Secret city offer a gift from you to Island airport: $2.5M/year

Brian Iler —

The City of Toronto has battled the Toronto Port Authority for more than a decade to collect property taxes on the Island Airport and other lands owned by the Port Authority. That battle, fought so hard by the City, now appears over. The City, faced with an intransigent and stubborn Port Authority, appears to have capitulated.

Recently, the Toronto Port Authority issued a press release announcing that it has accepted the revised offer approved by Toronto City Council in October 2013 regarding the amount of Payment-In-Lieu of Taxes (“PILT”) that Billy Bishop Toronto City Airport (“BBTCA”) pays to the City of Toronto. Pursuant to ongoing discussions with the City, the agreement would see BBTCA pay a PILT of $0.94 cents per passenger.

A subsidy the City cannot afford

Under the apparent offer made by the City to the TPA in October, and recently accepted by the TPA, the City would receive about $1,786,000, based on 2012 passenger levels.

The money involved is huge: given the rise in property values, the 2012 taxes payable at the same rate as everyone else pays on the Island Airport property, based on 2012 property assessment values, were $4,332,690. The difference between taxes payable and that now accepted offer is over $2.5 million dollars for 2012.

As property values continue to increase, the amount of that difference would increase, depending on passenger volumes.

By failing to pay their fair share of property taxes, and instead paying a per passenger fee, the TPA (and, in fact, Porter – see below) receives a massive subsidy from the City.

A subsidy the City cannot afford.

What is worse is that the apparent offer, which the TPA has now accepted, was made in secret: aside from the TPA press release, we have no idea what happened at that October Council meeting.

What’s this all about?

Everyone pays property taxes

Every property owner in Ontario (save four airports) is obliged to pay taxes on their property calculated as a proportion of the property’s fair market value, as determined by an Ontario government agency, the Municipal Property Assessment Corporation (“MPAC”).

The Island Airport occupies 215 acres of some of the most valuable land in Toronto – but the TPA argues it shouldn’t pay based on that land value.

In fact, at the Disputes Resolution Tribunal , the position of the TPA was that the land’s value was nominal, and that nothing, therefore, was owing.

How much is involved?

MPAC reports that, for 2012, the assessed value of the Island Airport lands was $144,423,000.

At the commercial tax rate of about three percent, property taxes payable on the Island Airport lands should have been $4,332,690 for 2012.

With increasing property values, depending on the tax rate, the amount payable will likely be higher each year.
Until recently, the TPA refused to pay anything.

It then accepted the Tribunal’s advice and commenced paying 80¢ per passenger per year but in 2010 the Tribunal’s advice was overturned by the Federal Court on an appeal by the City.

This battle has been going on since the Toronto Port Authority was established in 1999. As a result, there are very substantial arrears. At a meeting of Toronto and East York Community Council on March 20, 2012, a City Finance official stated that the City had billed $58 million in property taxes on the Island Airport lands for the period to the end of 2010, while the TPA had paid only $9 million.

With minimal payments since then, the amount of arrears outstanding is well in excess of $50 million.

Why hasn’t the City collected what it is owed?

Since its creation in 1999, the TPA has hidden behind a legal principle that the federal government and its agencies are exempt from municipal tax.

However, that legal principle has been whittled down over the years by legislation and by the courts.

Successful lobbying by municipalities that had long suffered from the presence of federal government property led to the enactment of this Regulation under the federal Payments in Lieu of Taxes Act:

“a payment made by a corporation [i.e. the TPA] in lieu of a real property tax for a taxation year shall be not less than [our emphasis] the product of
(a) the corporation effective rate in the taxation year applicable to the corporation property in respect of which the payment may be made; and
(b) the corporation property value in the taxation year of that corporation property.”

This says clearly that the TPA must pay its taxes (known Payments in Lieu of Taxes or “PILTs”) on the same basis as every other taxpayer.

The courts have weighed in, too:

In 2010, in Montréal (City) v. Montreal Port Authority, the Court stated:

“Parliament intended Crown corporations and managers of federal property to make payments in lieu on the basis of the existing tax system in each municipality, to the extent possible as if they were required to pay tax as owners or occupants.[para. 42]

“Thus, the purpose of the PILT Act is to establish a system of payments in lieu that reflects the actual tax situation in the places where federal property is located.” [para. 46]

Again, in 2012, the Court in Halifax (Regional Municipality) v. Canada (Public Works and Government Services) stated:

“Just as fairness to the Federal Crown demands that the Minister retain the discretion to come to his own opinion on property value, fairness to municipalities demands that the Minister’s opinion be informed by the tax system that would apply to the federal property in issue if it were taxable [para. 42]. …

“But the Act is directed to fair and equitable PILTs with reference to what taxes would be payable if the site were taxable” [para. 57].

All of this is very clear: the TPA is supposed to pay property taxes on the same basis as everyone else.

Both the legislation and the courts have said so.

The City could have placed the TPA in default under the Tripartite Agreement, under which this City leases a large portion of the Island Airport lands to the TPA until 2033 rent-free.

That Agreement requires the TPA to:

at all times fully observe and comply with and endeavour to ensure strict observance of and compliance with all statutory requirements, regulations, rules or by-laws of every municipal or other authority which in any manner affect or relate to the Toronto City Centre Airport, or the use or occupation of the Toronto City Centre Airport or any part thereof, for the purpose of a permanent public airport for general aviation, limited commercial STOL service operations or both.

