In the recent case of Montreal (City) v. Montreal Port Authority, 2010 SCC 14, the Supreme Court of Canada set down some guidelines for the application of federal legislation concerning payments in lieu of taxes (“PILTs”) by the federal Crown and federal Crown corporations. Such payments are governed by the Payments in Lieu of Taxes Act (the “PILT Act”) and the Crown Corporation Payments Regulations (the “Regulations”).
In an unanimous judgment, the Court held that decisions by federal entities about what PILTs they will pay must be reasonable, and must be based upon the tax system existing in the jurisdiction where federal property is located. While the legislation does grant federal entities a degree of discretion in making such decisions, the discretion is not limitless, and must be exercised within the scope of the PILT Act and the Regulations.
The case arose out of the amalgamation of numerous municipalities into the City of Montreal (the “City”), a process that began in 2000. Prior to the amalgamation, tax systems varied among the municipalities. Some of them, including the City, charged a “business occupancy tax” on top of the general property tax applicable to property classified as commercial or business property. Pursuant to provincial legislation, the amalgamated City introduced a new tax system in 2003, eliminating the business occupancy tax, while increasing the rate payable for commercial and business properties.
The Montreal Port Authority (the “MPA”) and the Canadian Broadcasting Corporation (the “CBC”) both decided, when calculating their PILTs, to discount the rate payable by an amount equivalent to the business occupancy tax they would not have paid, if it were still in effect. In other words, both the MPA and the CBC gave themselves a discount that had the effect of restoring the pre-2003 tax system. In addition, the MPA decided that certain silos on its property were exempt from PILTs, since they fell under the category of “reservoirs”. Under the PILT Act, reservoirs are exempt from PILTs.
The Court struck down the decisions of the MPA and the CBC on the basis that they were unreasonable, and in doing so, set out some essential principles and guidelines with respect to PILTs.
The Court recognized that PILTs were created by Parliament to address a potentially inequitable situation. Under the Constitution Act, 1867, the federal government and the provinces are immune from each other’s taxes. Accordingly, because local governments are creations of provincial legislation, federal entities are immune from municipal taxes. However, in the words of the Court at paragraphs 13 and 14:
“As owners of real property, the federal government and its agents receive a range of municipal services that go well beyond the mere supply of goods like water or electricity.
For this reason, the federal government created a system to compensate Canadian municipalities. In short, it wanted its administrators and agents to act as good residents of the municipalities where federal property is located.”
While the responsibility to pay PILTs is “voluntary” in the sense that the federal government is not legally obligated to impose such a requirement, and in the sense that a local government cannot sue as a creditor to recover unpaid PILTs, nonetheless under the PILT Act, federal entities are directed to pay PILTs for their property in an amount equal to the “effective rate” of tax multiplied by the “property value”. The “effective rate” and the “property value” for the purposes of PILTs are not necessarily identical to those established by a local government, since federal entities are afforded some discretion in determining them. In this case, neither the MPA nor the CBC took issue with the property value established by the City. They did take issue with the effective rate.
Because of the principle of immunity, the City could not bring an action to recover the PILTs it believed should have been paid, but the Court held it was appropriate for the City to use the judicial review process to attack the decisions concerning how PILTs are calculated.
The decisions by the MPA and the CBC, basing their effective rate on a tax system that was no longer in existence, were held to be unreasonable and therefore an unlawful exercise of discretion. The Court soundly rejected the calculation of PILTs on the basis of “a fictitious tax system they themselves have created arbitrarily”. In addition, the Court held that “reservoirs” store liquids, while “silos” store dry goods, therefore the MPA was unreasonable in deciding to exempt its silos from PILTs.
The Court’s judgment confirms that federal entities must act fairly when it comes to paying PILTs. However, the Court also cautioned that one of the reasons why a degree of discretion is given to federal entities under the PILT Act is to prevent abuse. In the words of the Court, at paragraph 35:
“[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 Crown property.”
In light of the Court’s judgment, it appears that so long as local governments do not single out the property of federal entities for unfair treatment, federal entities should contribute to the tax bases of the communities in which they are located in the same manner as any other landowners.