Ontario Superior Court of Justice, Divisional Court

Court File No. 506/99 Date: Heard: 2001-03-09

Lang J., Blair R.S.J. and MacKenzie J.

Counsel: W. Thomas Barlow and Vincent C. Kazmierski, for appellant. F.X. Shea, for respondents.

The judgment of the court was delivered by

Blair R.S.J.:—

Background

[1] This is an appeal from a decision of the Assessment Review Board regarding the tax assessments returned for the 1996 and 1997 taxation years for a shopping centre known as the Agincourt Mall. The Appellant is the owner of the Mall.

[2] The property was assessed for both years at $2,098,855. In its decision following a hearing on February 8 through 12, 1999, the Board affirmed the assessment with a small variation, reducing the assessment to $1,849,475.

[3] In March, 1995, the Appellant had purchased the Agincourt Mall, together with two adjoining strip mall properties, a gas station and a vacant development lot, for $24,800,000. The transaction took place on the open market and was at arm's length.

[4] The assessment approved by the Board, however, was based upon the assessor's estimated market value of $23,879,000. The assessor, Mr. Martino, agreed on cross-examination that this amount was close to the $24,800,000 price which the Appellant had paid for all of the property it had purchased in March 1995, just 10 months before the first relevant taxation year.

[5] On this appeal, the Appellant argues that the Board:

a) erred in failing to give effect to the actual sale, in March, 1995, as the best evidence of, and the legal test for, market value; and,

b) was wrong in its approach to the determination of "market value" under s. 19 of the Assessment Act,[^1] applying in effect a "current value" to the Mall — a concept introduced into the Act by amendment in 1997, but not applicable to the 1996 or 1997 taxation years — rather than the requisite concept of the price a willing buyer would pay on the open market for the land, and a willing seller would accept.

[6] The Respondents submit, on the other hand, that the fixing of assessed values for municipal tax purposes is a matter squarely within the jurisdiction of the Board's mandate, and an exercise in which it has particular expertise. Its findings about market value and assessed value are entitled to curial deference, therefore, and should not be disturbed on appeal. Moreover, they argue, the Assessment Act read as a whole shows that it is the real property or land itself which is subject to assessment, not any one person's interest in the property, and thus the "theoretical concepts" of "current value" and "market value" are essentially the same thing, and the ARB was entitled to take the approach it took.

[7] In my view, the Appellant is entitled to succeed, and the assessments should be remitted to the Assessment Review Board for redetermination. The Board was clearly wrong, and in the circumstances was unreasonable, in the approach it took to the interpretation of "market value" as defined in the applicable section of the Act, Standard of Review

[8] The Divisional Court has jurisdiction to hear this matter by virtue of s. 43.1(1) of the Assessment Act, R.S.O. 1990, c. A.31, as amended, which states:

43.1(1) An appeal lies from the Assessment Review Board to the Divisional Court, with leave of the Divisional Court, on a question of law.

[9] Leave to appeal was granted by O'Driscoll J. on June 1, 2000.

[10] This is an appeal, then, from the decisions of the Board, on a question of law alone. It is not an application for judicial review. While the standard of review must be considered in terms of the spectrum between "correctness" and "patent unreasonableness" described in such cases as Southam,[^2] and Pezim,[^3] I am satisfied that the standard in the circumstances of this case is that of correctness.

[11] The decisions of the Board are not protected by a privative clause, and the Court is given broad powers of disposition on the appeal. It "may reopen the whole question of the assessment": Assessment Act, s. 44(1). While the Assessment Review Board is to be accorded considerable deference in making its findings with respect to assessment values of land, given its relative expertise in the area, it does not have any particular expertise in interpreting the correct legal tests to be applied in exercising that function. Statutory interpretation is a question of law.

[12] The question of law here concerns the interpretation of the former s. 19 of the Assessment Act, and whether or not the Board applied the correct legal test in determining the "market value" of the Agincourt Mall, as defined in that section. Accordingly, given the lack of a privative clause protecting the decisions of the tribunal, the existence of the statutory provisions for appeal, the legal nature of the issue to be determined and the Board's relative lack of expertise in regard to such a question of statutory interpretation, the standard of review to be applied by the Divisional Court in such circumstances, in my opinion, is that of "correctness": see, Southam, supra; and Pezim, supra.

