COURT FILE NO.: 191/05
DATE: 20060309
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
O’DRISCOLL, CHAPNIK AND sWINTON JJ.
B E T W E E N:
THOUSAND ISLAND TAX/DUTY FREE STORE LTD., PENINSULA DUTY FREE SHOPS LTD., NIAGARA FALLS DUTY FREE SHOP INC., BLUE WATER BRIDGE DUTY FREE SHOP INC., PEACE BRIDGE DUTY FREE INC. AND WINDSOR DETROIT TUNNEL DUTY FREE STORE INC.
Applicants
- and -
MUNICIPAL PROPERTY ASSESSMENT CORPORATION
Respondent
Andrew J.F. Lenz and Joshua P. Moon, for the Applicants
Carl B. Davis, for the Respondent
HEARD at Toronto: February 24, 2006
SWINTON J.:
[1] The Applicants are duty free stores carrying on business at various international land border crossings in Ontario. The Respondent is the Municipal Property Assessment Corporation (“MPAC”).
[2] The Assessment Review Board has stated a case pursuant to s. 43 of the Assessment Act, R.S.O. 1990, c. A.31 (“the Act”), as amended, requesting the opinion of the Divisional Court on a question of law. The two questions before this Court are:
Does the use of the direct capitalization of income methodology (the “income method”) in valuing duty free stores result in the valuation of the properties in question contrary to the general provisions of the Act which mandate only the valuation of real property as defined in sections 1 and 3 of the Assessment Act?
If the answer to (a) is yes, do sections 3(2) and (3) of the Assessment Act preclude the use of the income method of valuation and mandate in its place the use of the depreciated replacement cost plus land methodology or any other specific method of valuation for duty free stores located on the land of a bridge or tunnel authority at an international crossing?
[3] The duty free stores all have appeals pending before the Assessment Review Board. Common to all the appeals is the issue of whether the income approach to property valuation, as applied by MPAC, is consistent with the Act. The issue for this Court to determine is whether revenue solely attributable to the use of the bridge or tunnel can be considered in the assessment of the duty free stores.
[4] The starting point in this case is s. 3(2) and (3) of the Act, which were added in 1997. They read:
3(2) The following apply with respect to a bridge or tunnel that crosses a river forming the boundary between Ontario and the United States:
Subject to section 30, land used for the purposes of the bridge or tunnel is liable to taxation even if the land is owned by the Crown or would otherwise be exempt under a paragraph of subsection (1). However, the bridge or tunnel structure is taxable only under section 320 of the Municipal Act, 2001.
The bridge or tunnel structure shall not be considered in the assessment of the land used for the purposes of the bridge or tunnel.
Land used for the purposes of the bridge or tunnel is not liable to taxation for school purposes.
(3) In subsection (2),
“land used for the purposes of the bridge or tunnel” includes land at the end of the bridge or tunnel used in connection with the bridge or tunnel, including duty-free stores.
[5] The duty free stores pay property tax based on the assessed value of the stores, which is established by MPAC. The property taxes paid are a function of the municipal tax rate, which is applied to the current value assessment.
[6] Historically, there are three main methods of valuing property: the sales comparison approach, the cost approach, and the income or direct capitalization of income approach. In the case of the duty free stores, MPAC has always used the income approach, which entails assessing the value of the property by measuring the amount of income which the property generates.
[7] In MPAC’s Guide to Property Assessment in Ontario, the income approach is described as follows (at p. 15):
The income approach presumes the value of certain properties can be determined by estimating the present value of all future benefits. Future benefits typically include the net income generated by the property and the proceeds from the sale at the end of the investment.
The income approach is ideally suited for larger investment types of properties such as office buildings, hotels and apartment buildings….
[8] MPAC approaches the landlord of each duty free store and demands to see the amount of rent paid by the store. In the leases of the stores, the rent paid is a minimum amount plus a percentage of income generated by the store. MPAC then deducts vacancy and legitimate expenses incurred to maintain the property in order to calculate net operating income. That figure is converted into an estimated current value using a market capitalization rate.
