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Ontario Tax - Assessment - 'Highest and Best Use' (HBU). Municipal Property Assessment Corporation v. Claireville Holdings Limited
In Municipal Property Assessment Corporation v. Claireville Holdings Limited (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal (of an appeal) from the Assessment Review Board.
Here the court considers an issue of 'highest and best use' tax valuation:[1] The respondents own five contiguous properties in the Entertainment District on King Street, in Toronto. At the relevant time, the properties consisted of two- and three-storey commercial buildings. The respondents intend to redevelop the properties into a mixed-use high-rise condominium project.
[2] The Municipal Property Assessment Corporation (“MPAC”), which is responsible for assessing properties in Ontario for the purpose of taxation, assessed the properties on the basis of their development potential as a mixed-use high-rise development. The respondents appealed the assessments to the Assessment Review Board (the “Board”). The Board allowed the appeal, finding that MPAC had not met its burden of proving that a mixed-use high-rise development was the properties’ “highest and best use” (“HBU”). Instead, the Board held that the properties should be assessed based on their current use, which the Board described as a presumption. The Divisional Court dismissed MPAC’s appeal.
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B. Statutory Scheme
[5] Subsection 14(1) of the Assessment Act, R.S.O. 1990, c. A.31, requires MPAC to prepare an assessment roll for each municipality, which includes the current value of all land in the municipality.
[6] Subsection 19(1) of the Assessment Act provides that the assessment of land is to be based on its “current value”. Subsection 1(1) of the Act defines “current value” as, “in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer”.
[7] Subsection 19.2(1) of the Assessment Act sets the valuation days that apply for specified valuation years. Subsection 19.2(1)3 sets January 1, 2012 as the valuation day for the taxation years 2013 to 2016. Subsection 19.2(1)4 sets January 1, 2016 as the valuation day for the taxation years 2017 to 2020.
[8] Pursuant to s. 40(1)(a)(i) of the Assessment Act, taxpayers are entitled to appeal the assessed value of their land to the Board. On an appeal, pursuant to s. 40(17) of the Act, MPAC has the onus of proving the current value of the land. Pursuant to s. 44(3)(a) of the Act, the Board is required to determine the current value of the land. Section 45 of the Act gives the Board all the powers of MPAC to determine the current value.
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(3) The Board’s decision
[16] Claireville appealed the assessments to Board.
[17] The Board allowed the appeals. The Board reduced the assessments for the years 2014 to 2016 to $7,775,000, and for the years 2017 to 2020 to $14,314,000. In doing so, the Board relied on the Properties’ current use as income-generating properties.
[18] In its decision, the Board explained that the assessed value of land is based on the state and condition of the land on the “assessment roll return date”. As agreed by the parties, this includes the land’s development potential. The Board further explained that the HBU methodology is to be used to determine whether land has development potential in excess of the value of its existing use.
[19] The Board set out the following definition of the HBU from a text co-authored by the Appraisal Institute and the Appraisal Institute of Canada:[HBU] may be defined as follows: The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. [20] The Board further stated that, to meet this definition, MPAC is required to present evidence that satisfied the four following four requirements: 1) legal permissibility; 2) physical possibility; 3) financial feasibility; and 4) maximum productivity.
[21] The Board went on to state as follows:The existing use of land is presumed to be the [HBU]. A party seeking to prove a different [HBU] must provide “compelling evidence of how another legally permissible, physically possible and financially feasible use is more productive than the current use…” [Emphasis added; citation omitted.] [22] Following this explanation of the test for determining the HBU, the Board considered whether MPAC had met its onus of proving each of the four requirements to establish that a 50-storey mixed-use development was the HBU for the Properties. The Board was satisfied that the evidence supported a finding that the first two requirements were met:a. Legal permissibility: Based on the approval of a similar development in the area in 2013, the Board was satisfied that there was a reasonable probability that the zoning amendment would be granted.
b. Physical possibility: The Board noted that Claireville agreed that MPAC’s proposed HBU was physically possible. [23] However, the Board found that MPAC did not prove that its proposed HBU was financially feasible. In reaching this conclusion, the Board found that MPAC did not rely on a recognized appraisal methodology to prove that the development would be financially feasible. The Board found that it was a methodological error for MPAC to simply rely on the “sales evidence of purportedly comparable properties” to satisfy the HBU financial feasibility test. Specifically, the Board found that MPAC failed to provide “narrative market and marketability analyses that include an analysis of residual demand”. The Board further found that MPAC failed to present evidence that would establish financial feasibility for each state and condition date.
