Municipal Property Assessment Corp. v. BCE Place Ltd.

Municipal Property Assessment Corporation v. BCE Place Limited et al.; Atikokan et al., Intervenors City of Toronto v. BCE Place Limited et al.; Atikokan et al., Intervenors [Indexed as: Municipal Property Assessment Corp. v. BCE Place Ltd.]

98 O.R. (3d) 581

Ontario Superior Court of Justice,

Divisional Court,

Carnwath, Jennings and Pardu JJ.

August 11, 2009

Assessment -- Valuation -- Assessment Review Board assessing current value of large office towers as if towers were vacant -- Board erring in its interpretation of "current value" and "fee simple, if [page582] unencumbered" -- Leasehold interest constituting interest in relation to land in context of real property assessment -- Board's value unreasonable and unjust as it valued only owner's interest and ignored value that attached to leases in place -- Assessment Act, R.S.O. 1990, c. A.31, ss. 1, 19(1).

The Bank Towers were large office complexes located in Toronto's financial district. They filed complaints regarding property tax assessments for 2001 and 2002. It was agreed that the highest and best use of the Bank Towers was as an income- producing property designed to be leased and that the Bank Towers should be valued using the income approach to valuation. The Bank Towers submitted that in order to ascertain the "current value" or the "fee simple, if unencumbered" value, all leases constitute encumbrances. As a result, they submitted that the Bank Towers should have been valued as if vacant and unfinished at base building condition with a notional 24-month lease-up. In an interim decision, the Assessment Review Board accepted that valuation methodology. The City of Toronto and MPAC appealed.

Held, the appeal should be allowed.

The standard of review of the Board's decision was correctness. Even if the standard of review was reasonableness, the Board's decision was unreasonable. The Board erred in its interpretation of "current value" and "fee simple, if unencumbered". It is not the case that when the whole of the land is to be assessed, it includes only physical objects described as "land" in the Assessment Act, such as buildings and structures. A leasehold interest is an interest in relation to land in the context of real property assessment. The legislature has not changed the principle that the whole of the land is to be assessed by using the term "current value" in the present Assessment Act as opposed to the previous "market value". To value the Bank Towers on the basis that they were vacant, when that was an entirely hypothetical scenario, was to significantly undervalue them as compared to other real property and undermined the purpose of the Act, which is to fairly divide the burden of real property ta xation. The Board's interpretation of "current value" valued only the owner's interest and ignored the value that attached to the leases in place.

APPEAL from an interim decision of the Ontario Assessment Review Board.

Cases referred to Carsons' Camp Ltd. v. Municipal Property Assessment Corp. (2008), 88 O.R. (3d) 741, [2008] O.J. No. 72, 2008 ONCA 17, 40 M.P.L.R. (4th) 165, 63 R.P.R. (4th) 163, 232 O.A.C. 297, 163 A.C.W.S. (3d) 514; Regional Assessment Commissioner, Region No. 11 and Nesse Holdings Ltd. (Re) (1986), 1986 2497 (ON CA), 54 O.R. (2d) 437, [1986] O.J. No. 2997 (C.A.), affg (1984), 1984 1857 (ON SC), 47 O.R. (2d) 766, [1984] O.J. No. 3333, 6 O.A.C. 134, 27 M.P.L.R. 253, 28 A.C.W.S. (2d) 93 (Div. Ct.), consd Other cases referred to 1098748 Ontario Ltd. v. Ontario Property Assessment Corp., Region No. 11, 2001 40233 (ON SCDC), [2001] O.J. No. 859, 198 D.L.R. (4th) 139, 143 O.A.C. 121, 103 A.C.W.S. (3d) 661 (Div. Ct.); A. Merkur & Sons Ltd. and Regional Assessment Commissioner, Region No. 14 (Re) (1977), 1977 1154 (ON SC), 17 O.R. (2d) 339, [1977] O.J. No. 2404, 4 M.P.L.R. 177, [1977] 2 A.C.W.S. 947 (Div. Ct.); Bell ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, 2002 SCC 42, 212 D.L.R. (4th) 1, 287 N.R. 248, [2002] 5 W.W.R. 1, J.E. 2002-775, 166 B.C.A.C. 1, 100 B.C.L.R. (3d) 1, 18 C.P.R. (4th) 289, 93 C.R.R. (2d) 189, REJB 2002-30904, 113 A.C.W.S. (3d) 52; Cardinal Plaza and Regional Assessment Commissioner, Region No. 19 (Re) (1984), 1984 1841 (ON CA), 49 O.R. (2d) 161, [1984] O.J. No. 3425, 15 D.L.R. (4th) 156, 7 O.A.C. 30, 29 A.C.W.S. (2d) 41 (C.A.); [page583] Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9, 329 N.B.R. (2d) 1, 64 C.C.E.L. (3d) 1, 164 A.C.W.S. (3d) 727, EYB 2008 -130674, J.E. 2008-547, [2008] CLLC Â220-020, 170 L.A.C. (4th) 1, 372 N.R. 1, 69 Imm. L.R. (3d) 1, 291 D.L.R. (4th) 577, 69 Admin. L.R. (4th) 1, 95 L.C.R. 65; J.D. Shier Lumber Co. (Re) (1907), 14 O.L.R. 210, [1907] O.J. No. 130 (C.A.); Metropolitan Toronto Condominium Corp. No. 1250 v. Mastercraft Group Inc., [2009] O.J. No. 3104, 2009 ONCA 584; Quebec (Communaute Urbaine) v. Notre Dame de Bon-Secours, 1994 58 (SCC), [1994] 3 S.C.R. 3, [1994] S.C.J. No. 78, 171 N.R. 161, J.E. 94-1522, [1995] 1 C.T.C. 241, 95 D.T.C. 5017, 3 G.T.C. 8071, 50 A.C.W.S. (3d) 541; Rizzo & Rizzo Shoes Ltd. (Re) (1998), 1998 837 (SCC), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, 154 D.L.R. (4th) 193, 221 N.R. 241, J.E. 98-201, 106 O.A.C. 1, 50 C.B.R. (3d) 163, 33 C.C.E.L. (2d) 173, 98 CLLC Â210-006; Standard Life Assurance Co. v. British Columbia (Assessor Area No. 01-Capital), 1997 4012 (BC CA), [1997] B.C.J. No. 972, 146 D.L.R. (4th) 247, 90 B.C.A.C. 270, 34 B.C.L.R. (3d) 346, 40 M.P.L.R. (2d) 80, 70 A.C.W.S. (3d) 768 (C.A.); Stevens Building Ltd. v. Sudbury (City), [1973] O.J. No. 393 (C.A.); Toronto (City) v. Wolf, 2008 39430 (ON SCDC), [2008] O.J. No. 3061, 241 O.A.C. 41, 169 A.C.W.S. (3d) 943 (Div. Ct.) Statutes referred to Assessment Act, R.S.O. 1990, c. A.31, ss. 1 [as am.], 3(1) [as am.], 17(1) [as am.], 19(1) [as am.], 19.2 [as am.], (1) [as am.], 40 [as am.] City of Toronto Act, 2006, S.O. 2006, c. 11, Sch. A Condominium Act, R.S.O. 1990, c. C.26 [rep.] Municipal Act, 2001, S.O. 2001, c. 25 Authorities referred to Appraisal of Real Estate, 2nd ed. (Ottawa: Appraisal Institute of Canada, 2002) Cowan, Jeff, "Government Reforms in Municipal Property Assessment and the Commercial Lease" (1998) Sullivan, Ruth, Sullivan on the Construction of Statutes, 5th ed. (Markham, Ont.: LexisNexis, 2008)

