area.
In Ontario, legislation prohibits municipalities from establishing TIF districts or diverting tax increases to a separate authority. Instead, as already mentioned, municipalities may prepare community improvement plans for one or more designated community improvement project areas.
These plans must provide the rationale for designation of the community improvement project area as well as the details of any grants or loans that may be provided to developers to promote brownfield redevelopment. Plans must be approved by the Province of Ontario. The entire municipality may be designated as a community improvement project area to allow the municipality to address geographically pervasive issues such brownfields or affordable housing on a citywide basis.
Where the Rebates Go
Municipalities in Ontario have been using community improvement plans to offer developers of brownfield sites a number of financial incentives, including TIF. As practiced in Ontario, TIF is essentially provided as a rebate of the property tax increase generated by a redevelopment project, although the provincial government insists that it be referred to as a grant.
For example, this tax rebate is paid to the developer of a brownfield property after the property has been redeveloped and the new (higher) property tax level has been established. The tax rebate — or TIF-based grant as it is often referred to — is paid to the developer as an annual rebate of part or all of the property tax increase generated by the project.
Typically, the term of this tax rebate is approximately 10 years and often includes a sliding scale of annual rebates from 100% of the property tax increment in the early years, decreasing to 0% of the tax increment at the end of the period. In accordance with the Planning Act, the total of this tax rebate and any other grants and loans provided by the municipality to the developer cannot exceed the cost of rehabilitating the subject land and buildings.
These costs have not been clearly defined in legislation or by regulation. Municipalities using TIF have interpreted these eligible costs to include the costs of environmental assessment, remediation, building demolition, retrofitting, on-site infrastructure replacement/upgrading, and even in some cases, new construction.
A Cross-Border Comparison
A comparison of TIF as practiced by municipalities in U.S. states versus Canadian provinces (only Ontario at this time) is beyond the scope of this article. However, some general conclusions can be drawn.
First, the tax rebate model employed by Ontario municipalities presents less risk to municipalities than the municipal investment model employed in the U.S. In Ontario, there is no risk that a lack of anticipated development would cause a shortfall of property tax revenues to pay for a debenture issue because Ontario municipalities do not finance infrastructure or other incentives by the issue of debentures.
Conversely, this limits the ability of municipalities in Ontario to finance the often-required and costly public investment projects that can act as catalysts to the redevelopment of blighted areas. Similarly, the conservative approach of Ontario municipalities using TIF, from the use of a declining sliding scale to a maximum 10-year TIF term (as opposed to 20 years or more in some U.S. states), reduces the size and attractiveness of the financial benefit to the developer.
Some U.S. municipalities have been criticized for misusing TIF as merely a tool to attract developers and investment to a community (even to greenfield areas) rather than as a redevelopment tool for blighted areas. This is a result of the ambiguity surrounding the definition of “blight” in some TIF statutes.
The definition of a “community improvement project area” in the Planning Act is similarly broad and includes “an area, the community improvement of which is desirable because of age, dilapidation, overcrowding, faulty arrangement, unsuitability of buildings or for any other environmental, social or community economic development reason.”
While municipalities in Ontario have not generally been permitted to misuse TIF by the province, it is expected that this definition will be tested by Ontario municipalities as they gain more experience with TIF and community improvement plans. Part two of this article will discuss the recent experiences of Ontario municipalities with TIF.
By Luciano P. Piccioni, president of RCI Consulting.
Coming Soon...See Part Two of the series in Volume 9 Issue 1 TIFs in Canada.
Related articles:
Financial Incentives in Canada (Vol. 8, Iss.
3)