Hudson's Bay Company et al. v. Attorney General of Ontario et al. [Indexed as: Hudson's Bay Co. v. Ontario (Attorney General)]

52 O.R. (3d) 737

[2001] O.J. No. 710

Docket No. C34550

Court of Appeal for Ontario

Catzman, and Labrosse, JJ.A. and

Spence, J. (ad hoc)

March 5, 2001

Municipal law--Real property taxation--Constitutionality --Direct taxation--Indirect taxation--Municipal Act amended by implementing "shortfall recovery" provision applicable to landlords of commercial, industrial and multi-residential properties--Shortfall recovery mechanism enabling landlords of tenanted commercial and industrial properties to recover amounts on account of realty taxes from their tenants --Provisions not amounting to indirect taxation and not ultra vires Province--Small Business and Charities Act, S.O. 1998, c. 3--Continued Protection for Property Taxpayers Act, 2000, S.O. 2000, c. 25--Municipal Act, R.S.O. 1990, c. M. 45, ss. 447.24 (5) (6), 447.25.

As part of a new realty tax regime, the Province of Ontario amended the Municipal Act to regulate the way a landlord can recoup property taxes from its tenants. The amendments included a "shortfall recovery" provision that permitted a commercial landlord to recoup from a tenant a greater amount of the landlord's property taxes than would otherwise be payable under the lease. The appellants, who were major tenants of shopping centres, brought an application for a declaration that the provisions were ultra vires the Province as indirect taxation contrary to the legislative authority of the Province under the Constitution Act, 1867. The application was dismissed and they appealed.

Held, the appeal should be dismissed with costs.

The shortfall recovery provisions merely regulate certain aspects of the landlord's tax recoupment of the realty tax and form part of the municipal real property tax scheme, a matter within provincial jurisdiction. The provisions did not by themselves impose any tax, and the fact of recoupment does not make the tax indirect. The true nature and character or pith and substance of the impugned sections related to municipal and real property assessment and taxation, which is clearly within the scope of s. 92 (2) of the Constitutional Act, 1867. The municipal property taxes in issue fell into the category of true land taxes and were therefore direct taxation and constitutional. Accordingly, the appeal should be dismissed.

APPEAL from the judgment of Archibald J. (2000), 2000 22392 (ON SC), 49 O.R. (3d) 455 dismissing an application for a declaration that certain provisions of the Municipal Act, R.S.O. 1990, c. M.45 were ultra vires.

Cases referred to Germain v. Montréal (Ville), 1997 393 (SCC), [1997] 1 S.C.R. 1144, 211 N.R. 153; Halifax (City) v. Fairbanks Estate, 1927 337 (UK JCPC), [1927] 3 W.W.R. 493, [1928] A.C. 117, [1927] 4 D.L.R. 945 (P.C.); Ontario Home Builders' Assn. v. York Region Board of Education, 1996 164 (SCC), [1996] 2 S.C.R. 929, 29 O.R. (3d) 320n, 137 D.L.R. (4th) 449, 201 N.R. 81, 4 R.P.R. (3d) 1, 35 M.P.L.R. (2d) 1 Statutes referred to Assessment Act, R.S.O. 1990, c. A.31 Constitution Act, 1867, s. 92(2) Municipal Act, R.S.O. 1990. C. M.45, ss. 447.24(5), 447.24(6), 447.25 (as am. Small Business and Charities Protection Act, 1998, S.O. 1998, c. 3, s. 30 and Continued Protection for Property Taxpayers Act, 2000, S.O. 2000, c. 25) Authorities referred to Hogg, P.W., Constitutional Law of Canada, looseleaf (Toronto: Carswell)

Peter A. Milligan, David G. Fleet, Prakash G. David and Patrick J. Monahan, for applicants (appellants in appeal). Janet Minor and Michel Hélie, for the Attorney General of Ontario. Diana W. Dimmer and Thomas H. Wall, for the Corporation of the City of Toronto. J.G. Cowan and Phillip L. Sanford, for IPCF Properties Inc. et al.

