By J. Bradford Nixon

Walker Poole Nixon LLP

Re: February 21, 2013 – First pre-budget consultation held by the new Minister of Finance, Charles Souza.

I appeared in my capacity as President of the Canadian Property Taxpayers Association:

“The Canadian Property Taxpayers Association offers you congratulations on your appointment as Minister of Finance.

The Canadian Property Taxpayers Association has 440 members across Canada, all of whom are professionals in the field of municipal assessment, property tax, whether they be consultants, appraisers, lawyers or paralegals.

We are over 200 members in Ontario, many of whom are employed by large real estate companies, large industrial and commercial concerns, and multi-residential property owners.

The property tax is the second largest source of governmental revenue in Ontario. The property tax expense is the second largest or third largest corporate expense after debt service.

We work directly with MPAC and municipalities appealing or negotiating fair and equitable assessments on behalf of our clients or employers.

The biggest concern we raise with you is the separation of MPAC from any direct supervision and policy management by the Province. Too often tax issues erupt because MPAC changes valuation or classification methodologies or principles without notice or consultation. The resulting uncertainty can be devastating to a taxpayer’s business operation. 2

Prior to 1998, MPAC’s function was performed by the Ministry of Finance and prior to that, the Ministry of Revenue.

Now MPAC is not directly accountable to the Minister and tax problems erupt suddenly which require tax policy intervention by the Minister. We believe the Ministry of Finance has to take a leadership role in consultation with the private sector on workable tax policies.

Let me give you an example which will soon require your decision: the dramatic increase and expansion of assessment of outdoor and indoor signage which has thrown an industry into turmoil, and created unconscionable tax burdens on some properties.

There are many others.

We urge you to take control and make MPAC accountable, and use your authority to provide tax policy solutions to the assessment problems. We urge the provincial Ministry of Finance to assume an activist role in developing tax policy solutions – working with all the stakeholders, MPAC, municipalities, and taxpayers. The field cannot be abandoned to only three of the four players. The Ministry has a critical role to play.

Thank you for your time; thank you for listening and we wish you well.”

This application for a vacancy tax rebate was heard by the Assessment Review Board on July 22, 2011.  Kitchener Frame sought vacant unit rebates under section 364 of the Municipal Act, 2001 in respect of vacant areas in the building.  The Board rejected the application stating “the evidence indicates that the building was not vacant and was still in use. . .”. 

The parties agreed that 103,700 square feet of the former manufacturing plant was being used to store disassembled equipment.  Kitchener agreed that it had previously processed vacancy tax rebate applications in relation to this plant for vacant space which still had idled equipment.  Kitchener Frame acknowledged that “much of the manufacturing equipment was still in place and adhered to the floor in the main manufacturing and processing area of the plant”. 

Both parties agreed that the staging area of 103,700 square feet was designated for equipment which was dismantled and taken out of the plant. Both parties also agreed that the remainder of the plant still had the existing manufacturing equipment which was slowly being removed through the staging area.

The Board concluded that the building was not vacant because a portion was still occupied by idle equipment owned by the manufacturer and there was no evidence of physical separation between the staging area and the manufacturing area where the equipment lay idle.  Kitchener Frame sought a review of the Board’s decision pursuant to Rule 147.  The reviewing Board found that there was an error of law.

The Board said on review:  “the conclusion that the presence of the idle equipment precluded the portion of the property eligible for a vacancy rebate is not within a reasonable range of outcome because subsection 1(4)(ii) [of O/Reg. 325/01] provides that the presence of fixtures does not constitute a usable portion of a building.”  Unfortunately for Kitchener Frame, this section was not “raised or argued at the hearing or was considered by the Board”. 

The review decision also identified discrepancies between the original Board decision and the agreed facts identified by the presiding Member. 

Ultimately, the Board on review found that it was “not satisfied that the decision is transparent and defensible as being within a range of possible and acceptable outcomes”.  And, therefore, found that it would be a denial of justice not to allow the parties “the opportunity to fully reargue the case with reference to all of the applicable law, which does not appear to have been argued before the Member who presided at the original hearing”. 

The latest ruling of the Supreme Court of Canada on standard of review of administrative tribunals is Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association, 2011 SCC 61.

