Montreal (City) v. Montreal Port Authority: Circumscribing Crown Corporations’ Discretion vis-a-vis Payments in Lieu of Taxes
With the expiration of the personal income tax filing deadline, it is fitting to mark the occasion by discussing the SCC’s recent decision in Montreal (City) v. Montreal Port Authority, 2010 SCC 14, regarding Crown corporation payments in lieu of taxes (PILT) to municipalities. At issue in this case was the scope of two Crown corporations’ discretion in determining the tax rate to be applied in calculating their PILTs to the City of Montreal (the City). Before delving into the facts of the case, a quick summary of the legal background regarding the taxation of governments is required. The federal and provincial governments are immune to taxation by each other on account of s. 125 of the Constitution Act, 1867, which states “No Lands or Property belonging to Canada or any Province shall be liable to Taxation.” In recognition of the benefits that the federal government receives from municipal services, the Payments in Lieu of Tax Act, R.S.C. 1985, c. M-13 (the Act), was created so that the federal government could remain immune to taxation, while still being able to fairly compensate municipalities. According to s. 15 of the Act, there is no right to a PILT; it is not a debt owed to a municipal tax authority. At the same time, it is misleading to say that these payments are voluntarily bestowed upon the municipalities. The SCC held that Parliament intended that the calculation of PILTs would be “consistent with the objective of equity and fairness in dealing with Canadian municipalities”. This decision seems to indicate that not only is it the norm to pay PILTs, but also that they are to be paid out fairly.
Tax Harmonization Leads to Disagreement
Prior to 2003, the City collected property taxes on all taxable immovables within its territory. Two other taxes that could be imposed on top of the general property tax included a surtax on non-residential immovables, and an occupancy tax on commercial and professional premises (“business tax”). When the City amalgamated the tax systems of local municipalities into one harmonized system in 2003, it abolished the business tax. The respondents, the Canadian Broadcasting Corporation (CBC) and the Montreal Port Authority (MPA), had been making PILTs corresponding to the property tax on the taxable value of their immovables in Montreal, but they had never paid the business tax. When the harmonization occurred, the City adjusted the tax rates to recover the loss of revenue from the abolition of the business tax. The effect was to increase the amount of PILTs paid by the respondents to the City. They refused to make the PILTs calculated according to the new tax rates for non-residential immovables.
The CBC and MPA exercised their purported discretion to determine the applicable tax rate in calculating their PILTs. Both engaged in creative calculating by reducing their PILTs by the amount equivalent to the increase in the property tax that was attributable to the abolition of the business tax. The CBC was more aggressive than its co-respondent with its additional argument that it should be allowed to recoup the amounts by which it claimed to have overpaid its PILTs to the City in the past. Its position was that the effect of abolishing the business tax should be applied retrospectively so that its PILTs would be considered to be overpaid by the amount of the business tax.
What is the Scope of Crown Corporations’ Discretion?
The crux of the decision written by LeBel J. came down to an interpretation of the scope of the discretion conferred upon Crown corporations in the definitions of “property value” and “effective rate” in the calculation of PILTs. Subsection 4(1) of the Act contains the basic formula for calculating a PILT, which is “the product of the effective rate applicable to the federal property in the taxation year and the property value of the property.” (Emphasis added). The respondents argued that both definitions gave them the discretion to determine the applicable tax rate. For convenience, the definitions are listed below:
effective rates means the rate of real property tax or frontage or area tax that, in the opinion of the Minister, would be applicable to any federal property if that property were taxable property;
property value means the value that, in the opinion of the Minister, would be attributable by an assessment authority to federal property…as the basis for computing the amount of any real property tax that would be applicable to that property if it were taxable property [.]
The SCC held that these provisions did confer discretion upon Crown corporations to determine the tax rate, but within certain limits. LeBel J. gave examples of circumstances in which this discretion was appropriately exercised, such as protecting federal government interests in the face of bad faith by municipal tax authorities. Discretion must be exercised in a manner consistent with the rule of law. LeBel J. wrote that the respondents “cannot base their calculations on a fictitious tax system they themselves have created arbitrarily. On the contrary, those calculations must be based on the tax system that actually exists at the place where the property in question is located.” In turn, neither Crown corporation could decrease the amount of their PILTs to account for the abolition of the business tax. Further, the CBC could not reach back in time and retrospectively apply the abolition of the business tax in order to claim that it overpaid its PILTs to the City.
The City of Montreal Sweeps the Floor with the CBC and MPA
The City’s success on all fronts marks a key victory for municipalities vis-a-vis Crown corporations beyond the specific facts of this case. Not only did the City manage to circumscribe the discretion of Crown corporations in determining their tax rates for calculating PILTs, it also managed to get away with indirectly imposing the business tax on them. Recall that the CBC and MPA did not pay the business tax prior to 2003. The effect of the harmonization was to increase the PILTs paid by both of them, which arguably constitutes indirect taxation on the basis of the business tax. The facts clearly showed that the City adjusted the tax rates to account for the loss of revenue arising out of the abolition of the business tax. However, LeBel J. found that Quebec municipal legislation allowed the City to impose variable-rate property taxes, and that the City was merely exercising that power. This element of the decision is disconcerting because it allowed the City to indirectly do what it could not do directly. Harmonizing the tax system is a worthy goal, but the City should not have been allowed to use its power in bad faith to increase the PILTs owed by the CBC and MPA. As mentioned earlier, Crown corporations are permitted to exercise their discretion in the face of bad faith by municipal tax authorities. LeBel J. specifically stated, “[M]anagers of federal property must retain some latitude so that they can react to protect federal government interests should municipalities use their taxing powers in bad faith to specifically target federal property.” Based on the legislative framework regarding PILTs, this elucidation of bad faith is rather narrow. Since the City technically has no legal right to the PILTs, it was arguably bad faith on its part to compel the respondents to pay PILTs at the higher tax rates. It difficult see how allowing the respondents to pay PILTs at the old tax rate would be contrary to “fairness and equity” when the rise in the tax rate is due to the abolition of a tax that they did not previously pay. The primary concern with such a narrow elucidation of bad faith is that it could led to future manipulations of the tax rates in order to get Crown corporations to make greater PILTs. A municipality could disguise the manipulation by changing the tax rates across the board as was the case here. It is for that reason that this decision should be applied as narrowly as possible in the future.