[13] Even if the standard of review were one which required a degree of judicial deference to an expert tribunal — away from the more exacting "correctness" end of the Southam/Pezim spectrum, and towards the "reasonable/unreasonable" middle of that spectrum,[^4] I would set aside the decisions appealed from in the circumstances of this case. The Board applied an incorrect legal test, and it was both clearly wrong and unreasonable in doing so. It in effect approved a "current value" assessment, of the sort enacted by the 1997 amendments to the Assessment Act, but which the Legislature had specifically stated was not applicable to the taxation years in question.

[14] I note in passing that the Assessment Act was amended in 1997 to provide for an appeal directly from the Assessment Review Board to the Divisional Court. Prior to the amendment, appeals had gone from that Board to the Ontario Municipal Board ("OMB") for a hearing de novo, and from the OMB to this Court. While this change in appeal routes has not altered the formal nature of the function performed by the Assessment Review Board, it has changed the importance and finality of what goes on before it. We are told that in the previous regime, hearings before the Board were more perfunctory and that the "full" hearing took place de novo before the OMB. I make this observation because it seemed to us, in reviewing the Board's decision, that it would have been helpful if the Board had provided more detail in expressing its reasons for arriving at its findings and conclusions. We found it difficult to ascertain from the Reasons, themselves, exactly how it was that the tribunal arrived at the decision as to assessed value and, particularly, how it arrived at the calculations set out in Appendix A and the reasons for doing so.

Analysis

[15] The law which applies to this case, in terms of assessing the value of land for municipal tax purposes, is set out in s-ss. 19(1) and (2) of the Assessment Act as it existed prior to the 1997 amendments. The assessor — and, therefore, the Assessment Review Board — must determine the "market value" of the property. The Act stated:

19(1) Subject to this section, land shall be assessed at its market value.

(2)... the market value of land assessed is the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer.

[16] On the "market value" issue, Mr. Marsiglio, the Appellant's expert, gave evidence that:

a) he had prepared an appraisal report valuing the property as of August 1, 1996;

b) he had separated out each of the component parts of the March 1, 1995 purchase and concluded that the market value as of August 1, 1996 was:

(i) Agincourt Mall — $ 17,000,000;

(ii) The two strip malls and the gas station — $6,250,000;

(iii) The parcel of vacant development land — $2,600,000.

c) the arm's length sale of March 1, 1995 provided the best comparable for his appraisal; and that,

d) his market value for the Agincourt Mall as of August 1, 1996 was $16,000,000 to $16,500,000.

[17] The Board's assessor, Mr. Martino, confirmed on cross-examination that the market value of commercial properties during the period between 1994 to 1996 was generally static.

[18] Mr. Marsiglio arrived at the above valuation using the income approach. His market value, however, was founded upon what Mr. Martino referred to as a "leased fee". That is, Mr. Marsiglio arrived at his market valuation based upon what in his view a willing buyer would pay on the open market and a willing seller would accept for the property as it stood, encumbered by the commercial leases to which it was subject. Mr. Martino conceded in cross-examination that he had no quarrel with Mr. Marsiglio's findings and conclusions on that basis, or with Mr. Marsiglio's allocation of purchase price to the Agincourt Mall.

[19] The following passages from Mr. Martino's cross-examination confirm this:

Pages 137-138:

Q. So for whatever interest was being identified — and we can discuss that in a different context perhaps — the appraisal[^5] is not something you quarrel with, its findings and conclusions?

A. Based on what the appraiser was commissioned to value, I don't have a quarrel with his findings and conclusions.

Q. And what the appraiser was commissioned to value is everything that the owner of the mall was in a position to sell?

A. The answer to your question, as was indicated in the appraisal, he valued the fee simple interest in the lands, in the redevelopment land and he valued the leased fee interest in the mall, I believe, the strips.

Q. I don't want to trip over semantics, I just want to focus for a moment on the mall, Agincourt Mall itself.

A. Yes.

Q. What the appraiser valued was the market value of what the owner of the mall, as a willing seller, was in a position to sell to a willing buyer on the open market?

A. That would be correct.

And at pp. 141-142:

Q. ... would you accept the appraisal evidence as an appropriate basis upon which to determine how much of that sale price to allocate to the subject property?

A. I don't believe I had any objection to the value which Mr. Marsiglio has attributed to the Agincourt Mall component. [Italics added.]