Carl B. Davis and Donald G. Mitchell, for appellant. Richard Poole and David Fleet, for respondents BCE Place Limited, 1225209 Ontario Limited, National Trust Company, Scotia Realty Limited and First Place Tower Inc. Jeff Cowan, for respondent Toronto Dominion Centre. Phillip L. Sanford and Tara L. Piurko, for respondent 200 Bay Holdings Inc. Susan Ungar, Diana Dimmer, W. Terrance Denison and Rodney Gill, for appellant City of Toronto. John L. O'Kane, for intervenors.

[1] By THE COURT: -- In these appeals ordered to be heard together, the City of Toronto (the "City") and the Municipal Property Assessment Corporation ("MPAC") appeal with leave the interim decision of the Ontario Assessment Review Board (the "Board"), dated February 22, 2008, and amended on December 5, 2008. The intervenors support the appellants. [page584]

[2] The Board's decision concerns complaints made against the property tax assessments of six large office complexes in Toronto owned by the Bank Towers (the "respondents"), namely: BCE Place Limited, Royal Bank Plaza, Toronto Dominion Centre, Commerce Court, First Canadian Place and Scotia Plaza (collectively, the "Bank Towers"). The Board interpreted the definition of "current value" and "fee simple if unencumbered" in the Assessment Act, R.S.O. 1990, c. A.31 (the "Act") and adopted a valuation methodology based on that interpretation, although it did not complete the determination of "current value" for the subject properties

[3] The issue to be decided is the question of law framed by the judge granting leave: Did the Assessment Review Board err in law in construing the definition of current value in s. 1 of the Assessment Act and, in particular, the phrase "fee simple, if unencumbered"?

The Facts

[4] The Bank Towers are large office complexes, including 12 towers and associated retail and parking components, located in Toronto's financial district near the intersection of Bay and King Streets. Their architecture is distinctive and their construction is of high quality. They serve as offices for Canada's major banks, insurance and trust companies, as well as law firms, accounting firms and other important businesses. These properties are referred to by the real estate industry as "AAA" and are among the most valuable commercial properties in Canada.

[5] MPAC has assessed the combined current value of the Bank Towers at approximately $5 billion for each of the applicable taxation years.

[6] The respondents filed complaints, pursuant to s. 40 of the Act, regarding the assessment of these properties for the taxation years 2001 and 2002. The current value of properties for those taxation years is based on a valuation date of June 30, 1999. The respondents complained that the assessments returned by MPAC were too high.

The income approach to valuation

[7] Land can be valued for assessment purposes by using one of three methods: a direct sales comparison approach, which considers recent sale prices of the subject or similar properties; a cost approach, which values the property based on the costs of the land and buildings located on it; and an income approach, which values the property based on the income it generates divided by a capitalization rate. While the appropriateness of [page585] each valuation approach varies depending on the nature of the building that is being valued, conceptually the result of each valuation approach should be the same (see Appraisal of Real Estate, 2nd ed. (Ottawa: Appraisal Institute of Canada, 2002), p. 4.2).

[8] It was agreed among the parties that the highest and best use of the Bank Towers is as an income-producing property designed to be leased and that the Bank Towers should be valued using the income approach to valuation. In this approach, the valuator must consider market rents and an appropriate capitalization rate to estimate the current value of the subject property. Capitalization rates are determined from sales of similar properties by creating a ratio of a single year's rental income over the price paid for the property. A higher capitalization rate results in a lower value for the property (see Appraisal of Real Estate, 2nd ed., pp. 20.19, 20.20).

Position of the parties at the hearing

[9] The position of each of the parties with respect to the current values and capitalization rates of each of the Bank Towers is set out as Appendix 1 to these reasons. As an example, as indicated in Appendix 1, the TD Centre was valued by MPAC at $1.439 billion and at $1.014 billion by the respondents, a difference of over $400 million. The difference between MPAC's and the respondents' assessed values for all of the Bank Towers is approximately $1.5 billion.