BY THE COURT:--

Overview

[1] This appeal questions the constitutionality of certain amendments to the Municipal Act, R.S.O. 1990, c. M.45. In 1998, the Province of Ontario introduced a significant reform of the municipal real property tax regime. The province amended the Municipal Act to regulate, as part of the new tax regime, the way a landlord can recoup property taxes from its tenants. The amendments include "shortfall recovery provisions" which permit a commercial landlord to recoup from a tenant a greater amount of the landlord's property taxes than would otherwise be payable by that tenant under its lease. The appellants argue that these shortfall recovery provisions constitute indirect taxation and are ultra vires the Province. (Section 92(2) of the Constitution Act, 1867 limits a province to direct taxation.)

[2] The shortfall recovery provisions under attack (also the "impugned sections") are found in ss. 447.24(5) and (6) and 447.25 of the Municipal Act as amended by s. 30 of the Small Business and Charities Protection Act, 1998, S.O. 1998, c. 3. The constitutional challenge extends to additional amendments to the Municipal Act contained in the Continued Protection for Property Taxpayers Act, 2000, S.O. 2000, c. 25.

[3] The appellants sought a declaration that the shortfall recovery provisions are ultra vires the Province and that Toronto's by-law is void to the extent it implements these provisions. Their application was dismissed and hence, this appeal.

The Facts

[4] The facts, along with a brief history of property taxation procedure, are succinctly and accurately set out in the detailed and considered reasons of the motions judge: (2000), 2000 22392 (ON SC), 49 O.R. (3d) 455.

[5] Briefly stated, the appellants are "anchor tenants" (major tenants) of shopping centre landlords. Effective January 1, 1998, the Province amended the Municipal Act by implementing a tax capping and clawback regime for landlords of commercial, industrial and multi-residential properties and a tax capping and shortfall recovery regime applicable to tenants of commercial and industrial properties. The shortfall recovery mechanism established by the legislation enables the landlords to recover from their tenants any shortfall on account of realty taxes that would occur as a result of the tenant caps. This scheme, although designed to soften the impact of a new regime, has adversely affected anchor tenants in the shopping centres.

Issue

[6] The appellants submit that the shortfall recovery mechanism is unconstitutional because it results in indirect taxation which is beyond the legislative power of the Province. Simply stated, the issue is whether the statutory scheme established direct or indirect taxation.

Analysis

[7] It is not in dispute that the statutory provisions in the Assessment Act, R.S.O. 1990, c. A.31, and the Municipal Act, apart from the shortfall recovery provisions, create a constitutionally valid direct municipal real property tax imposed against and collected from the owners of land. The shortfall recovery provisions facilitate the ability of landlords to recover the shortfall on account of realty taxes from their tenants according to a specific formula. These provisions do not by themselves impose any tax. Thus, the question is whether these provisions transform the direct nature of the tax under the legislation into an indirect one.

[8] In the decision of the Judicial Committee of the Privy Council in Halifax (City) v. Fairbanks Estate, 1927 337 (UK JCPC), [1927] 4 D.L.R. 945, [1927] 3 W.W.R. 493, Viscount Cave L.C. stated at p. 950:

It may be true to say of a particular tax on property, such as that imposed on owners by s. 394 of the Halifax Charter, that the tax payer would very probably seek to pass it on to others; but it may none the less be a tax on property and remain within the category of direct taxes.

[9] Similarly, in Ontario Home Builders' Assn. v. York Region Board of Education, 1996 164 (SCC), [1996] 2 S.C.R. 929, 137 D.L.R. (4th) 449, Iacobucci J. said at p. 976:

I agree that the incidence of a land tax, in the traditional sense, will be direct. The hallmarks of a land tax are that the tax is, of course, imposed on land against the owner of the land, and that the tax is assessed as a percentage of the value of the land, or as a fixed charge per acre. The tax may be an annual, recurring assessment, or a one-time charge. In some cases, the tax may be enforced through the sale of the land. Although landowners, like everyone, may wish to pass on their tax burden to someone else or otherwise avoid taxation, this desire or ability does not transform the direct nature of the tax into an indirect one. I also accept that the case law reveals that land taxes are generally direct taxes but I do not believe the case law prevents a tax on land by itself from being treated as an indirect tax.

