Managed Forest Tax Incentive Program
In fall 2003, the ECO received an EBR application for a review of the Ministry of Natural Resources’ Managed Forest Tax Incentive Program (MFTIP) from persons representing private foresters in southern Ontario. MFTIP was created in 1997 to provide a financial incentive to encourage private forest stewardship. Under the program, forests that are actively managed by their landowners and are more than four hectares (10 acres) in size would be assessed similar to farmland and taxed at the rate of 25 per cent of the municipal tax rate for residential properties.
The application for review raised concerns about how properties were being assessed for taxation purposes – an issue that began to intensify for managed forest property owners in early 2003. The applicants argued that around that time, the Municipal Property Assessment Corporation (MPAC), a municipally funded, not-for-profit corporation that assesses the value of property in Ontario for taxation purposes, began changing its methods of assessing the value of managed forest properties. (MPAC states it made certain changes in April 2003 at the direction of the Ministry of Finance, the ministry that oversees the Assessment Act, the legislation MPAC uses to administer property tax assessment.) According to the applicants, the changes to MPAC’s property value assessment methodologies mean that many managed forest owners are required to pay substantial increases in property taxes, undermining the goals of the MFTIP program.
The applicants charged that the assessment of managed forests was redefined to be the “highest end use” (i.e., a land’s potential value for residential and commercial development), instead of being valued on the same basis as farmlands. The applicants noted that when MFTIP was formulated in 1997, MNR indicated that managed forests would be taxed at the same rate and assessed identically to farmlands.
The applicants contended that if these issues are not resolved, many forested properties in southern Ontario could undergo clearing and land use transformation. They noted that more than 95 per cent of treed lands in southwestern Ontario are privately owned. Equally harmful, property owners will face a disincentive to reforesting marginal farmland if farm and forest lands are not given equivalent tax treatment. The applicants anticipated that the harmful environmental impacts from these forestry disincentives will include habitat loss and water quality degradation. Also, provincial initiatives such as MNR’s Southcentral Region Forest Strategy and the Oak Ridges Moraine Plan could be adversely affected.
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Ministry response
The Ministry of Natural Resources provided a thorough response to the application for review of MFTIP in the form of a 50-page report. The following is an overview of key items from the report:
Appropriateness of assessment methodology changes
MNR reported that using proxy values (farmland for forest lands) was inconsistent with the Assessment Act, particularly where sales data for forest properties were available. Continuing with this approach would lead to the establishment of a precedent in property tax policy. For these reasons, MNR agreed that MPAC acted appropriately in identifying the divergence in land values between farm and managed forest properties. MNR also concurred with MPAC’s use of a new model for assessing the value of managed forest properties based on the sales of managed forest (MF) properties within defined areas of the province.
Communication to landowners
MNR acknowledged that the change in 2003 assessment methodology was not communicated by MPAC to MFTIP property owners in advance or as it was implemented. This lack of communication was particularly unfortunate, since property owners often received assessment notices with significant increases without an accompanying explanation or outreach effort from MPAC. Communicating to landowners about assessment methodology should have been a priority given the widespread understanding in the late 1990s that the government had committed to a principle of “assessing managed forest properties in a manner similar to (sometimes expressed as “identical to”) farmland.” Program materials for the MFTIP program included this wording, and it was commonly understood by stakeholders and property owners that it reflected a commitment to use acreage rates for farms as a proxy for managed forest land values.
Assessment and tax impacts
MNR reported that the average property values for managed forest properties (in aggregate), as measured by the average value per acre, did not increase substantially as a result of MPAC’s new assessment methodology. Thus, tax increases were minimal for many MF property owners. For example, the ministry indicated that, according to their analysis, values per acre of MF properties were similar to values per acre for Class 4 farmland in all areas of the province, with the exception of the Greater Toronto Area and southcentral Ontario, where values lie slightly above Class 4 rates. Also, MNR noted that property taxes for the majority of MF property owners fall within the $50 to $250 range per parcel and fewer than 10 per cent of property owners will face a tax responsibility greater than $500.
Environmental harm
MNR concluded that harm to the environment would not result from MPAC’s change in assessment methodology.
Recommendations arising from the review
MNR produced eight recommendations based on this EBR review (see the Supplement, pages 265-269, for a full list). Key among them was “MOF and MNR will establish a committee, including stakeholder representatives and MPAC, to respond to issues with implementation of the assessment procedures in the coming year. This committee will also oversee the implementation of recommendations in this report.”
ECO Comment
The goal of MNR’s Managed Forest Tax Incentive Program is “to maintain and enhance healthy forests that contribute to the maintenance of a healthy environment.” The program has become very popular among landowners with managed forests and woodlots in Ontario. By 2004, more than 10,700 landowners were participating, helping to protect approximately 690,000 hectares of forest lands in Ontario. MNR acknowledges that the program is a powerful tool for increasing landowner awareness and education about sustainable forest management practices. Thus, the ECO believes that MPAC’s assessment methodology changes are likely to be very detrimental to the managed forests of Ontario.