[10] The respondents submitted that in order to ascertain the "current value" or the "fee simple if unencumbered" ("FSIU") value, as they called it, all leases constitute "encumbrances". As a result, they submitted that the Bank Towers should have been valued as if vacant and unfinished at base building condition with a notional 24-month lease-up. The respondents' main expert's report noted that "an extraordinary assumption of the appraisal is that the statutory definition of fee simple, if unencumbered, requires the valuation of the Subject Property as if vacant, notwithstanding the existing leased fee state".

[11] The appellants submit this hypothetical "vacancy" theory affected the determination of both the market rent and the applicable capitalization rate for the Bank Towers, leading to lower rents and a higher capitalization rate, and thus a significantly lower assessed value.

[12] The respondents claimed that only seven out of the 250 available Bank Tower leases that were negotiated in the relevant time period met their criteria for determining "FSIU" [page586] rent. The seven leases consisted of new tenants of a full floor or more, since only those leases reflected vacancies and, thus, fit the FSIU "vacancy" theory. The remaining 243 Bank Towers' leases, which included renewals, expansion and "blend and extend" leases, or new leases of less than a full floor, were therefore excluded by the respondents' experts in calculating their version of market rent or the "FSIU rent".

[13] The respondents' experts agreed that if MPAC's interpretation of "current value" was accepted, then MPAC's capitalization of 8 per cent would be correct. However, the respondents' expert determined that the capitalization rate should be adjusted to 8.75 per cent to account for the hypothetical lost rent and the continuing operating costs during the 24-month notional lease-up, as well as other associated risks inherent in the lease-up. The difference in capitalization rates of .75 per cent creates a significant difference in the valuations. The respondents' values were all approximately one-third lower than the current values returned by MPAC for the Bank Towers.

[14] The City and MPAC argued that the "current value" of an owner's unencumbered fee simple interest of an income-producing property is achieved when using market rents and a market-based capitalization rate. The City and MPAC determine market rents by looking at a broad range of rental data during the valuation period. The City's valuators identified a range of capitalization rates for the properties from 7.25 per cent to 7.75 per cent, whereas MPAC used a capitalization rate of 8 per cent.

[15] MPAC assumed that, for the purposes of arriving at the "current value", all space in the Bank Towers, less a standard vacancy factor of 7 per cent, was leased at market rents. The 7 per cent vacancy factor was agreed to by MPAC and the respondents, although the actual vacancy rate was lower.

[16] First Canadian Place was sold in September 1999 for $817 million, some three months after the valuation date of June 30, 1999. All parties agreed that the sale of First Canadian Place was a leased fee transaction because it sold with in-place rents. The parties also agreed that the rents at First Canadian Place were typically below market at the time of the sale, no doubt reflecting an increase in the market rents over the period since those leases were originally signed. The FSIU value proposed by the respondents' experts for First Canadian Place was approximately $609 million, approximately $200 million lower than the sale of the leased fee. MPAC valued First Canadian Place at $825 million. [page587]

The Board's Decision

[17] Although the Board issued an interim decision, it made final determinations on the legal issues before it, particularly the interpretation of "current value" and the words "fee simple, if unencumbered". The Board adopted the interpretation advanced by the respondents that a property must be assessed as though vacant because commercial leases are always encumbrances. Based on this legal interpretation, the Board accepted the valuation methodology of the respondents.

[18] The Board's findings and conclusions regarding the calculation of market rent, the determination of the capitalization rate, the treatment of tenant improvements, the relevance of sales of the Bank Towers and the expert evidence called at the hearing are all premised on the Board's interpretation of the Act as evidenced by the following statements: (i) "All parties to this hearing agreed that fundamental to a determination of the central issue of this hearing, the correct assessments of the properties, is a legal interpretation of the relevant provisions of the Assessment Act (the 'Act')." (ii) "The appropriate valuation methodology to be used to value the Bank Towers for the purposes of assessment must have its foundation in the statutory direction given by the Act, as interpreted by this Board." (iii) "Therefore, the Board accepts the submission of counsel for the complainants that to value the fee simple, if unencumbered interest in one of the Bank Towers, one must utilize a 'hypothetical valuation construct'". (iv) "The Board accepts the model, with certain caveats as set out above, established by Mr. Jenkins and supported by the complainants' other valuation witnesses. Only this model was premised on a proper interpretation of the words of the Act." (v) "It was Mr. Jenkins' evidence on this matter, which the Board accepts, that he, as an independent professional appraiser, having regard to the language of the Act, determined how a valuation of the fee simple, if unencumbered should be done." (vi) "The Board finds that the only valuation model presented in this case which is based on the correct interpretation of the words of the Act is that of the complainants." [page588] (vii) "The Income Approach will therefore be utilized to value the interest for the purposes of the Act: the fee simple, if unencumbered. The Board, for the reasons set out above, has determined that such an interest is that of the owner of the property to be valued. MPAC and the City, in submitting that 'in a fee simple valuation, the "full bundle" of interests, including both those of the landlord and the tenant is to be assessed' is, the Board finds incorrect in law and therefore for the purposes of setting out a valuation methodology." (viii) "However, as the Board has found above, Mr. Jenkins has developed a model, based on a hypothetical construct that allows for the valuing of fee simple, if unencumbered interest in the Bank Towers, an interest which, in reality, does not transact. The Board has determined that the use of such a model is appropriate to value the interest mandated by the Act. The Board therefore accepts Mr. Jenkins' evidence and finds that a capitalization rate of 8.75 per cent should be utilized in valuing the Bank Towers." (ix) "As the Board has found that MPAC's interpretation of the statute is not correct, the Board must prefer the evidence of Mr. Jenkins on the issue of the capitalization rate."

[19] Both the City and MPAC sought and obtained leave to appeal the Board's decision. Leave to appeal was granted on the following question of law:

Did the Assessment Review Board err in law in construing the definition of "current value" in s. 1 of the Assessment Act, and in particular, the phrase "fee simple, if unencumbered"?

The Statutory Scheme

[20] Section 3(1) of the Act provides that "all real property in Ontario is liable to assessment and taxation" subject to certain exceptions (none of which apply in this case).

