A Parks not Planes Report – May 2023
Introduction
The aviation industry in Canada is heavily subsidized by taxpayers. There are many ways in which those subsidies are made; one that does not get much attention is the unusual property tax regime applied to some airports, including Toronto’s Island Airport.
This report explains how that works for that Airport. [1]
We pay taxes without much grumbling if we can have confidence that all other taxpayers are treated the same. For property tax, that means everyone should pay their fair share, based on the current market value of their property.
That’s more or less the case. Except for airports like the Island Airport, which pay far less than any other property owner of similar property.
How much?
Using property tax assessments and applicable tax rates, we’ve calculated the amount of property taxes that should have been paid on the Airport lands. Deducting the amounts the Airport’s operator, Ports Toronto, has paid to the City of Toronto over the past 20 years, the total subsidy given to the Island Airport by the taxpayers of the City of Toronto over those years is, conservatively, $36,607,528.
This is a lot of money.
Until this report was issued, no one really knew how much of a subsidy the City has given – mostly involuntarily, at the insistence of senior governments – to prop up an airport that has never seen financial success. [2]
Now we know.
It’s time to consider whether that subsidy should continue – or are there other ways in which scarce public dollars should be spent, that might better serve our city, and our communities?
This is an appropriate time. The City’s lease of a significant portion of the Airport lands expires on June 30, 2033, and there is a need for a serious public debate on what the best use of those lands – the most valuable in our city – should be before any decision is made on a renewal of that lease.
It has recently been revealed that Porter Airlines, the beneficiary of exceptionally generous terms from Ports Toronto for its base at the Island Airport, has still been unable to find financial success at that Airport, [3] and is in the process of centering its Toronto operations at Pearson.
How Property Tax in Ontario works
Municipalities, like the City of Toronto, rely on property taxes to generate most of the revenue they need to provide their services – primarily, police and fire services. An additional education tax is levied to fund our schools.
Unlike income taxes, which are based on the amount of income earned, property taxes are calculated each year as a portion of the market value of the real property.
With some exceptions for organizations that provide public benefit, like churches, and some cultural institutions like Massey and Roy Thomson Halls, all property owners pay property (and education) taxes to the City, calculated as a proportion of the fair market value of their land and buildings.
All, except the Island Airport. Like some other Ontario airports, who receive a similar subsidy, its owner pays a substantially lower amount of tax, calculated not on the value of the land and buildings, but on the number of passengers.
That value is determined by a provincial agency, the Municipal Property Assessment Corporation (MPAC) which provides every municipality on Ontario with its determination of the “assessed value” of all property in that municipality. The municipality, is its budget, determines how much it needs to raise from property taxes, and sets the tax rate, which in Toronto in 2022 was about 0.6% of assessed value for single‑family residential property, 1.1% for multi‑residential buildings, and 2.1% for commercial and industrial property.
A corner store, for example, with an assessed value of $500,000, would be billed $10,500 for property taxes in 2022 by the City.
How Does MPAC determine Assessed Value?
Prior to 1998, each municipality could decide how to value property in its jurisdiction. With the election of Mike Harris’ government, a standardized current value for all property in Ontario was imposed.
Current value is defined in law as “the amount of money the [property] … would realize if sold at arm’s length by a willing seller to a willing buyer”. [4]
MPAC determines that value, applying the principle of “Highest and Best Use”, the reasonably probable and legal use of [real] property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. [5]
The existing use of land is presumed to be the Highest and Best Use. A party seeking to prove a different Highest and Best Use must provide “compelling evidence of how another legally permissible, physically possible and financially feasible use is more productive than the current use…”
Is airport use the Highest and Best Use for the vast area of land an airport occupies? Appraisers struggle with that. Two appraisers, writing in the Canadian Property Valuation Magazine, state
The value of the land underlying an airport, based highest and best use in alternate use (in urban areas, often an industrial business park) can be very significant, in the billions of dollars for the largest airports. Although the direct, indirect, and induced economic benefits from airports can be significant, revenues generated from airport operations – rentals, landing fees and so forth often do not provide a market return on the underlying asset. Yet it is rare to see a Canadian airport decommissioned and put to alternate use.
In other words, airport use is far from the Highest and Best Use.
Assessing the value of the Island Airport
Ports Toronto (legally, Toronto Port Authority) has long resisted paying its fair share of property taxes. The City of Toronto valiantly attempted, over many years to collect what it viewed as appropriate. In a decision of the Dispute Advisory Panel for 2004‑7 tax years, this appears:
The City’s values of the Airport… are
2004/2005 $39,057,770
2006/2007 $42,944,060
The position of the Port Authority used value in exchange the Airport is nominal.
It is an understatement that they are far apart.
The tribunal failed to decide, and the City successfully appealed. In its decision, the Federal Court of Appeal stated:
Cordick [the City’s expert witness] did not use either the direct comparison approach or the income valuation approach in part because it is MPAC policy to value special purpose public service institutions using the cost approach [our emphasis].
Cordick had concluded that the “highest and best use” of the properties was their current use [i.e. airport ].