[20] In arriving at his value of $23,879,000 for the Mall, Mr. Martino adopted a different income approach. He assessed market value based upon the "unencumbered fee simple". That is, he incorporated into his market value assessment not only the owner's interest in the lands, but in addition the theoretical current leasehold values of the commercial space — ignoring the actual rent for the leases then in place. These leasehold values he characterized as "fair market rent". In arriving at the owner's interest in the lands he appears to have utilized an "effective tax rate" calculation.

[21] In effect, Mr. Martino applied the concept of "current value", imported into the legislation in 1997 as the new basis for the assessment of land value for taxation years after 1997.

[22] "Current value" is defined in s. 1 of the Assessment Act, as a result of the amendment of S.O. 1997, c. 5, s. 1(3), as follows:

"current value" means, in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm's length by a willing seller to a willing buyer. [Emphasis added.]

[23] By the same amendment [1997, c. 5, s. 12], s-ss. 19(1) and 19(2) — which provide for "market value" assessment — were repealed, and the following "current value" provision was substituted for them:

19(1) The assessment of land shall be based on its current value or average current value, as determined under section 19.1.

[24] These amendments, however, do not apply to the subject property for the taxation years in question, namely 1996 and 1997. The amendment 1997, c. 5, s. 80(1) (in force December 1, 1997) specifically states:

80(1) The Assessment Act, as it appeared immediately before December 1, 1997, continues to apply with respect to a complaint under section 40 of the Assessment Act relating to the 1997 taxation year or an earlier year.

[25] Mr. Martino appears to have recognized that this was the case; however, the approach he actually took was otherwise. That this is so is well illustrated in the following passages from his cross-examination:

At p. 112:

Q. I'll rephrase the question. A precondition to accepting a sale of the subject property for you is that fair market rents — that contract rents equal fair market rents?

A. Or are very similar to market rents, they don't have to equal. I doubt very highly that you will come across situation where that is the case.

And at pp. 201-204:

Q. Now, in your evidence and also in your report, over several pages, you talked about what the statute required you to do; do you recall that?

A. Yes, I do.

Q. The statute being the Assessment Act.

A. Yes.

Q. And you set out some hypotheticals and so on. I don't intend to go over all of that, but when you were indicating about what the statute called upon you to do, it's fair to say that you were giving us your interpretation?

A. My understanding of market value would be the unencumbered fee simple.

Q. And in some cases you were using words that we would not find in the statute like, for example, the word "unencumbered", you read that into the statute, do you?

A. That's my understanding, yes.

Q. But it doesn't appear?

A. No.

Q. Similarly, even "fee simple" does not appear in the relevant statute for this, you read that in?

A. That's right.

Q. The same with "leased fee"?

A. That's right.

Q. And when you say that what you're called upon to do by the statute is to determine the value of each interest in the property and then add them together to get market value, you'll agree with me that you're reading that into the statute as well, [it] doesn't say that?

A. My interpretation is to value the land and there are cases where there are separate interest in land. If you're going to refer to it as "the land" it is my understanding that that is the total interest in land.

Q. Well, again, I don't want to repeat your evidence in chief with you in examination in cross, but you cannot point to me any sections of the statute that say expressly you're suppose[d] to take the interest of the tenant, value them; and the interest of the owner, value them, and add them together?

A. What I can refer to is the definition of current value to the revised statute [sic] and that's the definition that was taken into consideration in arriving at the 1996 current value assessments.

Q. But certainly in the statute that applies to this matter, which the statute as it existed before its revisions in 1998, none of that appears?

A. No.

Q. As I understand what you're saying — correct me if I'm wrong — you're saving, in this case, to arrive at a market value for the subject property where, in your submission or your position, there are long term leases with contract rents that are significantly lower than market rents, you have to value that tenant interest and then you have to value the owner's interest. So the value to tenant, value to owner, and add them together to determine market value, is that what you're saying?

A. That's another way of saying valuing the unencumbered fee simple of the property.

Q. So the answer is, effectively, yes?

A. Yes. [Emphasis added.]

[26] The Board accepted and adopted Mr. Martino's approach to the valuation of the Agincourt Mall, subject to a minor adjustment. This is evident from a review of Schedule A to the Board's decision, which forms the basis for the assessments that are to be entered on the roll for the Mall. Schedule A represents the total of (a) a capitalized fair market rent for the anchor tenant (after deducting vacancy and expense allowances), plus (b) a capitalized fair market rent for the allied tenants (after similar deductions), plus (c) a capitalized property tax adjustment apparently designed to provide an estimated "current" value (tax adjusted) of the owner's interest. According to the Schedule, the "total 1996 Market Value using this Income approach" is $23,118,438. In a calculation with which all parties seem to agree, this "market value" is then reduced by the application of an 8% multiplier to $ 1,849,475 — the amount to be entered on the tax roll.