[21] Section 1 of the Act defines "land", "real property" and "real estate" to include: (a) land covered with water, (b) all trees and underwood growing upon land, (c) all mines, minerals, gas, oil, salt quarries and fossils in and under land, [page589] (d) all buildings, or any part of any building, and all structures, machinery and fixtures erected or placed upon, in, over, under or affixed to land, (e) all structures and fixtures erected or placed upon, in, over, under or affixed to a highway, lane or other public communication or water, but not the rolling stock of a transportation system.

[22] Section 17(1) of the Act states that "land shall be assessed against the owner". The term "owner" is not defined in the Act, but has been interpreted to mean the legal owner of the land. Our Court of Appeal has held that where land is comprised of interests owned by tenants or third parties other than the owner of the underlying land, all of the interests are assessed against the owner of the underlying land (see Carsons' Camp Ltd. v. Municipal Property Assessment Corp. (2008), 2008 ONCA 17, 88 O.R. (3d) 741, [2008] O.J. No. 72 (C.A.), at paras. 14-15).

[23] Section 19(1) of the Act states that "the assessment of land shall be based on its current value". "Current value" is defined in s. 1 of the Act 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;

[24] The term "current value" first appeared in the Act in 1997. Prior to that, the Act provided that land was to be assessed at its "market value", which was defined as "the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer".

[25] Section 19.2 of the Act specifies the valuation dates for determining current value in the different taxation years. Section 19.2(1) provides that for the 2001 and 2002 taxation years, land is valued as of June 30, 1999.

[26] MPAC, as the assessment corporation, is required to prepare an annual assessment roll for each municipality to be used to calculate municipal taxes. The assessment roll must contain certain information including the current value of land and the classification of the land.

[27] Municipalities in Ontario are obligated, pursuant to the Municipal Act, 2001, S.O. 2001, c. 25 (or in the case of the City of Toronto, the City of Toronto Act, 2006, S.O. 2006, c. 11, Sch. A), to prepare a tax roll for each year based on the last returned assessment roll for the year that was prepared by MPAC. In addition, municipalities are charged with collecting the taxes once the tax roll has been prepared, pursuant to the process set out in the applicable Acts. [page590]

The Standard of Review

[28] The appellant submits that the standard of review on this appeal from the Board is correctness. The respondents say that the standard of review should be reasonableness.

[29] Since the decision in Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, there are two standards of review -- correctness or reasonableness.

[30] In 2001, Blair, R.S.J. (as he then was), writing for the Divisional Court, considered the standard of review on an appeal from the Board [(1098748 Ontario Ltd. v. Ontario Property Assessment Corp., Region No. 11, 2001 40233 (ON SCDC), [2001] O.J. No. 859, 143 O.A.C. 121 (Div. Ct.), at paras. 10-12)]:

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 and Pezim, I am satisfied that the standard in the circumstances of this case is that of correctness.

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.

The question of law here concerns the interpretation of the former section 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. [Footnotes omitted]

[31] Post Dunsmuir, this court again considered the standard of review on an appeal from the Board. Chapnik J., writing for the panel, stated [(Toronto (City) v. Wolf, 2008 39430 (ON SCDC), [2008] O.J. No. 3061, 241 O.A.C. 41 (Div. Ct.), at para. 17)]:

This appeal raises a question of law or specifically, an issue of statutory interpretation, that does not engage the Board's expertise. The Board is not protected by a privative clause and there is a right of appeal, with leave, on a question of law, pursuant to s. 43.1(1) of the Act. The standard of review in these circumstances is correctness. Dunsmuir v. New Brunswick (2008), 372 N.R. 1, 2008 SCC 9 at paras. 55, 60; [page591] 1098748 Ontario Ltd. v. Ontario Property Assessment Corp. (2000), 2001 40233 (ON SCDC), 198 D.L.R. (4th) 139, 143 O.A.C. 121 at paras. 10-12 (Div. Ct.).

[32] The respondents submit that the question of law involved in this case is one which, by virtue of the evidence, the Board was particularly suited to answer, given its expertise and experience. The respondents say that the Board is interpreting its home or constitutive statute to which the court's deference is appropriate when the decision is rationally supported. Therefore, the standard of review is reasonableness.

[33] With respect, we reject the respondents' submission. The Board was called upon to interpret the meaning of the words "fee simple, if unencumbered". Both the concept of "fee simple" and "encumbrances" are questions of real property that do not fall within the expertise of the Board but, rather, lie within the expertise of the court.

[34] We find the standard of review on this appeal to be correctness.

[35] Were reasonableness to be the appropriate standard, we would conclude the Board's decision to be unreasonable, for reasons developed later in this decision concerning the proper approach to statutory interpretation.

Analysis

[36] As noted earlier, s. 19(1) of the Assessment Act requires that land shall be assessed at its current value. Current value is defined in s. 1 of the Act 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.

[37] It has long been established that in the context of assessment of real property, the whole of the land is to be assessed, and not the separate interests which may make up the whole. In J.D. Shier Lumber Co. (Re) (1907), 14 O.L.R. 210, [1907] O.J. No. 130 (C.A.), at p. 221 O.L.R., the court noted:

Throughout the assessment law the general principle in the assessment of land has been and is to assess the entire ownership; in other words, the fee simple, in one assessment, and not to assess separately the smaller interests which make up the whole.