[9] The Act contains no general provision directing an assessor to use any particular appraisal methodology in the determination of current value. Specifically, there is no statutory provision in the Act and no regulation made pursuant to s. 19(2.1) providing for the determination in a specified manner of the current value of “land used for the purposes of the bridge or tunnel”, as that phrase is used and defined in s. 3(3). In the absence of specific statutory or regulatory direction in explicit terms, the question of the appropriate appraisal methodology or approach to valuation is a question of fact for the Assessment Review Board (Municipal Property Assessment Corporation v. Inmet Mining Corp., 2002 7325 (ON SCDC), [2002] O.J. No. 3540 (Div. Ct.) at para. 14).
[10] It is the Applicants’ position that the way in which MPAC has applied the income approach is inconsistent with the provisions of the Act. They argue that virtually all of the revenue generated by the stores is derived from customers using the international bridges and tunnel to leave Canada, as the stores can sell only to customers leaving the country. While they concede that MPAC can use the income approach to value their properties, they submit that in doing so, it can not consider revenue generated from customers using the bridges or tunnel, as to do so is contrary to s. 3(2)2 of the Act. In other words, revenue earned from such customers is said to be derived solely from the bridge and tunnel structure and cannot be considered in the assessment of the “land used for purposes of the bridge or tunnel”.
[11] Thus, the specific issue for this Court to determine is whether MPAC, in the application of the income approach, is prohibited from taking into account revenue generated from customers using a bridge or the tunnel.
[12] Subsections 3(2) and 3(3) of the Act, in conjunction with s. 320 of the Municipal Act, 2001, create an assessment and taxing regime for international bridge and tunnel crossings, in which two specifically identified parts of the same property are assessed and taxed differently. By s.3(2)1, the bridge or tunnel structure is taxable only under s. 320 of the Municipal Act, 2001. In contrast, the land used for the purposes of the bridge or tunnel is subject to assessment under the Assessment Act, but that land is not liable to taxation for school purposes.
[13] In our view, the use of the income method to value the duty free stores does not, in the words of the Act, “consider the bridge or tunnel structure”. In using the income approach, the assessor considers the rental income specified in the lease between the duty free store and the bridge or tunnel authority, as the case may be. By restricting the analysis to income generated by the duty free store’s lease, the assessor arrives at a valuation, using the income approach, that reflects the value of the portion of the property used as a duty free store. The fact that the rental income is determined in part from the revenue generated by the duty free stores does not constitute a consideration of the bridge or tunnel structure. The valuations are of the duty free stores’ rental and expenses on a stand alone basis. In coming to a valuation, the assessor considers neither the income or expenses associated with the operation of the bridge or tunnel structure itself.
[14] Therefore, the answer to Question 1 of the Stated Case is No. As Question 2 was premised on a Yes answer to Question 1, we need not respond to Question 2.
[15] The parties have agreed that no costs should be awarded, and accordingly, there is no order as to costs.
SWINTON J.
O’DRISCOLL J.
CHAPNIK J.
Released: March , 2006
COURT FILE NO.: 191/05
DATE: 20060309
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
O’DRISCOLL, CHAPNIK AND sWINTON JJ.
B E T W E E N:
THOUSAND ISLAND TAX/DUTY FREE STORE LTD., PENINSULA DUTY FREE SHOPS LTD., NIAGARA FALLS DUTY FREE SHOP INC., BLUE WATER BRIDGE DUTY FREE SHOP INC., PEACE BRIDGE DUTY FREE INC. AND WINDSOR DETROIT TUNNEL DUTY FREE STORE INC.
Applicants
- and -
MUNICIPAL PROPERTY ASSESSMENT CORPORATION
Respondent
REASONS FOR JUDGMENT
SWINTON J.
Released: March 9, 2006