[27] The March 1995 Transaction

[28] In the process of arriving at its decision, the Board rejected the March 1995 purchase and sale of the subject property as evidence of its market value for assessment purposes, stating (Board Reasons, page 3):

The Board finds the sale, although of interest, is not meaningful in as much as it is neither timely nor did the agreement of purchase and sale note any apportionment of value amongst the individual component parts.

[29] On behalf of the Appellant, Mr. Barlow submitted the Board erred in law in dismissing the March 1995 sale in such a fashion, arguing that the courts have held recent actual sale prices to be the best evidence, and the test in law, for determining market value. I do not think the Board erred in law in this regard, however. Although I may not have arrived at the same conclusion as it did, the Board applied the facts as it found them to the law as set out in the authorities referred to by Mr. Barlow. If it erred, its error was one of mixed fact and law, from which there is no appeal to this Court.

[30] In Regional Assessment Commissioner, Region No. 11 v. Nesse Holdings Ltd. (1984), 1984 1857 (ON SC), 47 O.R. (2d) 766, the Divisional Court did confirm that the best indication of the market value of property for tax assessment purposes is generally the price paid in a recent arm's length transaction. Speaking for the Court, Galligan J. (as he then was) said (pp. 767-768):

It seems to me to be worth remembering that where the Assessment Act, R.S.O. 1980, c. 31, requires the determination of what a property might be expected to realize if sold in the open market by a willing seller to a willing buyer (s. 18(2)),[^6] the price paid in a recent free sale of the subject property itself, where, as in this case, there are neither changes in the market nor to the property in the interval, must be very powerful evidence indeed as to what the market value of the property is. It is for that reason that recent free sale of a subject property is generally accepted as the best means of establishing the market value of that property.

I think that generally speaking the recent sales price, if available as it was in this case, is in law and, in common sense, the most realistic and most reliable method of establishing market value. [Emphasis added.]

[31] The Board was alive to this issue, however, and indeed purported to follow Nesse in making its findings. After quoting the above passage, and more, from the Divisional Court decision, the Board said:

Had the subject property alone been the subject of the March 1, 1995 sale, there would be no argument and the Nesse Holdings decision would hold. But that is not the case with the subject as the sale contained five components and the complainant had extracted from the sale what he estimated to be the value attributable to the mall portion. By applying this extrication method the complainant has created a situation that does not apply to the merits of the Nesse Holdings decision, for this is no longer a sale of the whole part, but a part of the sale of the whole, and there is no evidence as to the value to the mall.

And later at the end of its decision:

Counsel for both parties provided substantial case law. The Board, while taking note of all the case law presented in argument, has relied on the decision in Nesse Holdings Ltd., Merkur & Sons Ltd. and Regal Stationery, supra, as being most relevant to the subject matter.

[32] I am puzzled by the Board's statement that there was "no evidence as to the value [of] the mall". There was such evidence. Although there was no precise allocation of purchase price to the Mall at the time of the Appellant's purchase of the Agincourt Mall in March, 1995,[^7] the Appellant's expert, Mr. Marsiglio, estimated the allocation for the Mall at between $16 million and $16.5 million, and the Respondents' expert, Mr. Martino, did not quarrel with that allocation in view of Mr. Marsiglio's assumptions. Given the context of the Board's remark, however — it was referring to what it called "the extrication method" the Applicant had used — I think what the Board meant was that there was no actual allocation of purchase price to the Mall at the time of the March 1995 sale. In that respect, the Board was correct. It would have been open to the Board to have considered and given effect to this evidence, particularly in light of their own assessor's acceptance of the estimated allocation. However, it opted for a different approach to the evidence.

[33] The fact is there was no actual evidence of a recent sale price for the Mall. Arriving at an allocated purchase price — as Mr. Marsiglio did — required a process of estimation, using an income approach analysis. The Board was required to choose between two estimation processes in this regard, and it was within its jurisdiction in doing so. It recognized the law as articulated in Nesse Holdings, and applied the facts before it to that law, concluding that the case before it fell outside of the general principle laid down by the Divisional Court in that case. In doing so it was engaging in an exercise of mixed fact and law, and no appeal lies from its conclusions in that regard.