[38] Steele J. addressed the issue of a tenant's interest in lands, and the effect on assessment, in A. Merkur & Sons Ltd. and Regional Assessment Commissioner, Region No. 14 (Re) (1977), 1977 1154 (ON SC), 17 O.R. (2d) 339, [1977] O.J. No. 2404 (Div. Ct.), at p. 343 O.R.: [page592]

I am of the opinion that where there are two or more interests in land it is the land itself that must be assessed and not merely the owner's interest in the land. As in the present case, the owner often does not have the exclusive occupation of premises because it is held by the tenants. Even if the rent charged by the owner is in line with general market rents, there is still an interest to a tenant. Therefore, it is not just the market rent less the expenses of the owner that must be used in calculating the market value of the land, but also whatever the interest of the tenant is. In many cases, the tenants' interest may be subject to certain variable adjustments. It is quite obvious that if only the rent that is received by the owner is to be used as the basis of assessment, two buildings identical in construction and finishing could be assessed at different valuations. I use as an example an office building that is built as a shell and then rented by the owner to individual tenants with an obligation upon the tenant to finish the interior thereof. Obviously, the rent received by the owner would be less than that of a similar office building which the owner constructs, finishes the interest and thereafter rents. If only rents were considered in the two cases, although the buildings are identical, the assessment of one would be lower than the assessment of the other, even though in both cases a fair market rent was charged to the respective tenant. Under a rental agreement, by merely casting the burden of cost of repairs and finishing and decorating of a building in different directions, the assessment would differ although if the properties were being sold as complete units, including tenants' interest, they should sell at identically the same price. This is the nub of the difference in the arguments raised by the assessment commissioner and the owner of the property in the present case. I am of the opinion that it is the total property and not its parts that form the basis of assessment.

[39] This decision was overturned on appeal on other grounds. The validity of the principles expressed there is implicitly confirmed by subsequent authority to the effect that when assessing land generating income on an income basis it is the current market rental rate, rather than the actual rent which should be employed to calculate the value of the whole land. In Stevens Building Ltd. v. Sudbury (City), [1973] O.J. No. 393 (C.A.), the court observed:

We are all of the opinion that "actual value" in s. 35(4) means inherent value for the present use of the property and is determined under that subsection by looking at the rental value and is not to be determined by regarding actual rental only for the property in question. This question of course deals only with the situation existing prior to the 1968-69 amendment. In our view, in adopting the income approach to valuation, the income of the property must be calculated on the basis of the current market rent for comparable premises at the time the assessment is made.

[40] In Cardinal Plaza and Regional Assessment Commissioner, Region No. 19 (Re) (1984), 1984 1841 (ON CA), 49 O.R. (2d) 161, [1984] O.J. No. 3425 (C.A.), at p. 163 O.R.:

By analogy, "fair market rent" referred to in s. 13(3) was correctly interpreted by the assessor as the "most typical rent that a unit would rent for if available in the open market". The witness Barry Humphreys, a real estate [page593] appraiser in the Hamilton area for 21 years, agreed that the most reliable approach to value apartment buildings was the income method of valuation. In his terminology, there are two types of "market rents": contract rent, which is the actual rent based on the lease, and market rent, which is the rent at which the same piece of property would rent in the open market. . . . In our view, it is not the function of the assessor to determine the competence of management, but to determine "what the typical tenant would be willing to pay for the occupancy of a particular property for a specified period of time".

[41] The relationship between a fee simple interest and leasehold interests is described in the text accepted as authoritative, The Appraisal of Real Estate, 2nd ed. (Ottawa: Appraisal Institute of Canada, 2002) at 5.12:

Since all partial and fractional interests are "cut out" of the fee simple interest, the appraiser must have an understanding of the fee simple interest in a property prior to appraising a fractional or partial interest.

Economic Interests

The most common type of economic interests is created when the fee simple interest is divided by a lease. In such a circumstance, the lessor and the lessee each obtain partial interests, which are stipulated in contract form and are subject to contract law. The divided interest resulting from a lease represent two distinct but related interests -- the leased fee interest and the leasehold interest. . . . . .

Leased Fee Interests

A leased fee interest is the lessor's, or landlord's, interest. A landlord holds specified rights that include the right of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the lessee (leaseholder) are specified by contract terms contained within the lease. . . .

When an assignment involves the valuation of a leased fee interest, the appraiser often must also appraise the fee simple interest. If the rent and/or terms of the lease are favourable to the landlord (lessor), the value of the leased fee interest will usually be greater than the value of the fee simple interest, resulting in a negative leasehold interest. If the rent and/or terms of the lease are favourable to the tenant (or lessee), the value of the leased fee interest will usually be less than the value of the fee simple interest, resulting in a positive leasehold interest. The negative or positive leasehold interests will cease if contract rent and/or terms equal market rent and/or terms any time during the lease or when the lease expires.

[42] Accordingly, if the lease is at less than market rent, the value of the leased fee interest of the owner of the fee simple will be diminished, but the value of the lease will increase. Conversely, if the lease requires rent in excess of the market, the value of the interest of the owner will be increased, and the [page594] value of the tenant's lease will diminish, relative to the market rent otherwise available.

[43] If the property is assumed to be rented at market rent, it then follows that the tenant has no advantage or disadvantage vis-à-vis the market, and valuing the fee simple on that assumption may eliminate the need to separately value the landlord and the tenant's interests, at least for assessment purposes.

[44] The relationship between the value of a landlord's and a tenant's interest in real property and the use of market rather than actual rents was explored in Standard Life Assurance Co. v. British Columbia (Assessor Area No. 01-Capital), 1997 4012 (BC CA), [1997] B.C.J. No. 972, 146 D.L.R. (4th) 247 (C.A.), at paras. 10-16:

I think the real issue in this case is what is meant by the phrase "the fee simple interest in land and improvements" in s. 26 of the Act. My conclusion is that the Assessor is correct in submitting that the fee simple interest includes all the interests in the land and buildings and not just the owner's interest. In my opinion, the assessor here had to consider not just the owner's interest, as I think the judge below did, but also the tenant's interest. That, for practical purposes, leads to the conclusion that the totality of the interests properly considered should, generally speaking, be the equivalent of the owner's unencumbered interest.

I should say here that the judge below did not appear by his reasons to have considered the significance in the assessment of the concept of "the fee simple interest".