[10] And Professor Hogg in his text Constitutional Law of Canada states at p. 30-10:

Taxes on land or other fixed assets are direct. Municipal real property taxes fall into this category. Such taxes are of course levied not only on owner-occupiers but also on landlords, and landlords will seek recoupment from their tenants; but this recoupment does not make the tax indirect . . . .

[11] Moreover, in Germain v. Montréal (Ville), 1997 393 (SCC), [1997] 1 S.C.R. 1144, 211 N.R. 153, the Supreme Court of Canada ruled that a substantially similar provision falls into the category of "true land taxes" and therefore is valid legislation. The Supreme Court upheld the constitutional validity of a property surtax scheme that expressly facilitated the accepted practice of landlords recouping property taxes from tenants.

[12] In his reasons [at pp. 475 and 479 O.R.] the motions judge said:

In the court's view, the facts in Germain are not materially distinguishable from the facts in the case at bar. Both cases concern real property taxation of commercial properties in which ordinary economic forces operate to facilitate the shift of the burden of property taxes paid by the owners onto their tenants. In both cases, tax legislation changes prevented some landlords from completely shifting their property tax burdens onto their tenants. In both cases, the legislative response was to provide express provisions to re-open leases and to permit the landlords to increase the rent payable by their tenants, despite the lease terms, in order to allow the landlords to recoup their shortfalls. Although the rationales behind the legislation, which resulted in the shortfalls, differ in the two cases, this difference is not material to the assessment of whether the legislation amounts to direct or indirect taxation.

In both cases, the rent adjustments are transitional, discretionary, and within the control of the landlords. While economic reality and common sense dictate that many landlords will avail themselves of this provision, this does not transform the statutory scheme into an indirect tax, especially since it is a quintessential form of land tax. Municipal real property taxes have always been recognized as a direct form of taxation.

The impugned legislation is not materially or substantially different from the impugned legislation in Germain.

[13] In this case, the shortfall recovery sections merely regulate certain aspects of the landlord's tax recoupment of the realty tax and form part of the municipal real property tax scheme, a matter within provincial jurisdiction. The true nature and character or pith and substance of the impugned sections relate to municipal real property assessment and taxation, which is clearly within the scope of s. 92(2) of the Constitution Act. They do not add to or change the taxes a municipality levies on a property owner and so do not change the pith and substance of these taxes from being direct taxes. Like the provisions in Germain, the shortfall recovery provisions do not create a new right of transferability of tax expenses from landlord to tenant but merely regulate the pre- existing transferability.

[14] In Germain, the provisions achieve this result by allowing recoupment from the tenant of the amount of the surtax in issue that is "attributable to the taxable value of the premises". In the present case, the provisions allow for recoupment of the total amount of the new tax assessments in respect of the tenants' premises. No tenant can be required to pay more than the tenant's cap, which is based on the amount of the tenant's tax expense for the previous year. The formula can result in some taxpayers paying more or less than their new tax assessment. This differential reflects the tenants' respective shares of the tax expenses for the previous year. There is no reason to regard these provisions as inconsistent with a proper realty tax regime.

Conclusion

[15] We agree that the Supreme Court's earlier decision in Ontario Home Builders' Assn., distinguished in Germain as not concerning "true land taxes" is of no assistance to the appellants because it concerns charges on land development to fund schools necessitated by the development rather than municipal real property taxation.

[16] We also agree with the conclusion of the motions judge that Germain is not materially distinguishable from the present case and is dispositive of the appeal. The municipal property taxes in issue fall into the category of true land taxes and are therefore direct taxation and constitutional.

[17] The additional amendment to the Municipal Act in the Continued Protection for Property Taxpayers Act does not add anything to the debate. We agree with the submission of the Attorney General for Ontario that the amendments simply continued the application of the impugned scheme in order to fully bridge the transition between the two regimes. The impugned scheme will last only so long as there is a shortfall.

[18] The appeal is therefore dismissed with costs.

Appeal dismissed with costs.