The majority of the Supreme Court confirmed that deference to the tribunal will usually result where the tribunal is interpreting its own statute or statutes closely connected to the function, unless the question falls into a category of question to which the correctness standard continues to apply, eg. a constitutional question, a question regarding the jurisdictional lines between competing specialized tribunals, a question of central importance to the legal system as a whole, or a true question of jurisdiction or vires.

The Court reiterated that the category of true questions of jurisdiction attracting a correctness standard of review in statutory interpretation is narrow.  The Court went on to say that, pending clarification of the scope of true questions of jurisdiction by the Court, unless the situation is exceptional, the interpretation by a tribunal of its home statute, or of statutes closely connected to its function, should be presumed to be a question of statutory interpretation subject to deference.

This decision suggests that the reasonableness standard is here to stay as the standard of review of Assessment Review Board decisions interpreting the Assessment Act and related regulations.

One practical consequence of this level of deference seems to be an abrupt and marked decrease in grants of leave to appeal from Board decisions.  This will achieve the policy direction of the Supreme Court of Canada, but at what cost to the taxpayer and municipalities?

By:  J. Bradford Nixon, Walker Poole Nixon LLP 

Steelcare was a long-term tenant of a portion of rail lands in the City of Hamilton owned by Canadian Pacific Railway (“CPR”).  On the 14.4 acres which it leased from CPR, Steelcare constructed a 167,000 square foot single storey industrial warehouse with drive-through rail and truck loading/unloading facilities.  The entire property was assessed by MPAC using the cost approach for buildings and structures and the comparative sales approach for land.  Unlike other industrial properties in the City of Hamilton, no market adjustment factor (“MAF”) was applied by the assessor.  The parties agreed that the cost approach was the appropriate method of valuation. 

MPAC had developed the MAF after observing that industrial properties were selling in the marketplace for less than the cost values.  According to MPAC’s in-house policy, the MAF is not applied to certain lands, including railway yards, because they do not typically sell in the marketplace, although the MAF is applied to Port Authority lands and petro-chemical plants for example.

MPAC argued that the entirety of the lands, both those occupied by CPR and those leased by Steelcare should be assessed under section 30(2)(d) of the Assessment Act which is the special valuation section for rail yards “in actual use and occupation” by the railway company.

The facts indicated that:

• ·       Steelcare had built, owned and maintained the 167,000 square foot warehouse.
• ·       Steelcare controls access and moves railcars in and out
• ·       Steelcare services both CPR and its own customers from the warehouse
• ·       CPR does not conduct any business on the Steelcare personal lands
• ·       The facility is operated by and for the sole benefit and profit of Steelcare

Member Ian Birnie, of the Assessment Review Board, wrote:

“The evidence is that standard industrial properties in the City of Hamilton receive a MAF reducing their assessments by around 20%.

Consequently, the result of not applying the MAF to properties which do not sell, is that they are assessed higher than identical properties which do sell.

This makes no sense to the Board since surely a property for which there is no market cannot be no more than an identical property for which there is a market.”

Member Birnie found that:

“By valuing the subject property by the same Cost Approach methodology, without a MAF, MPAC has over-assessed the subject property.

. . . the Board can find no justification for this by reason of the subject properties being a type of property that typically does not sell or because rail yards have to be assessed under section 30(2)(d).”

On June 25, 2012, the Superior Court of Justice (Divisional Court), denied MPAC’s Motion for leave to appeal stating:

“I see no error of law in the Board’s conclusion that the MAF should be applied in order to value the CPR property.”

This was litigation arising from dissident shareholders seeking an oppression remedy from actions of the corporation, which relief the Judge denied.

Apparently at the hearing of this application (for which there had been cross-examinations) the Judge ruled affidavit evidence of an opinion expert to be inadmissible. See paragraphs 45-46.

This expert was the principal of a large shareholders services firm under contract to the corporation. The firm was retained to provide services for shareholding meetings of the corporation; one of the meetings was the subject of contention in the court proceeding.

Mr. Justice D.M. Brown held that “….a person under retainer to a party to litigation, however qualified he might be in the subject area, lacks the independence necessary to provide opinion evidence that is ‘fair, objective and non-partisan…’”, citing rule 4.1.01 of the Rules of Civil Procedure.

