COMMERCIAL LEASING: The Reality about Realty Taxes

It would appear from the papers reviewed so far in this series that the emphasis was on Commercial Law jurisprudence. There are instances, however, where matters such as property taxes were considered.

Realty Taxes

A new regime of property tax assessment, known as fair market assessment, was introduced in 1998. Prior to that, commercial tenants received separate assessments regarding their contributions to the building’s property tax and such assessments were used as a means to allocate realty taxes under lease agreements. With the introduction of fair market assessments in 1998, tenants and landlords were left to determine the allocation of taxes themselves.

Indigo Books & Music Inc. v. Manufacturers Life Insurance Company

In this case, the tenant, Indigo Books & Music Inc., argued that the landlord, Manufacturers Life Insurance Company, was to rely on working papers based on the wording of the lease. The lease agreement was executed on January 12, 1998, 12 days after the new tax assessment regime was implemented. Alternative approaches were suggested in the tax clause to create a hierarchy in the event a separate tax assessment was not available. If a separate tax assessment was available, taxes are to be allocated on the basis of same. If not, the landlord is to find out whether or not “there is other information deemed sufficient by the landlord to make the calculation of Additional Rent under the lease”. If sufficient information was unavailable, then the Lease defaults the tenant’s allocation to proportionate share, which is the landlord’s contention from the outset. The tenant said that other information was indeed available to the landlord in the form of the assessor’s “working papers” and thus, there was no need to take the default position. However, this particular realty tax clause, unlike others contained in the lease, did not ask the landlord to “act reasonably” when considering what other information was “deemed sufficient”.

In the opinion of the court, the word “deemed” allowed the landlord to decide not to consider the information found in the working papers sufficient to complete the calculation of Additional Rent under the lease. The meaning of the word “deemed” in this case granted the landlord some discretion.

Applying Greenberg v. Meffert (1985), the court held that “provisions in agreements making payment or performance subject to the discretion…of a party to the agreement…fall into two general categories. In contracts in which the matter to be decided…is not readily susceptible of objective measurement – matters involved…judgment of the party for whose benefit the authority was given, such provisions are more likely to be construed as imposing on a subjective standard”. Also, the court pointed out the fact that Ontario courts have consistently determined that working papers are unreliable because they fail to reflect the current reality of property, contain incorrect computations, and fail to reflect an appropriate appreciation of market conditions. Working papers are not meant for individual premises, but instead are used to indicate a value for the entire property. Hence, the landlord is right in judging the working papers unreliable and it is reasonable for the landlord not to “deem” the information “sufficient” as part of its determination of Additional Rent owed. It was within the limits of the discretion the terms of the lease granted to the landlord.

On appeal, the Ontario Court of Appeal upheld the decision of the lower court agreeing with its reasoning and analysis throughout.

Ontario Inc. v. Municipal Property Assessment Corp.

In this case, the point is whether or not Section 34(2) of the Assessment Act (“Act”) gave the authority to the Municipal Property Assessment Corporation (“MPAC”) to issue a notice of supplementary tax classification change and supplementary assessment that affected the previous taxation year. The court observed that the Act did not confer such an authority on the assessor and dismissed the application.

Ontario Inc., owned a commercial parking lot in downtown Toronto and started construction on an office building known as RBC Place on August 1, 2006. The change in occupancy (from parking lot to office building under construction) was a “change event” for the purpose of Section 34(2) of the Act , in which the latter classification results in a lower tax ratio than the former. MPAC already assessed the property for the 2007 taxation year based on its use as of June, 2006, so they made a supplementary classification change that was to become effective January 1, 2007. MPAC took the position that it did not have the authority under the Act to make a retroactive assessment to August 1, 2006 despite the request by the landlord.

To determine whether or not MPAC had authority to retroactively assess the property to August 1, 2006 the court relied on the following principles of statutory interpretation from established case law: (i) The interpretation of tax legislation should follow ordinary rules of interpretation; (ii) A legislative provision should be given a strict or liberal interpretation depending on its underlying purpose which shall be determined by examining the context of the statute, its objective and legislative intent (the teleological approach); (iii)The teleological approach will favour the taxpayer or tax department depending on solely the provision in question, and not predetermined presumptions; (iv) Substances has precedence over form; and (v) Only reasonable doubt, not resolved by ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer.

Since the objective of the Act is to have a tax base through which municipalities would generate revenue for services, the court stated the Act also contains mechanisms that reflect changes arising after the assessment roll has been returned and are designed to provide the necessary flexibility to ensure an equitable distribution of tax burden. The Act is applied in conjunction with the City of Toronto Act under which the City of Toronto collects and administers its property taxes. Together, the two Acts form a complete regime for assessing, levying, collecting and rebating fiscal taxes. Section 34(2) of the Act says: “If, during the taxation year or the period after June 30 in the preceding taxation year, a change event…occurs…the assessor may change the classification accordingly….and the tax levied…shall be determined in accordance with the new classification.” It was pointed out by the court that there was nothing in the language of Section 34(2) that expressly states that the reclassification was to have retroactive effect and that other provisions in the Act contained this language. It was therefore quite clear that the legislative intent was not to grant retroactive effect to this provision.

Should the reclassification be made in the taxation year due to a change event occurring after June 30 in the preceding taxation year, the clause provides that the adjustment to the tax roll and tax levied is “for the taxation year” and does not state that the adjustment applies to the preceding year as well.  The court held that the intent of Section 34(2) is that for the changes contemplated, supplementary assessments can be made for the current taxation year only. Nothing has been stated in the two subsections to conclude that the supplementary assessments can result in a tax adjustment for a preceding year.

Don’t make a move before fully understanding your rights and obligations. For more information and assistance regarding commercial leasing, tax law or Real Estate law in Ontario contact Levy Zavet PC in Toronto, Ontario today.