Breach of its obligation under the Payments in Lieu of Taxes Act to pay its fair share of taxes would seem to be covered by this requirement.

The City has not placed the TPA in default under the Tripartite Agreement.

The City could have made payment a condition of its recent lease of the lands
the TPA needed for taxi queuing during the pedestrian tunnel construction.

It didn’t.

The City could have insisted that the taxes be paid as a condition of even considering Porter’s jets proposal.

It didn’t.

Having won at the Federal Court of Canada in 2010, the City hasn’t even taken that Court’s decision back to the Disputes Resolution Tribunal, in relation to the Island Airport lands.

Why has the City apparently just given up?

We do not know.

What happened last October?

Here are the publicly available minutes of that City Council meeting:

City Council on October 8, 9, 10 and 11, 2013, adopted the following:

1. City Council adopt the recommendations contained in Confidential Attachment 1 to the report (July 9, 2013) from the City Solicitor and the Treasurer, as amended.
2. City Council direct that Confidential Attachment 1, including all Appendices, to the report (July 9, 2013) from the City Solicitor and the Treasurer, as amended, remain confidential as it contains advice and information that is subject to solicitor-client privilege and pertains to litigation or potential litigation. City Council authorize the public release of all or a portion of the adopted confidential instructions at the discretion of the City Solicitor.
3. City Council authorize and direct the appropriate City staff to take the necessary action to give effect to Council’s decision.

Since everything was confidential, our Councillors still can’t tell us what was decided.

We do not know what happened to the more than $50 million arrears of back taxes.

We don’t know what advice City Council got from its lawyers.

We don’t know what was so persuasive that even staunch opponents of the TPA voted to capitulate.

Council rejected PILTs settlement last March

A proposed settlement, in which the TPA offered to pay only 80 cents per passenger, for arrears back to 1999, and 94 cents going forward, was rejected by City Council at its March 4, 2013 meeting .

We don’t know why this secretly came back to Council in October.

Isn’t a per passenger charge fair?

Pearson Airport does pay 94¢ per passenger in lieu of property taxes, mostly to the City of Mississauga, as most of the Airport is located in that municipality.

Three other airports – London, Ottawa, and Thunder Bay are also permitted to pay a per passenger fee.

The Province of Ontario imposed that alternative on those municipalities through a Regulation under the Assessment Act.

The TPA has lobbied, unsuccessfully to date, to obtain similar treatment from the Province .

No other property owner in Toronto, save Pearson Airport, is able to pay its taxes based on the amount of business it does on the property.

The effect of a per passenger charge is to make the municipality a business partner with the airport operator, sharing in its success and in its failures.

Should the City’s tax revenues be subject to the varying fortunes of a business operation?

Porter Airlines business success is far from assured. While it has a virtual monopoly at the airport, its passenger numbers have declined, on a year-over-year basis, for four of the last six months it reported passenger data . It then, in April 2013, ceased to provide any further reports.

For 2006 there were only 6,449 commercial passengers using the Island Airport. At the TPA’s offered rate of 80 cents per passenger, a PILT of a little over $5,000 for the year would have been payable, on land valued, in 2012, at $144,423,000.

Also consider the TPA’s International Marine Passenger Terminal. Revenues today on a per passenger basis would gross the City exactly $0.00 as it sits begging for use as a filming location, rather than a passenger facility.

The Federal Court of Canada, on this precise issue, in City of Toronto v. Toronto Port Authority considered the TPA’s preference for such a “per passenger” fee and stated:

“The TPA attempted to enjoy the benefits of [ a per passenger fee]. …The … legal error is compounded by the absence of any explanation as to the merits of the quantum of the per passenger amount.

“Therefore, the [per passenger fee] … is not sustainable as a matter of jurisdiction nor as a matter of reasonableness.”
Per passenger charge is a back-door subsidy

Airports require huge swaths of land the Island Airport is comprised of 215 acres. Pearson occupies 4,613 acres.

For that reason, airports are normally located well outside of urban areas, where land is cheap.

For Pearson, that was once the case.

But as urban development eventually surrounded Pearson, the per passenger charge was imposed to allow Pearson to escape property taxes that reflected increasing market value.

Essentially, the per passenger charge keeps the cost of flying down, and by requiring the host municipalities to accept less from airports than from any other taxpayer, this amounts to a back-door subsidy by municipalities of their airports.

The Island Airport is an extreme case – its land is some of the most valuable in Canada, and the amount of the subsidy represented by a per passenger charge is, at the 94¢ rate, massive.

This is a subsidy of Porter

We now know that any payments the TPA makes on account of PILTs are fully reimbursable by Porter, pursuant to the Commercial Carrier Operating Agreement between them.

In that Agreement, Operation and Maintenance Expenses are expressly stated in the Agreement to include any such taxes payable:

[Operation and Maintenance Expenses] includes all other direct and indirect expenses, whether similar or dissimilar, which arise out of TPA’s ownership, maintenance or operation of the Airport System, including any tax, or payment in lieu of tax, payable by TPA which may be lawfully imposed upon the Airport System by a Person other than TPA; the Contribution to TPA Corporate for such Fiscal Period [Schedule of Fees para. 1.1(j)]

Since any resolution of the PILTs issue is for Porter to fund, the TPA’s resistance to its payment is in fact only for Porter’s benefit.

Failure to pay its fair share of PILTs becomes another very substantial unilateral subsidy, by the City of Toronto, of Porter.