Ontario Superior Court of Justice, Divisional Court

Court File No. 861/97

Date: Heard: 2001-04-17

O'Leary, Meehan and Carnwath JJ.

Counsel:

Michael Bowman, for appellants.

Chester Gryski, for respondents.

The judgment of the court was delivered by

[1] Carnwath J.:—720 Spadina Limited owns a mixed-use building at 720 Spadina Avenue in Toronto. The first five floors are leased to various commercial interests; the remaining twelve floors are residential units. In a complicated series of transactions, more particularly described later in these reasons, certain persons (who call themselves "co-owners") purchased a percentage interest in a 999 year lease, together with a licence to occupy a particular unit. I stress these "co-owners" own an undivided percentage interest in a lease — they are not co-owners of the fee. The Regional Assessment Commissioner, Region No. 9 ("the Commissioner") continues to assess the property as an income-producing multi-residential rental property. The "co-owners" claim they should be assessed at the same rate as condominiums, which in turn, are assessed at the same rate as single-family residences. They say they own the units they occupy and should be treated the same as other owner-occupiers.

[2] The Commissioner's assessment was appealed to the Ontario Municipal Board. The Board dismissed the appeal and 720 Spadina now appeals to the Divisional Court. The issue to be decided is whether the Board was correct in law in deciding that co-ownership of a percentage interest in a 999 year lease disentitled 720 Spadina (and by extension, its sub-tenants) from having the residential units assessed in the same manner as arrangements where the co-ownership in question is co-ownership of the fee.

Background

[3] The background facts are usefully set out in the Board's decision issued November 19, 1997, by W. E. King, Board member [at pp. 1-4]:

The property whose assessment is at issue is a mixed use building: the first five floors are occupied by various commercial interests; the remaining twelve floors are residential. This has remained constant since the building was constructed in the 1970s. The nature of the residential component, however, has changed. Until 1987. the property was owned in a straightforward way by 720 Spadina Limited and the residential units rented to tenants on short term leases. Then, in that year, the twelve residential floors were "transferred" to a limited partnership by way of a complicated 999 year lease arrangement. The evidence was that this was done in order to be able to market the residential units as "owner-occupied" units because owner-occupied units were worth more in the market of the day than were rental units.

There were, however, two complicating factors: the Rental Housing Protection Act, 1986, which prohibited the conversion of any rental resident property to a condominium, co-operative or any other use than rental residential without approval by the municipal Council, and the commercial uses occupying the first five floors of the building.

The conversion was done by means of a limited partnership in an attempt to avoid offending the Rental Housing Protection Act. As the Court found when the principals in a number of these limited partnership transactions were prosecuted for violation of the Act, the transactions complained of were merely "sales of limited partnership interests which in law is personalty, a mere chose in action" and not sales of residential units. The limited partners did not own, or hold legal title to, any unit, but merely had a right to exclusive possession "conjoined" with their respective partnership interests. Even in regard to those properties that were sold outright to the partnership, it was the general partner that held legal title to the property. The limited partner, having no ability "to claim an interest in the partnership assets in specie or in any other way (it is not even exigible under execution), the definition of "co-operative" cannot be extended to cover the situation. The fact that right to exclusive possession is attached or "conjoined" to an interest in such partnership does not make any difference since such right is not associated with any incidents of ownership". The use of the limited partnership as a vehicle, therefore, accomplished its purpose, and the transaction was found not to violate the Act. (In 1989, the 1986 Act was superseded by the Rental Housing Protection Act, 1989, which revised and expanded the definitions in a way that clearly prohibited future transactions of the type found by the Court not to violate the 1986 Act).

After the Court had ruled that the limited partnership transaction was legal, another step was taken, and the limited partnership was dissolved after having passed on its interest in the property to a "co-ownership". This was done, according to the evidence, in order to avoid onerous requirements of the Securities Act, which apply to partnership interests. It was also done in order to enhance marketability by conveying to "co-owners" a direct interest in the property (instead of merely a conjoined right to possession), setting up a structure as close as possible to that of a condominium, and enabling "co-owners" to mortgage their interests. It was this "co-ownership" that appealed the assessment.