Presumptively, this decision suggests that a party (i.e. a landlord) maintaining a standing retainer with a property tax consultant may not be able to rely upon an employee of that consultant as an expert witness when the firm’s work is the subject matter of the dispute (i.e. taxes charged back to a tenant, in a lease interpretation dispute).

This is a note about two legal decisions regarding retroactive assessments by MPAC.  The two are a recent decision of the ARB (Martino v. MPAC, R. 13, 2012 CarswellOnt 4213), regarding omitted assessments, and an older decision of the Ontario Superior Court of Justice (Ontrea Inc. v. MPAC, 2008 CarswellOnt 6721, 51 M.P.L.R. (4^th) 206), regarding supplementary assessments.

Both matters relate to the retroactive assessment by MPAC of a change in classification.

The facts before the Ontario Superior Court of Justice in Ontrea Inc. v. MPAC were that:

• on August 1, 2006, Ontrea began construction of an office building on property which was formerly used as a commercial parking lot;

• the change in use from the commercial property class to the vacant commercial property class was a “change event” for purposes of the supplementary assessment provisions in section 34(2) of the Assessment Act;

• the change in classification to the vacant commercial subclass would result in a lower tax ratio;

• MPAC became aware of the change event in March of 2007 and made a supplementary classification change assessment for the property effective January 1, 2007;

• MPAC took the position that it did not have authority to make supplementary assessments for reclassification effective as of August 1, 2006.

Ontrea sought a declaration that it was entitled to a supplementary assessment as of the change event.  The Superior Court dismissed the application holding that under section 34(2), the assessor may change the classification in the current year if a change event occurs during the taxation year (ie. 2007), or after June 30^th during the previous taxation year (ie. 2006).  The tax levied for the taxation year is determined in accordance with the new classification.  However, notwithstanding the change event occurred in 2006.  The Superior Court held that the Act only permitted a supplementary assessment for the current (not prior) taxation year (ie. 2007):

“The assessor does not have the authority, on reclassifying a property in a taxation year based on a change event in the preceding tax year, to issue a supplementary assessment in the taxation year which is effective during the preceding taxation year.”

The Court explained its view that the mechanics of section 34(2) are clear:

“The change event giving rise to a reclassification can occur in the current taxation year or after June 30^th in the preceding taxation year.  The reclassification is made in the current taxation year.  This effects the tax roll and the taxes levied for the current taxation year, not the preceding taxation year.  It is only the date of occurrence of the change event which extends into a previous taxation year, not the reclassification or adjustment of taxes.”

So that decision seemed clear enough.  It had a harsh result for the taxpayer.

We then turn to Martino v. MPAC, R. 13, a decision of the Assessment Review Board.

The taxpayer operated a commercial business in the Town of Uxbridge.  A building permit for an addition was issued in 2002 and after a building permit follow-up inspection in 2009, MPAC issued a Notice of Omitted Assessment increasing the value and changing the property tax classification from commercial to industrial for the two previous taxation years, 2007 and 2008.  The taxpayer disputed the change in classification believing the property continued to be commercial.  The taxpayer asked the Board that, if the industrial classification was upheld, then the reclassification should not apply retroactively to the 2007 and 2008 taxation years.

The Board confirmed the additional value of $96,000 for 2009, and $74,000 for 2007 and 2008.  The taxpayer referenced a decision of the Ontario Municipal Board which had granted permission to “enlarge and extend the building” but made it clear that “no new uses will be permitted”.  The taxpayer argued that if no new uses were allowed, then she failed to understand how the assessment could be changed from commercial to industrial when it was entirely commercial before.  The Board determined the applicability of the industrial tax class based upon the fact that furniture was being assembled within the subject property.  The Assessment Review Board disregarded the applicability of the zoning variance application stating “zoning and assessment are entirely different matters, governed by different legislation”.

The taxpayer asked that the “retroactive” application of the omitted assessments for 2007 and 2008 in terms of the change in tax class be foregone “because of the financial obligations for a commercial property owner during an economic recession”.  She submitted that the increased taxes resulting from the industrial classification would add an expense to the taxpayer “after the fact, that the property could absolutely not off-set through his commercial billing”.