In Re Forfar and Township of East Gwillimbury, 1971 543 (ON CA), [1971] 3 O.R. 337 at 344 (C.A.) the Court said:

. . . an estate in fee simple is the greatest estate and most extensive interest which a person can possess in land and property, being an absolute estate in perpetuity.

As I have said, in my opinion, the "fee simple interest" is comprised of the entirety of the interests in the property. This bundle of interests includes both the tenant's and the landlord's interest. Implicit in this is the principle that consideration of actual rental value is, generally speaking, not relevant to the valuation of the "fee simple interest". This is because the actual rental value is relevant only to the owner's interest in the land and buildings whereas the actual value in the Act is the totality of all interests in the land and buildings. The owner's interest and the tenant's interest, in principle, should reflect the market or actual value of the land and buildings. It is for this reason that I have concluded that the "fee simple interest" is, again generally speaking, the same as the owner's unencumbered interest.

In Manhattan Holdings Ltd. & Hanover Properties Ltd. v. Assessor of Area 08 -- North Shore/Squamish Valley (1993), B.C. Stated Case 340 (S.C.) at p. 2020-21 Braidwood J. (as he then was) said:

The Appellant also argued that the Board erred in principle in failing to consider the circumstance that the owner granted a long-term [page595]

lease for the underlying land. Accordingly, the market value of the land should reflect and be based on the value of the lease.

I am of the opinion that this is an erroneous approach to evaluation. Although it is necessary to determine separately the value of the land and the value of the building, yet to assume the value of the land is equivalent to the value yielded by the contractual lease is only to assess and determine the value of a partial interest in the land.

It is the ability of the whole of the property both the improvement and the land to attract rent on which the valuation of the land and buildings must be based. The fact that the interest of the underlying land is divided does not alter the value to be attributed to the whole interest.

In J.D. Shier Lumber Co. Assessment (1907), 14 O.L.R. 210 (C.A.) at p. 221 this was said:

Throughout the assessment law the general principle in the assessment of land has been and is to assess the entire ownership; in other words, the fee simple, in one assessment, and not to assess separately the smaller interests which make up the whole.

I think these cases accurately reflect the meaning of the "fee simple interest" in s. 26 of the Act.

[45] Given this history, we do not accept the argument that when the whole of the land is to be assessed, it includes only physical objects described as "land" in the Assessment Act, such as buildings and structures. While, in some contexts, a leasehold interest might be considered to be personalty, in the domain of real property assessment a leasehold interest is an interest in relation to land.

[46] This conclusion is fortified by the decision of the Ontario Court of Appeal in Carsons' Camp, above, where Rouleau J.A. said, at para. 15:

Where the land is comprised of interests owned by tenants or third parties other than the owner of the underlying land, the Act does not provide for separate assessment of each individual owner; Myers v. Ontario Regional Assessment Commissioner, Region No. 32 (1991), 1991 7078 (ON SC), 3 O.R. (3d) 488 at 491. In Myers, the court held that trailers, which were occupied year round in that case, were assessable against the owner of the land upon which they were placed or to which they were affixed, notwithstanding the trailers being owned by third parties.

[47] It would not have made a difference in that case if the trailers had been leased rather than owned by the tenants.

[48] In light of this background the question remains, has the legislature changed the principle that the whole of the land is to be assessed by specifying "current value" as opposed to the previous "market value?"

[49] Carsons' Camp provides the answer, at paras. 29-30: [page596]

In my view, the change from "market value" to "current value" and the reference to "fee simple" in the definition of "current value" were not intended to change what is to be included in the assessed value. The definition of "current value" in s. 1 must be read harmoniously in the context of the whole of the Act, the object of which is to assess all property in Ontario coming within the expanded definition of "land", "real property" and "real estate". Similarly, the term "fee simple" cannot be isolated from the rest of the definition of "current value". That definition clearly states that it is to be applied "in relation to land". From this contextual perspective, it is apparent that the expression "fee simple" was not intended to limit assessment to the "fee simple interest of the freehold owner at common law or as that interest would appear in the registry or land titles offices. Rather, the words "fee simple" must be interpreted "in relation to" the statutorily broadened definition of "land".

Put another way, the Act contemplates identifying what is land according to the expanded definition, then assessing the value of the land assuming a fee simple ownership interest without encumbrance of all that comes within the definition. There are strong policy reasons for interpreting the Act in this way. The dominant owner of the freehold is easily identified; there is no need to determine the ownership interest in each portion of the broadly defined "land". This approach makes it easier to assess the total value of the land, while also preventing manipulation of the assessed value by changing the ownership of parts of the land. Further, the freehold owner controls what is included in the assessed value because the freehold owner controls what is placed on the land and on what terms.

[50] As recently as July 2009, the Ontario Court of Appeal confirmed the textual approach it applied in Carsons' Camp. The court was faced with whether the owner in "fee simple" of the eighth floor of a condominium building was a "declarant" as defined in the Condominium Act, R.S.O. 1990, c. C.26. The court found [(Metropolitan Toronto Condominium Corp. No. 1250 v. Mastercraft Group Inc., [2009] O.J. No. 3104, 2009 ONCA 584, at paras. 22-23)]:

The question is whether that qualifies Lomico as "the owner or owners in fee simple" of the eighth floor of the building as set out in the statutory definition.

In our view it does. The statutory definition must be read in light of the objective of the Act and the intention of the Legislature. Fundamental to the purpose of the "declarant" concept in the Act is the objective of identifying the true owner or owners of the property at the time of registration of the declaration in order to place certain responsibilities on them as the property is converted to a condominium under the Act. The meaning of the phrase "the owner or owners in fee simple of the land" must be informed by this policy objective even if the result may not exactly accord with the meaning that this phrase might have at common law. In a similar context, that of provincial assessment legislation, that is what this court did with the term "fee simple" in Carsons' Camp Ltd. v. Municipal Property Assessment Corp. (2008), 2008 ONCA 17, 88 O.R. (3d) 741.