In its response to the applicants, MNR stated that MPAC’s assessment methodology changes were appropriate and that continuing to use a subset of farm land values for assessment of managed forest properties would be inconsistent with the principles of Ontario’s Assessment Act. But up until May 2003, MNR vigorously defended the pre-existing approach in correspondence to the Ministry of Finance. MNR wrote then that “MPAC’s most recent valuation procedures (April 2003) are contrary to the government direction for MFTIP.” This reversal of opinion on the part of MNR suggests that MPAC and MOF may be unduly influencing the administration of MFTIP and forcing MNR to abandon the core policy commitment of MFTIP – that managed forest properties would be assessed identical to farmland.
The ECO feels that MNR, MOF and MPAC should focus more attention on some of the underlying principles of the Assessment Act that affirm, not undermine, the goals of MFTIP. For example, forests on farm properties are considered by the Act to be of such value that certain forested lands are included under a category of tax-exempt properties that includes churches, museums, cemeteries, public hospitals and other institutions greatly valued by society. The Assessment Act also has wording that states that forests should be valued and assessed as forests, not as cottage or estate home developments.
MNR relied on average increases in assessments in its summary of the impact of MPAC’s methodology changes in order to declare that property assessments did not increase substantially. As noted, MNR stated that property taxes for the majority of property owners fall within the $50 to $250 range and few will face a tax responsibility greater than $500. But it is also true that for about 5 per cent of the properties, assessments will rise by more than $1,000 a year and some of these by more than $10,000 a year – a very substantial increase. Some of the most affected properties are also large, and, therefore, major forest ecosystems could be put in jeopardy by the assessment increases. Furthermore, from MNR’s detailed findings, it is apparent that the managed forest class was the hardest hit by MPAC’s methodology changes:
Per cent increases in property tax assessments by class over 2003/2004
| Property Class | 2003 | 2004 | Compound Increase |
|---|---|---|---|
| Residential | 11% | 13% | 25% |
| Multi-Residential | 12% | 12% | 24% |
| Commercial (broad) | 12% | 5% | 18% |
| Industrial (broad) | 18% | 7% | 26% |
| Farmland | 18% | 8% | 27% |
| Managed Forest | 22% | 18% | 44% |
| Average increase | 12% | 12% | 25% |
MNR concluded that harm to the environment would not result from MPAC’s change in assessment methodology for managed forests. Yet the ministry acknowledged that in areas such as the outskirts of Toronto, where property values are significant and increasing, the reduction in property taxes provided by MFTIP may not be a significant enough incentive alone, and that “some participants may feel it necessary to sell the land, sever the land into smaller pieces, or as an interim measure practice poor forest management practice (i.e., heavy cuts).” Further, the ministry wrote that the afforestation of marginal farmland could be threatened. An “unintentional barrier could be created which may discourage tree planting and afforestation” on low productivity farms if there is a “divergence in taxation between farm lands and managed forests.” This is precisely what is occurring, according to many of the letters of landowners that the applicants included in their application for a review of the MFTIP program.
In our 2003/2004 annual report, the ECO recommended that MNR ensure that the MFTIP provides no financial incentives to clear forested tracts of land in southern Ontario, where the majority of MFTIP participants are located. It is critical that these forested lands and woodlots be regarded as important for what they are intrinsically, and just as important as food production or the “next” development project. Such forests are vital for numerous reasons, providing biodiversity and habitat, mitigating floods and soil erosion, and buffering the effects of climate change.
The changes to MFTIP in 2003 significantly altered the initial conditions by which private foresters agreed to participate. Managed forest property owners made investments in land and silviculture based on the original program design. Redefining the program, several years into it and without public consultation, is unfair to the private foresters.
These changes have become significant enough that some private forest managers have discussed litigation to resolve the matter. In the balance is the long-term silvicultural health of thousands of hectares of forest, mostly in southern Ontario, where private forested lands make up a significant portion of all forests in the area.
In December 2004, MNR issued a press release affirming that the province is working with the committee struck to carry out the recommendations arising from the EBR application in order to develop an assessment method that is similar to the approach used for farmlands. The ECO urges MNR to ensure that any new assessment methodology provide no financial incentives to MF property owners to remove trees from their property, nor any financial disincentives to reforesting marginal agricultural lands.
Any new assessment methodology for managed forests must properly recognize a property’s forest productivity value, and not its development value. This is key to ensuring that MFTIP’s goal continues to be met. The ECO will be monitoring MFTIP developments in the future.
| This is an article from the 2004/05 Annual Report to the Legislature from the Environmental Commissioner of Ontario. |
Citing This Article:
Environmental Commissioner of Ontario. 2005. "The Managed Forest Tax Incentive Program." Planning our Landscape, ECO Annual Report, 2004-05. Toronto, ON : Environmental Commissioner of Ontario. 137-141.