[24] The Board then stated that, given that MPAC’s proposed HBU was not financially feasible, it was not necessary to determine whether it had established maximum productivity. However, the Board nevertheless commented as follows:In any event, the maximum productivity test is a choice between the profitability of various Proposed Uses found to be financially feasible. As MPAC had only proposed a single [HBU], there is no choice required to be made among financially feasible proposed uses, to determine which would be maximally productive. [Emphasis added.] [25] Having found that MPAC did not meet its onus of proving its proposed HBU, the Board accepted Claireville’s evidence of valuation based on the “income approach” for the existing use of the Properties as two- and three-storey commercial buildings. In doing so, the Board observed that MPAC had not presented any evidence based on the income approach for the existing buildings, and that, when cross-examined, “MPAC’s expert agreed with the valuations given by [Claireville’s] expert, if the Board found that the [HBU] as a high-rise residential building was not made out”.
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[36] In principle, I agree with MPAC’s argument that the Assessment Act does not create or allow for a presumption that the current use of a property is its HBU. As the Divisional Court explained in Zarichansky, at paras. 40 and 41, the Board is charged with determining the current value of lands and therefore cannot ascribe a value it knows is not the current value simply because MPAC has failed to meet its burden of proof:Under the statutory scheme, MPAC is initially tasked with determining the current value of the property. However, where a taxpayer appeals to the Board, it is up to the Board to make that determination:. Section 40(1)(a)i provides that a person can bring an appeal to the Board on the basis that the “current value” of his or her land is incorrect. Section 40(19) requires the Board to determine the “matter” after hearing submissions from the parties.
. Section 44(3) requires the Board to determine the “current value of the land”, after which the Board can reduce the value to make it equitable in relation to land in the vicinity.
. Section 45 provides that, on an appeal, the Board has all of MPAC’s powers in determining the value of the property. In combination, these provisions make clear that an assessment must be based on the current value of the property. The Board has no power to dodge this responsibility based on a finding that MPAC has not met its burden of proof. [Emphasis added.] [37] However, that is not what happened in this case.
[38] While the Board made reference to a presumption that the current use of the Properties is its HBU, this is not in fact how the Board reasoned through its decision. As reviewed above, the Board first considered MPAC’s proposed HBU and found that it had not met its burden of proving the financial feasibility of this proposed use. It is worth remembering that MPAC does not contest this finding. The Board then turned to the other expert evidence available regarding the value of the Properties, which consisted of Claireville’s evidence regarding the current value of the Properties. Based on that evidence, which the Board accepted, it concluded that the Properties’ current value should be based on the “income approach”, which was based on the current use of the Properties as income properties. In making this finding the Board relied on a concession made by MPAC’s expert that, if its proposed HBU was not made out, Claireville’s proposed valuation was appropriate:MPAC did not present any valuation evidence, based on the income approach, for the existing use as 2 and 3-storey commercial buildings. Under cross-examination, MPAC’s expert agreed with the valuations given by the Appellants’ expert, if the Board found that the [HBU] as a high-rise residential building was not made out. [Emphasis added.] [39] I agree with the Divisional Court. The Board first found that MPAC had not met its onus, and then turned to Claireville’s evidence. MPAC did not apply a presumption, but simply decided the case based on the evidence and arguments presented by the parties, while keeping in mind that MPAC bore the onus of proving its proposed HBU and current value.
[40] MPAC’s position amounts to an argument that, while the Board rejected its proposed HBU, the Board should nevertheless have considered an alternative to its proposed HBU and to Claireville’s position that the valuation should be based on the income approach. There is nothing in the record to suggest that MPAC made this alternative submission to the Board. MPAC conceded this point before us in oral argument.
[41] In the circumstances, in the absence of submissions on this issue and a properly developed evidentiary record, there is no basis for finding that the Board made a legal error by failing to use comparative sales as the basis for arriving at the current value for the relevant valuation dates. While the Board’s role is to determine the current value of the Properties, it is to do so based on the submissions and evidence of the parties, keeping in mind that MPAC bears the onus to prove its proposed current value. The Board did not commit a legal error by failing to come up with its own current value in the circumstances of this case.
[42] This case is unlike Zarichansky, where the Board was not satisfied that MPAC met its burden and then reverted back to the prior valuation, knowing that it did not represent the current value of the property. In this case, the Board’s valuation was based on evidence put forward by Claireville that it accepted, as it was entitled to do. This does not amount to a legal error.
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