The reason for the appeal is that the Regional Assessment Commissioner (RAC) has continued to assess the property as an income-producing multi-residential rental property. The "co-owners" claim that this is erroneous and unfair, and that they should be assessed at the same rate as condominiums, which in turn, are assessed at the same rate as single family residences. They say that, for all intents and purposes, they own the units they occupy, and should be treated the same way as other owner-occupiers.

The reason that they have not been is connected with the other complicating factor: the commercial uses occupying the first five storeys. The evidence was that, although it is possible to have a residential condominium on top of commercial uses, it is difficult to do. Perhaps for that reason, or perhaps because the owner of the land wanted to continue the lucrative relationship with the commercial tenants at the same time that it was maximizing the income or profit potential from the residential portion of the building, it did not transfer ownership of any part of the property itself to the limited partnership or, through it, to the "co-ownership" (unlike the other limited partnerships, which later became fee-based co-ownerships). Instead it entered into a 999 year lease (the headlease) with the limited partnership, which then assigned its lease to the "co-ownership", giving it what remained of a 999 year leasehold interest in the entire residential portion of the building. By sublease, each individual "co-owner" acquired an undivided percentage interest in the unexpired term of the 999 year lease. At same time, [sic] pursuant to a "co-ownership agreement", each "co-owner" acquired the exclusive right to occupancy of a particular unit for the remainder of the lease. Unlike the limited partners under the original limited partnership, then, each of the "co-owners" has an interest in the leasehold interest, as well as exclusive rights to occupy a specific unit. On the other hand, unlike condominium or equity co-operative owners, or the co-owners in the fee-based co-ownerships, the "co-owners" of 720 Spadina Avenue have no interest in the fee or in the title to the land. As it was expressed at the hearing, they own part of a lease, but no part of the dirt or bricks or mortar. The RAC, therefore, considers them tenants like any others and assesses the property as an income producing multi-residential rental property.

The Board's Decision

[4] The Board heard four witnesses for the appellants, including a lawyer who specializes in co-ownership and co-operative housing, and three residents of the building. Their combined evidence in favour of the appellants' position can be summarized as follows:

(i) each "co-owner" has an undivided percentage interest in the 999 year lease;

(ii) each "co-owner" has the exclusive right to occupy an individual unit;

(iii) both the interest in the lease and the right to occupy are bought and sold in the context of an agreement of purchase and sale;

(iv) each "co-owner" assumes all rights and liabilities under the Co-ownership Agreement;

(v) the two interests can be mortgaged and the mortgage registered on title;

(vi) purchasers of the units are in the market for a home, which they can buy and own and ultimately sell. Typical purchasers have considered other options, including condominiums, co-operatives, and fee-based co-ownerships:

(vii) units are advertised for sale in the same manner and in the same market as condominiums, co-operatives, and fee-based co-ownerships;

(viii) purchasers of units qualified for financing under the Registered Retirement Savings Plan Home Buyers' Plan — not available for rental accommodation;

(ix) purchases are completed by lawyers specializing in real estate transactions who give reporting letters confirming a good and marketable title to an undivided leasehold interest in the property;

(x) land transfer taxes are payable upon the transfer of the interests;

(xi) the purchase price is paid in a lump sum (perhaps with proceeds of a mortgage). There is no payment of periodic rent, as with multi-residential apartment buildings;

(xii) each "co-owner" is responsible for repairs and maintenance of the unit, insures the unit and owns the appliances in the unit;

(xiii) financial statements of the co-ownership are produced showing no profit, with all income going to maintenance, upkeep and expenses.