[34] Accordingly, I would not allow the appeal on the ground relating to the way in which the Board dealt with the March 1995 transaction.

[35] "Market value" vs. "Current Value"

[36] The Board did err in law in my opinion, however, by applying the equivalent of a "current value" test in determining the market value of the Mall instead of the "market value" test called for by s. 19 of the Assessment Act as it then stood.

[37] In Nesse Holdings the Divisional Court rejected the argument that in determining market value of a shopping centre the value of the tenants' leasehold interests in the property should have been included as well as the owner's interest in the property. The Nesse decision was upheld in the Court of Appeal. Robins J.A. dissented on this latter point, taking the view that all interests in the land must be valued in order to determine "market value" for Assessment Act purposes. The majority of the Court (MacKinnon A.C.J.O. and Tarnopolsky J.A.) disagreed, however. They concluded — notwithstanding "a lengthy tour through the Act" and "struggle through the statute" by counsel for the appellant in order to demonstrate that the then s. 18(2) "meant something more than "market value of land assessed" (p. 439) — that market value did not mean "something more than the statutory definition as set forth in [the section]" (p. 440). See also, Re A. Merkur & Sons Ltd. and Regional Assessment Com'r, Region No. 14 (1978), 1978 1530 (ON CA), 21 O.R. (2d) 797, 91 D.L.R. (3d) 764 (C.A.). The majority noted that if they were wrong in their conclusion, the error could be "speedily corrected by further legislation", observing (at p. 440) that:

It would take very little by way of amendment to extend or clarify the meaning of s. 18(2) if that is the intention.

[38] The amendment, it appears, came 11 years later in the form of S.O. 1997, c. 5, cited above. Its provisions, however, do not apply to the taxation years here in question.

[39] As I have explained above, both the assessor and the Board adopted an "unencumbered fee simple"— or "current value" — approach to the establishment of the market value assessment of the Mall. In doing so, in my opinion, they erred in law.

[40] "Current value" assessments do not apply to the subject property for the taxation years in question. The approach had been rejected by the Courts before in the cases referred to above. As noted in Merkur, supra, at p. 798, "shopping centres are bought and sold upon a consideration of the actual rents obtainable". A willing buyer must take the land subject to existing commercial leases, and a willing seller can only dispose of the land subject to those encumbrances. The price to be paid and accepted will reflect that reality. Given the definition of "market value" in s-s. 19(2) of the Act, no other conclusion can be reached.

[41] Since the Act has been amended to replace "market value" with the concept of "current value" — based upon an unencumbered fee simple — the determination of assessed value of land for taxation purposes has changed. It was not open for the Board to apply the amended approach to the 1996 and 1997 taxation years when the Legislature had specifically provided that the new approach was not to apply to those years. To have done so was both clearly wrong and unreasonable, in the circumstances, in my view.

Disposition

[42] Accordingly, I would allow the appeal and remit the assessments back to the Assessment Review Board for a redetermination based upon a "market value" assessment as contemplated by s. 19 of the Assessment Act, as that section existed prior to December 1, 1997. The Appellant is entitled to its costs of the appeal, to be assessed.

[43] Appeal allowed.

[^1]: R.S.O. 1990, c. A.31, as amended. [^2]: Canada (Director of Investigation and Research) v. Southam Inc. (1997), 1997 385 (SCC), 144 D.L.R. (4th) 1 (S.C.C.) at pp. 11-18. [^3]: Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, 114 D.L.R. (4th) 385. [^4]: Even where the decision of an expert tribunal is subject to a statutory right of appeal, the standard of review is not a fixed subject and may vary, depending on the circumstances, and "fall somewhere between correctness, at the more exacting end of the spectrum and patently unreasonable, at the more deferential end": Southam, supra, p. 11 (d.l.r.); Pezim, supra, at pp. 589-590 (s.c.r.). Where there is a statutory right of appeal from the tribunal's decision, however, "patent unreasonableness" is not the test." The standard of patent unreasonableness is principally a jurisdictional test and ... the statutory right of appeal puts the jurisdictional question to rest": Southam, supra, at p. 19 (per Iacobucci J.). [^5]: That is, Mr. Marsiglio's appraisal. [^6]: The equivalent of s-s. 19(2) above. [^7]: The Mall, the two strip malls, and the gas station were all part of one deed for which the purchase price was $20,800,000 There was a second deed, at a purchase price of $4,000,000, for the vacant development land.