The Board found that it had “no option in this matter”.  It said:  “The application is not optional [ie. of the industrial tax class]; it is required . . .”.

The Board referenced section 33(1)(i) of the Act which states that:

“The Assessment Corporation shall make any assessment necessary to correct the omission. . .  The assessment including the property tax classification must apply as legislated.”

It struck me as more than passing strange that the taxpayer seeking a retroactive reclassification under the supplementary assessment process is denied the tax benefit flowing from a reclassification of the prior year’s assessment from commercial to vacant commercial; however, the taxpayer seeking to avoid the tax burden of a reclassification from commercial to industrial retroactive for two years is refused.  There seems to be an absence of common sense here.

The subtle intricacies of assessment and taxation legislation in Ontario often lead to parties and decision-makers confusing themselves. Two recent cases provide examples.

Ashforth v. MPAC

Ashforth v. Municipal Property Assessment Corp., Region No. 17, 2011 CarswellOnt 2136 (ARB) rendered March 23, 2011 concerns the jurisdiction of the Assessment Review Board (“ARB”) to determine correct phase-in current values for 2009 and 2010 taxation. A cottage complex had an undisputed value as of January 1, 2008 of $1.82M. For 2006 and 2007 taxation the property had a value as of January 1, 2005 of $1.131M. For 2008 taxation, MPAC changed its opinion and returned a corrected value as of January 1, 2005 of $1.417M.

For the phase-in (i.e. determining the “eligible increase”) in order to arrive at the current values for 2009 and 2010, MPAC utilized the notional 2005 CVA figure of $1.417M [a number which appears on the assessment notice]. The Taxpayer asserted the appropriate 2005 number was $1.131M.

The presiding Member asked for guidance from the parties on the issue of jurisdiction to determine the “eligible increase.” Inexplicably, neither party provided submissions for his assistance!

Without the benefit of appropriate guidance, the Member expressly held there was no provision within the Assessment Act (the “Act”) or regulation “…to correct an error in MPAC’s determination of the eligible increase and its phasing in pursuant to subsection 19.1(3).” This writer respectfully suggests the Member was significantly confused about the ARB’s jurisdiction in rendering this decision, which cannot possibly be correct.

Section 19.1(3) of the Act is a mandatory provision to determine the correct current value of a property when the value as of January 1, 2008 exceeds the value as of January 1, 2005. For assessment notices in 2009-2011 taxation there is a notional 2005 value that, appropriately, will not be the same as the assessed current value actually utilized for  2006, 2007 and 2008 taxation, when, by 2009, there has been a change in the physical state and condition of the property (i.e. new construction or demolition).

The Member failed to consider sections 19.1(5), (6) and (7) of the Act that permit MPAC to adjust an “eligible increase”, including correcting an arithmetic error. If the property owner lacks prior notice of such an adjustment then a fresh assessment notice must be sent to the property owner with a right of appeal to the ARB. This notice and appeal provision is critical to a property owner because the eligible increase is intrinsic to the proper determination of current value due to phase-in, and hence the ultimate tax burden.

The determination of a property’s correct current value is the raison d’être of the ARB. When one frames the question of jurisdiction in that context there is no controversy from any quarter that the ARB has exclusive jurisdiction to render the necessary determination.

The Board Member’s confusion was failing to recognize that the “eligible increase” determination is but a component in the proper determination of the current assessment for the taxation years 2009 and 2010 (and would similarly be applicable for taxation in 2011). Having asked himself the wrong question about what to determine, the Board Member then reached an incorrect conclusion concerning the ARB’s jurisdiction.

The interesting but unaddressed point is the one raised by the taxpayer. MPAC utilized two different values for a property as of January 1, 2005 simply because of the assessor’s change of opinion, not because of a change of physical state and condition of the property. Since the taxpayer did not challenge the appropriateness of the $1.417M value used for 2008 taxation, this writer suggests that MPAC correctly determined the “eligible increase” and thus the appropriate phased-in current values for 2009 and 2010 taxation.