[5] One witness was called for the Commissioner, Dennis Hefferon, a teacher of real estate and property law, as well as a practitioner in the field. His approach focused on the "niceties of property law", to use the Board's words [at p. 13]. Mr. Hefferon testified that in property law"an ounce of history is worth a pound of logic" [at p. 13]. His testimony centred on the proposition that an estate in fee simple is for an indefinite term and cannot be ended by anyone other than the holder of the fee while any estate that is for a certain duration, whether of one year or 999, is a lesser interest. From his evidence and from the cross-examination of 720 Spadina's witnesses, the following propositions in favour of the Commissioner's position were developed:

(i) all the documentation referring to the residential units contain words like "landlord""tenant""rent""leased premises""headlease""sublease""assignment of lease", and "covenants of lease". All these terms, the Board found, spoke to a rental arrangement rather than an ownership arrangement, in spite of the many admitted similarities between the co-owners of 720 Spadina and other forms of co-owned housing, based on co-ownership of the fee.

(ii) "co-owner's" of 720 Spadina are subject to the lease covenants over and above the co-ownership controls. This is the control retained by 720 Spadina Limited, a control exercised by an entity other than the collectivity of which the "co-owners" are a part. 720 Spadina Limited has the right to enter a unit, to do repairs itself, if necessary, and to refuse to allow an assignment of a sublease.

(iii) section 60(1) of the Assessment Act provides that real property is assessed; while the "co-owners" have an interest in the property, that interest is a leasehold interest depriving them of an interest in the land, bricks, mortar and plaster that is being assessed;

(iv) the reversionary interest in 720 Spadina has value to the owner, derived from the covenants in the lease which, among other things, enure to benefit of the commercial portion of the building;

(v) "co-owners" have fewer rights and take on greater risks, They need the owner to consent to do certain kinds of work or to transfer interests;

(vi) The Board may only alter an assessment if it determines that the assessment is inequitable compared to the assessments of "similar real property in the vicinity": The Assessment Act, R.S.O. 1990, c. A.31, s. 60(1). There is no provision in the Assessment Act to permit a tenant's interest to be assessed separately from the owner's interest. The owner's assessment is apportioned to the occupants of the real property.

[6] In balancing the propositions in favour of the respective parties, the Board acknowledged a continuum of owner-occupied housing forms starting with detached single-family home-ownership and running through condominiums, co-operatives, to co-ownerships of the fee. The Board said that lease-based "co-ownership" had many and pronounced similarities to the continuum but found that the continuum stopped at the line drawn in property law between real property and personal property or leasehold interest. The Board found that ownership of the fee is still considered the sine qua non of real property in Canada. While the Board acknowledged it seemed unfair that residents of 720 Spadina should have to pay more in taxes than the owners of units in other multi-residential buildings, the Board felt bound by the authorities and the case law which negated the similarities to other forms of co-ownership, requiring the Board to conclude that the residential portion of 720 Spadina Avenue is an income-producing rental property and should be compared with other residential income properties.

Analysis

[7] Any analysis of the issue to be decided must be done in the light of s. 60(1) of the Assessment Act, R.S.O. 1990, c. A.31:

60(1) The Assessment Review Board, Ontario Municipal Board or any court, in determining the value at which any real property shall be assessed in any complaint, appeal or proceeding, shall have reference to the value at which similar real property in the vicinity is assessed, and the amount of any assessment of real property shall not be altered unless the Assessment Review Board, Ontario Municipal Board or court is satisfied that the assessment is inequitable with respect to the assessment of similar real property in the vicinity, and in that event the assessment of the real property shall not be altered to any greater extent than is necessary to make the assessment equitable with the assessment of the similar real property. 1982, c. 40, s. 3(14).

[8] To paraphrase the section, court shall have reference to the value at which similar real property in the vicinity is assessed and shall not change the assessment unless it is satisfied that it is inequitable with respect to the assessment of similar real property in the vicinity.