[51] The same reasoning applies where ownership of interests in the land is divided by leasehold interests granted by [page597] the owner. This is supported by a contextual interpretation of the statutory provision. "Current value" is defined "in relation to land". It matters not that portions of the land have been leased; undoubtedly the Bank Towers in issue here and the land upon which they are situate are land, as defined in the Assessment Act. The definition connotes a notion of market value in referring to "the amount of money the fee simple . . . would realize if sold at arm's length by a willing seller to a willing buyer". For single family dwellings this will generally approach market value on the valuation date. To value these Bank Towers on the basis that they are vacant, when all agree that that is an entirely hypothetical scenario, is to significantly undervalue them compared to other real property and undermines the purpose of the Assessment Act, to fairly divide the bur den of real property taxation. The definition is in relation to "value", and, in our view, "fee simple, if unencumbered" describes a valuation standard and does not limit the nature of the asset to be valued, which is the whole of the land. In the context of income-producing property, "fee simple if unencumbered" means value calculated without reference to leases at other than market value, a long-standing principle governing assessment of income-producing property, and corrects the anomaly referred to by Robbins J.A. in Regional Assessment Commissioner, Region No. 11 and Nesse Holdings Ltd. (Re) (1984), 1984 1857 (ON SC), 47 O.R. (2d) 766, [1984] O.J. No. 3333 (Div. Ct.).

[52] In 1098748 Ontario Ltd. v. Ontario Property Assessment Corp., Region No. 11, supra, the court referred to the use of "market rent" so as to value both the owner's interest and the leasehold interest, as the approach contemplated by "current value", as defined by the Assessment Act, as a result of the amendment of S.O. 1997, c. 5, s. 1(3).

[53] We conclude the Board was wrong in law when it reached the following two conclusions:

The amended Act, which provides that land is to be assessed against the owner and not against the tenant has not simply done away with business assessment. Rather it sets out ownership as fundamental to assessment and clarifies that it is an ownership interest which is to be valued. As stated above, "land" remains the subject of the assessment. In providing for current value assessment and in defining "current value" as it has, the Legislature has set out the interest to be valued to get to a current value assessment of land. And further:

Rather the Legislature, acknowledging that only real property is liable to assessment under the Act, and therefore, to taxation, expressed the intent [page598] that only the owner's real property interest was to be valued. This Board finds, as stated above, that a tenant's interest in land arises by way of contract and is therefore, at law, a personal property interest. As such, it cannot be subject to assessment under the Act.

The 1997 Amendment to the Assessment Act

[54] As noted earlier, prior to 1997, the Act provided that land was to be assessed at its "market value", which was defined as "the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer".

[55] The 1997 amendment states that "the assessment of land shall be based on its 'current value'". "Current value" is defined in s. 1 of the Act as 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. In 1986, the Court of Appeal decided Regional Assessment Commissioner, Region No. 11 and Nesse Holdings Ltd. (Re) (1986), 1986 2497 (ON CA), 54 O.R. (2d) 437, [1986] O.J. No. 2997 (C.A.). In Nesse, the Court of Appeal, in a majority judgment, found that a recent sale price of the subject property was the best evidence of "market value" even though the property was subject to long-term leases with below- market rents. The court's finding ignored the tenants' interest in the property and did not value all interests in the land. In deciding Nesse, the majority distinguished Merkur and Stevens, above, holding that those cases dealt with a valuation based upon the income approach, as opposed to the sales app roach. The effect of this decision created the following anomaly -- where there was a recent sale of a subject property with below-market rents, the sale would determine the value for assessment purposes even though the property was encumbered by below-market rents.

[56] Robins J.A., in his dissent in Nesse, recognized the double standard of valuation that would result from the majority decision, depending on whether the sales or income valuation was used [(Nesse, above, at p. 442 O.R.)]:

It seems to me highly incongruous to require that the tenants' interest be taken into account by basing the value of land on current market rents in the case of the income approach and at the same time to disregard the identical interest in the case of the sales approach. In my view, the tenants' interest should be included on either approach where there is a substantial disparity between actual and fair market rents. It is the totality of the interests in the title to land which is to be valued in order to determine the market value at which the land is to be assessed.

[57] The majority of the Court of Appeal in Nesse commented that the legislature could remedy this anomaly if it so wished by amending the Act. We conclude that the 1997 amendment to the Assessment Act did just that. The words "fee simple, if [page599] unencumbered" were added to the new definition in order to address the "mischief" of the double standard described above. Specifically, the intention of the amendment was to create consistency in valuation for assessment purposes regardless of which approach is used, so as to ensure that all the interests are valued in all cases. Thus, where there has been a recent sale of the subject property encumbered by below- market rents, the land should be valued as though there are no such "encumbrances". This interpretation achieves the consistency that should exist whether a property is valued using the sales approach or the income approach.

[58] In his 1998 article on the changes to the Assessment Act, Mr. Jeff Cowan commented that the 1997 revisions were not meant to change the fact that land is still to be assessed at market value. With regard to the inclusion of the words "if unencumbered", Mr. Cowan stated [("Government Reforms in Municipal Property Assessment and the Commercial Lease", Jeff Cowan, 1998, at p. 2)]:

The definition of "current value" is very similar to "market value". "Market value" was defined in s. 19(2) of the former Assessment Act as "the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer". Under the new legislation current value means "the amount of money the fee simple, if unencumbered, would realize if sold at arms [sic] length by a willing seller to a willing buyer." This latter concept was rejected in Re Regional Assessment Commissioner, Region No. 11 and Nesse Holdings Limited (1984), 1986 2497 (ON CA), 54 O.R. (2d) 437 (C.A.), decided under the former definition, and many believe the intent of the new definition is to remove the effect of this decision of the Court of Appeal.