Toth Equity Limited v. Ottawa

The case of Toth Equity Limited v. Ottawa (City), 2010 ONSC 2605 (Div. Crt.), reversed, 2011 ONCA 372, concerns Towngate Shopping Centre in Ottawa. The facts identified in the Divisional Court decision re-released June 30, 2010 and the Court of Appeal decision released May 12, 2011, are curious and at times sketchy.

A single assessment appeal in 2005 lead to consent decisions of the ARB in May, 2005 for each of 2003, 2004 and 2005 taxation. Presumably, the 2003 and 2004 taxation year assessment determinations concerned omitted assessments. The Court of Appeal claimed that the City was not a party to the assessment appeal, the settlement or the consent decisions. The Court of Appeal must be technically wrong because the City is a statutory party to assessment appeals pursuant to section 40(11) of the Act.

These ARB decisions reduced current values and shifted the apportionment of value between property classes. However, in mid-2005 the City advised the property owner the result was a collective tax increase of over $400,000.

The property owner asserted that for 2001 taxation [the first year of capping and clawback calculations derived from notional taxes in the prior year, but not from frozen assessment listings] the City failed to properly take into account apportionment changes to calculate 2000 notional taxes. The City had therefore erroneously calculated taxes for all subsequent tax years. In September, 2005 the owner applied for a tax refund under section 357 of the Municipal Act, 2001, asserting a gross or manifest error in the preparation of the assessment roll arising from the ARB decisions.

The Municipal Act, 2011 requires such an application to be made by “…February 28 of the year following the year in the respect of which the application is made.” Council is required to render a decision by the September 30^th following February 28. There is a right of appeal to the ARB from either a decision or non-decision of Council. The appeal from a non-decision of Council must be made by October 21^st.

On October 16, 2006, the owner appealed to the ARB from Council’s non-decision by September 30, 2006 to address the section 357 application.

On July 7, 2007 the property owner commenced its judicial review application.

The Divisional Court granted an Order requiring Council to hold the requested hearing to address allegedly overcharged taxes for 2003, 2004 and 2005 due to an alleged gross or manifest error.

The Court of Appeal overturned the Divisional Court because its Order was contrary to both the legislative scheme and established jurisprudence. The ARB is an adequate alternative to judicial review. The ARB has expertise in matters of valuation, classification and taxation.  The property owner has an onus to demonstrate that appeal rights were exhausted prior to commencing the judicial review application.

There was unclear and disputed evidence concerning the resolution of the owner’s appeal to the ARB concerning the section 357 application. The Court of Appeal concluded that evidence of “closed” files of the ARB did not mean that a decision had been rendered.

Interestingly, the Court of Appeal treated the City’s timing of advice to the property owner that taxes for 2003, 2004 and 2005 would increase as a result of the ARB assessment appeal decisions as if those taxes had all been levied in mid-2005. Thus, the year in which the taxes are levied is key to triggering appeal rights, as opposed to the taxation year at issue or the taxation year during which the error may have occurred.

The commonsensical interpretation of the Court of Appeal decision is that judicial review applications to the courts from tax refund applications are discouraged. No surprise there.

A more technical consideration of the Court of Appeal decision sends a more subtle and perhaps more far-reaching message to taxpayers who are trying to sort their way through these confusing measures:

(a)   Upon discovering any adverse tax treatment generated by either a tax bill or simple municipal correspondence the prudent action is to treat that occurrence as the levying of a tax for which a section 357 application due to gross or manifest error ought to be filed by not later than February 28^th of the year following that levying event (regardless of the taxation years at issue);

(b)  Expect municipalities to routinely attack taxpayer judicial review applications if there is any plausible basis for the municipality to claim: “You should have first exhausted your remedy at the ARB.”;

(c)   When Council renders a decision on a section 357 application, the 35 day appeal period runs from the date of the Council decision, and neither the municipality’s notice of decision date nor the content of the notice can necessarily be relied upon to establish the requisite appeal period; and

(d)  If there is no decision of Council for a section 357 application then an appeal to the ARB is required by not later than October 21^st of the year in which the February 28^th deadline occurred.

The total assessment of the Subject Property for the 2009 taxation year was $21,000,000. The total building area of the Subject Property was 1,210,438 square feet and the portion in question constituted 1,203,618 square feet of large industrial area.