[9] The words "real property" appear only once in the definition section of the Act:

1. In this Act.

"land""real property" and "real estate" 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,

(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; ("biens-fonds""biens immeubles", biens immobiliers")

[10] No distinction is made between the definitions of "land""real property", and "real estate" which are defined to "include" the enumerated classes. Mr. Hefferon conceded that the "co-owners" of 720 Spadina had an interest in "land" — but that it was "not a real property interest as that term is understood in property law". This "ounce of history" may be worth a "pound of logic" in property law, but is, I say respectfully, of little assistance in construing the provisions of the Assessment Act. 720 Spadina submits that the words "land""real property" and "real estate" have an identical meaning under the Act. I would not go so far. However, it can be said that the three terms give rise to an ambiguity which must be resolved in favour of the taxpayer. See, Regional Assessment Commissioner, Region 10 v. Xerox of Canada Ltd. (1980), 1980 1627 (ON CA), 11 O.M.B.R. 238, 115 D.L.R. (3d) 428 (C.A.); Canada v. Crabbs, 1933 417 (BC CA), [1934] S.C.R. 523, [1933] 4 D.L.R. 112.

[11] For the Board to conclude that 720 Spadina's leasehold interest could not be considered an interest in "land""real property" or "real estate" for the purposes of the Assessment Act imports arid historical concepts of property law into an area where logic should prevail over the accidents of history. In so doing, I find the Board failed to meet the standard of correctness it faces when construing a statute other than its own.

[12] This conclusion does not violate any rule which may dictate that only the owner of the fee can be assessed. The residential portion of the building owned by 720 Spadina is so similar to condominiums and co-operative apartments, and so dissimilar to income-producing residential property, that it should have been assessed accordingly. Tax on that assessment is passed on to the "co-owners"; there is no necessity for the "co-owners" to be assessed as owners. Put another way, the important issue is the manner of assessment and not who is assessed.

[13] The Board also erred in failing to give sufficient significance to the underlying principle of s. 60(1) of the Act. An assessment should be equitable and fair, and should be uniform. The Board erred in failing to be persuaded by the numerous similarities between the 720 Spadina residential units to other co-ownership arrangements that it was inequitable for the owners of such units to be taxed on the basis of rental units; it erred by adopting a narrow interpretation of the words "real property" in arriving at its decision.

[14] The Divisional Court has recognized the comparison of leasehold interests. In 1990, the Board considered an assessment appeal respecting premises leased by the appellant at Terminal 1 of the Toronto International Airport. The Divisional Court held that the Board erred in law by failing to consider evidence of the subject premises "in relation to similar real property in the vicinity", namely, similar space rented by the same tenant in Terminal 2 at the same airport [at p. 303]. It is clear from the Court's judgment that it considered the comparison of two leased properties to constitute an exercise of the requirement in what is now s. 60(1) of the Act, that is. to have reference to the value at which similar real property in the vicinity is assessed. York County Quality Foods Ltd v. Regional Assessment Commissioner, Region No. 15 (1990), 45 O.A.C. 303 (Div. Ct.).

[15] Also in 1990, the Divisional Court found a comparison of two leasehold interests to be a reference to "similar real property in the vicinity". A restaurant was located in leased premises in a large office building. In considering the appropriateness of the assessment attributed to the restaurant, the Board found that the original assessor was in error in not looking at "similar real property in the vicinity", that is to say, similar leased premises. An application for leave to appeal the Board's decision was dismissed by the Divisional Court. The Court found the comparison of restaurants occupying leased premises to be contemplated by the Act. Movel Restaurants Ltd. v. Regional Assessment Commissioner, No. 9 (1990), 25 O.M.B.R. 38 (Div. Ct.).

[16] The similarities between the co-owners of the 999 year leasehold interest to other fee-based interests is compelling. The Board's decision to ignore those similarities in favour of a restrictive definition of real property both frustrates the underlying thrust of the Act to assess equitably and fails to recognize prior decisions of this Court where comparisons of rental properties were found to have reference to "similar real property in the vicinity".

Result

[17] The parties are agreed that if the appeal is successful, the assessment of the residential component should be reduced from $672,700 to $280,000 for the taxation years under appeal and that the total assessment (including the residential component and the $665,000 commercial component) be reduced to $945,000. I so order.

[18] Costs to the appellants fixed at $600 plus $500 for disbursements, excluding costs of the leave to appeal application.

[19] Appeal allowed.