Through the pandemic more people have worked from home than ever before. There is a growing view that some people will not likely go back to offices and continue to complete professional tasks from home. This has the potential to transform the real estate market. An issue that may come before the Ontario Assessment Review Board more frequently in that new landscape is the classification of a home office.
In Ontario there are a variety of tax rates that apply to property. Those rates can differ dramatically. In Ottawa, for example, the 2019 urban residential rate was 1.076669% of the assessed value of the property, while the urban commercial rate was 2.700993%. That means that a commercial property will pay 2.5 times the taxes when compared to a residential property with the same value. Property class can have big implications on the taxes payable!
Classification turns on how a property is used on June 30 of the year preceding the tax year and is governed by Regulation, O Reg 282/98. In terms of home offices, there are two relevant provisions. Subparagraph 3(1)1(i) of the Regulation states that land is in the residential property class if it is “land used for residential purposes that is... land that does not have seven or more self-contained units.” Paragraph 5(1)1 of the Regulation provides that “the commercial property class consists of …land and vacant land that is not included in any other property class.” So in cases where a home office is at issue, the question to be decided is: Is the current use of the home office a use "for residential purposes”?
The property class applied to a home office has been considered by the Board on a number of occasions, and some principles can be gleaned from those decisions. Two of those Board decisions are Ren v. Municipal Property Assessment Corp. Region No. 19 , 70 O.M.B.R. 415 and Seawright v. Municipal Property Assessment Corp. Region No. 15 , 57 O.M.B.R. 248.
Ren involved a paralegal business that was operated from a home. MPAC argued that a portion of the value of the main floor of the house should be in the commercial property class. The Board found that it should be in the residential property class. The Board held that much of the work of the paralegal took place off-site, at the courthouse, that there were no employees or visitors to the office, that there was no external signage, and the lot was zoned residential. For those reasons it found that the residential property class applied to the home office.
Seawright is another decision dealing with a home office. That case involved a business that services clients' electrical equipment at the clients’ places of business. Administrative functions for the business were undertaken in the home office space which had four desks and computers. The issue was whether the home office should be in the commercial property class. The Board noted that home based offices are becoming more and more common and states, at paragraphs 33 and 38:
The Board would suggest that the issue is one of the scale of and nature of the activity undertaken in a residential property. At one end of the scale might be a desk and computer in one corner of the living room used, as with the phone, primarily for household activities but occasionally for work related functions. The Board would have difficulty in finding such a use as being not a normal component of a residential property. At the other end of the scale might be a fully functional office, such as… that of a lawyer, a doctor or an accountant, with non-resident employees, a separate entrance, separate client parking and signage visible from the road. The Board would have difficulty finding such a use as being a normal component of a residential property.
The Board suggests that only by weighing a number of criteria, in terms of the scale and the nature of the activity undertaken within a specific space, can a reasoned conclusion be arrived at as to the appropriateness of the use as being a use for residential purposes.
The Board accepted the taxpayer argument that the home office there was used for residential purposes based on four factors:
- the “home office” space is used solely for the benefit of residents of the house;
- that no revenue producing activity takes place in the space;
- that non-resident employees, clients, deliveries and salespeople are discouraged from coming to the space; and finally,
- that the “home office” space has no separate entrance, signage or visitor parking.
Factors (1), (3) and (4) are useful when considering a home office. Working from home will not usually constitute a commercial use because no other employees or visitors or customers would be attending. There is unlikely to be any visitor parking or separate entrance or have use by anyone who does not live in the house.
Perhaps a factor from Ren and Seawright that may not be as relevant in today’s virtually motivated workforce is “that no revenue was produced on site.” If a professional is having a Zoom meeting with a client in a different city, is the revenue made in that different city or the city where the professional lives? If work is done by an employee of a corporation on a laptop while at home, where was that revenue made? Was it made at the employee’s home on the laptop? At the coffee shop where the employee regularly does some of her work? At the corporation’s regional or head office? At the location of the corporation’s servers? It may not be helpful to consider whether work was done from a particular location as a factor.
It should not be determinative that all billable work is done from the home, if there are still no visitors, no signage and no external impacts of the business. In those earlier cases, an argument was that the money-making side of the business was really off-site. We wonder whether a business can make money without an organized administrative end. Leaving that issue aside, a home office should also be in the residential property class if there are no external impacts.
That external impact test is relatively easy to apply and has a solid policy basis. The Board implicitly applied that test to a home based travel agency in Singh v Municipal Property Assessment Corporation, Region 15, 2017 CanLII 32655 (ON ARB). Increased taxes for commercial property are justified, at least in part, on commercial properties bringing more traffic impacts and potentially a greater draw on other infrastructure due to that use, such as a commercial kitchen’s draw on water and sewer, or the number of visitors wearing on sidewalks and roads. None of those impacts exist for professional work done by the residents of a home from a home office.
There may be more appeals coming on the proper classification of home offices. NextGenLaw LLP is ready to help you navigate those issues and pay the right amount of municipal tax. Contact us today.