The relevant section of the statutory scheme is contained in Ontario Regulation 325/01 at (1) which states that eligible property for the purposes of s.364 of the Act is “a building constructor on property that is classified in one of the commercial classes or industrial classes and is prescribed to be eligible property for the purposes of s.364 of the Act for a period of time if, (a) the period of time is at least 90 consecutive days; and (b) no portion of the building or structure was used at any time in the period of time.”

Subsequent to the closure of the manufacturing operations at the Subject Property during the 2008 taxation year the owner of the property began to disassemble the large industrial manufacturing equipment contained in the 1,000,000 plus square foot area that was once part of the manufacturing operation. It was in evidence that the assessment personnel for the City of Kitchener and a representative of the Appellant had agreed that an area of approximately 103,700 square feet had been sectioned off as equipment storage along with 5,000 square feet for storage of wire and a staff working area of 1,000 square feet that being utilized as staging areas for dismantling and removing the remaining equipment. The evidence presented indicated that in 2009 the activity within the remainder of the Subject Property was the dismantling and removal of equipment which was being sold as used equipment or as scrap. During the entire period, two to three staff members worked on the dismantling process. This was a reduction in staff from the over 2,000 personnel at peek operations in the years past. The Municipality conceded that production had ceased at the plant and that no part of the building was being used for the purposes of manufacturing any automotive parts.

The Board in making a determination began by reviewing the section 364 of the Legislation Act which states that “an Act shall be interpreted as being remedial and shall be given such fair, large, and liberal interpretation as best ensures the attainment of its objects.”

No reference was made by the Board with respect to the rules of statutory interpretation or any case law with respect to either interpretation of physical statutes or the interpretation of section 364. The Board held that the purpose of section 364 of the Act is that “every municipality should have a program to provide tax rebates to owners of property that have vacant portions if that property is in any of the commercial or industrial classes.” The Board found, as a matter of fact, that a staging area of 103,700 square feet was designated for equipment which was dismantled and taken out of the plant. Furthermore, both parties agreed that the remainder of the plant still had existing manufacturing equipment which was slowly being removed through the staging area. The Board noted that subsection 325.1(1) states that “no portion of the building or structure can be used at any time during the period of time for which vacancy rebate is claimed.” The Board concluded that based on the evidence “provided to the Board, it is clear that the building was not vacant.” The Board, despite the agreement between the parties being in evidence, concluded on its own prerogative that there was no evidence of physical separation between the staging area and the manufacturing area where the equipment lay idle. The Board found that the activity of the three personnel in removing the idle equipment from the over a million square foot industrial plant constituted a use under Regulation 325/01.  The Board denied the application for vacancy on the basis that the dismantling and removal of the industrial manufacturing equipment for the purposes of auto parts constituted a “use” for the purposes of the statutory scheme.

This decision is quite opposite of the Board’s 2009 decision in the matter of 539843 Ontario Limited v. Marathon (Town), 2009 CarswellOnt 6779. Member Whitehurst found that section 364 and the related regulation provisions provide property tax relief for industrial and commercial businesses when a portion of the property is not used for 90 days or more. The Board states that “this situation often occurs when companies suffer from economic distress.” The Board believes the legislation is intended to promote the economy by helping businesses whether economic distress. Ultimately, the Board in that case determined that while emptiness may provide an indication as to whether or not a unit is being used, it is not the determinative factor. Member Whitehurst found that the restaurant in question was not eligible because it was not inhabited, unoccupied, and unused and that the furniture equipment remaining in the unit may have promoted the sale or lease of the property but does not constitute a use because it was not used for its intended function, which in that case was to prepare and serve food. Clearly these two decisions are on opposite sides of the spectrum and will require a future determination by the Board as to whether “use” under the statutory scheme requires a use of the property for its intended purpose or whether the section is indeed intended to assist tax payers suffering economic distress. It is our understanding that the matter of Kitchener Frames Limited is continuing a pursuit of its administrative remedies towards correcting the decision of the Board and reconciling it with its earlier decisions such as that of the Marathon case through the Board’s Request for Review process.

http://www.cbc.ca/news/politics/story/2011/10/17/pol-scoc-appointments.html