[59] We are among the many who believe the intent of the new definition is to remove the effect of the majority decision in Nesse. That decision created a potential situation where rental property could be assessed at one amount based on a market value sale and at another amount based on an income valuation representing the (then) current market rent for such a property. This is contrary to assessment theory and created the double standard recognized by Robins J.A. in his dissent in Nesse.

[60] The Board stated that it could not "accept the argument of MPAC that the amended Act enshrines the dissent in Nesse". It stated further that "if the Legislature had intended to follow that dissent and wanted the 'totality of interests in the title to land . . . to be valued to determine the assessment' it could very easily have said so". We conclude that it was not necessary for the legislature to state that it wanted the totality of interests to be valued. The totality of interests have been so valued in the jurisprudence since the Shier case down through to [page600] Carsons' Camp. We conclude that the intention of the legislature in the 1997 amendment was, among many other changes effected by the amendment, to give effect to the dissent of Robins J.A.

The Board's Decision Viewed in the Light of Statutory Interpretation

[61] The purpose of the Act is to subject all real property in Ontario to assessment and taxation, subject to certain exemptions not applicable in this case.

[62] As noted earlier, the Act requires land to be assessed at current value, that is, 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.

[63] The Act intends that every parcel of land shall bear its proportionate share of municipal taxation in a fair and equitable manner, favouring neither the taxing authority through an over-valued assessment nor the taxpayer through an undervalued assessment.

[64] Thus, the definition of "current value" in s. 1 must be read harmoniously in the context of the entire Act, to ensure fairness.

[65] In construing a statute, the language of the statute must be addressed in its total context, having regard to the purpose of the legislation, the consequences of proposed interpretations, the presumptions and special rules of interpretation, as well as admissible external aids. After considering all these indicators of legislative meaning, the court must adopt an interpretation that is appropriate. An appropriate interpretation is one that can be justified in terms of (a) its plausibility, that is, its compliance with the legislative text; (b) its efficacy, that is, its promotion of the legislative purpose; and (c) its acceptability, that is, the outcome is reasonable and just (see Sullivan, Ruth, Sullivan on the Construction of Statutes, 5th ed. (Markham, Ont.: LexisNexis, 2008) at pp. 3-4 ("Sullivan")).

[66] The following guides are to be used to assist in interpreting a taxing statute: (i) The interpretation of tax legislation should follow the ordinary rules of interpretation. (ii) (a) A legislative provision should be given a strict or liberal interpretation depending on the purpose underlying it, and that purpose must be identified in light of the context of the statute, its objective and the legislative intent: this is the teleological approach.

(b) The teleological approach will favour the taxpayer or the tax department depending solely on the legislative [page601] provision in question, and not on the existence of predetermined presumptions. (iii) Substance should be given precedence over form to the extent that this is consistent with the wording and objective of the statute. (iv) Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer. Québec (Communauté urbaine) v. Notre Dame de Bon-Secours 1994 58 (SCC), [1994] 3 S.C.R. 3, [1994] S.C.J. No. 78, at p. 20 S.C.R.; Rizzo & Rizzo Shoes Ltd. (Re) (1998), 1998 837 (SCC), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, at para. 21; Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, at pp. 580-82 S.C.R.; Carsons' Camp Ltd. v. Municipal Property Assessment Corp., supra, at p. 749 O.R.

[67] The Board's interpretation does not comply with the legislated text as interpreted in the jurisprudence. It is predicated on valuing the interest of the owner when it is the value of the land that is to be assessed.

[68] The Board's interpretation does not promote the legislative purpose. One example is sufficient. The Board's interpretation of "current value" results in an assessment of the First Canadian Place tower at $600 million, approximately, as of July 1, 1999, when three months later it sold for $825 million, approximately, while encumbered by less-than-market rents. The legislative purpose of fairness by valuing at market is frustrated by the Board's interpretation. According to valuation theory, any of the valuation methods, whether sale price, income or replacement value should theoretically arrive at the same number.

[69] The Board's interpretation is unacceptable. It is unreasonable and unjust for several reasons: (i) it values only the owner's interest and ignores the value that attaches to the leases in place; (ii) it hypothesizes a vacant building with a two-year period to market. The right of the owner of the fee simple of a bank tower to occupy a property which is designed to be leased has little value. In short, giving up possession cannot diminish the value of the owner's fee simple interest where the highest and best use of the property is an income-producing property designed to be rented to someone other than the owner; [and] [page602] (iii) it values the First Canadian Place tower at $600 million, approximately, when its market value was established three months later to be $825 million approximately.

[70] On all three components of the Sullivan test, the Board's interpretation makes no sense. It is unreasonable, approaching the absurd.

[71] Justice Iacobucci, writing for the Supreme of Canada in Rizzo, above, stated the following, at para. 27:

In my opinion, the consequences or effects which result from the Court of Appeal's interpretation of ss. 40 and 40a of the ESA are incompatible with both the object of the Act and with the object of the termination and severance pay provisions themselves. It is a well established principle of statutory interpretation that the legislature does not intend to produce absurd consequences. According to Côté, supra, an interpretation can be considered absurd if it leads to ridiculous or frivolous consequences, if it is extremely unreasonable or inequitable, if it is illogical or incoherent, or if it is incompatible with other provisions or with the object of the legislative enactment (at pp. 378-80). Sullivan echoes these comments noting that a label of absurdity can be attached to interpretations which defeat the purpose of a statute or render some aspect of it pointless or futile. (Sullivan, Construction of Statutes, supra, at p. 88).

Disposition

[72] The Board's interpretation of "current value" and "fee simple, if unencumbered" is wrong in law. The matter must be returned to the Board to a differently constituted panel. We find it advisable to give the parties 21 days to agree upon the form of direction to be given to the newly constituted panel, failing which we will issue our direction without the assistance of the parties. When the form of the direction has been determined, we shall invite written submissions as to costs.

Appeal Allowed. [page603]

APPENDIX 1

Summary of Valuations as at June 30, 1999

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