The TPA, … looked at the properties not on the basis of redevelopment value - had they been owned by a taxable entity - but on their income producing history.
As a consequence of TPA’s view, TPA through its expert focused on the Income Approach.
Since the Airport had been losing money in those years, and its income was negative, Ports Toronto took the position that the Airport lands had no value.
We have used MPAC valuations. Even they, given MPAC Policy, may be well lower than the value of the Airport lands absent an airport. The property tax subsidies we have calculated are therefore estimated conservatively.
It is useful to look at the 143‑acre Buttonville airport. Because there was a sale of part of that airport’s lands for development, MPAC decided to double the assessed value of the entire airport, from $31,400,000 to $63,693,000, applying the sale price of that part to the whole airport. In a 2014 decision the Assessment Review Board, the increase was rolled back, with the Board ignoring the development potential stating:
The land was zoned for airport use, the land was being used as an airport and the Board agrees with the Appellants that the highest and best use for the land at that date was still its use as an airport.
One can readily infer from the MPAC and tribunal decisions that they are wary of imposing property tax valuations that come close to what airport lands would generate from an arm’s length sale for development on the open market.
The payment‑in‑lieu‑of taxes issue
Constitutionally, one government cannot tax another in Canada. As this principle means considerable hardship to municipalities, the federal government has developed a method for federal agencies like Ports Toronto to “voluntarily” pay (as a Payment‑in‑Lieu‑of‑Taxes – PILT) an amount more or less equivalent to the amount of property taxes any other property owner must pay.
The Supreme Court of Canada [6] has twice, in 2010 and in 2012, rapped the federal government for its agencies’ practice of refusing to pay their fair share of property taxes [7].
Ports Toronto has consistently attempted to avoid paying its fair share of property taxes, as PILTs, advocating instead for a PILT based on the number of passengers the Airport handles in a year.
The Federal Court of Canada disagreed, stating
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.
Notwithstanding the court’s decision, Ports Toronto was successful in obtaining an amendment to the Ontario Assessment Act in 2017 [8], backdated to 2013, to permit it to pay $0.94 per enplaned and deplaned passenger on account of property tax to the City of Toronto.
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.
Calculating the Subsidy
Using various sources, we have assembled a table indicating for each year since 2000, the property tax assessment of the Airport lands, per MPAC, the applicable City property tax rate, the amount that should have been paid, if Ports Toronto were any other taxpayer in the City, and the amounts actually paid.
The difference between what should have been paid, and what was actually paid is shown in the last column.
Year | MPAC assessed value of airport lands | City property tax rate | Property tax that should have been paid | Amount actually paid [10] | Difference |
2000 | $23,451,000 | 7.69% [11] | $1,803,382 | $92,674 | $1,710,707 |
2001 | $61,601,000 | 2.65% [12] | $1,632,427 | $70, 857 | $1,561,569 |
2002 | $61,601,000 | 2.66% [13] | $1,638,587 | $53,341 | $1,585,246 |
2003 | $56,834,000 | 2.31% [14] | $1,312,865 | $35,825 | $1,277,040 |
2004 | $56,834,000 | 2.21% [15] | $1,256,031 | $24,280 | $1,231,751 |
2005 | $56,834,000 | 4.50% [16] | $2,557,630 | $22,815 | $2,534,715 |
2006 | $71,156,000 | 2.06% [17] | $1,465,814 | $27,901 | $1,437,913 |
2007 | $71,156,000 | 3.67% [18] | $2,611,425 | $209,803 | $2,401,622 |
2008 | $71,156,000 | 4.10% [19] | $2,917,396 | $406,859 | $2,510,537 |
2009 | $71,156,000 [20] | 2.03% [21] | $1,444,467 | $616,544 | $827,923 |
2010 | $71,156,000 | 3.59% [22] | $2,490,460 | $904,480 | $1,585,980 |
2011 | $71,156,000 | 3.22% | $2,291,223 | $1,267,722 | $1,023,501 |
2012 | $106,271,000 | 3.17% | $4,578,209 | $1,760,000 | $2,818,209 |
2013 | $137,534,000 | 3.12% [23] | $4,291,060 | $1,735,000 [24] | $2,556,060 |
Year | MPAC assessed value of airport lands | City property tax rate | Property tax that should have been paid | Amount actually paid | Difference |
2014 | $166,177,000 | 3.07% | $5,101,634 | $2,160,000 | $2,941,634 |
2015 | $198,830,000 | 3.00% | $4,898,900 | $2,160,000 | $2,941,634 |
2016 | $229,483,000 | 2.90% | $6,655,007 | $2,250,000 | $4,405,007 |
2017 | $132,444,750 | 2.85% | $3,178,674 | $2,520,000 | $658,674 |
2018 | $96,565,500 | 2.40% | $2,317,572 | $2,638,580 | ‑$321,008 |
2019 | $96,749,250 | 2.27% | $2,196,208 | $2,607,560 | ‑$411,352 |
2020 | $132,996,000 | 2.17% | $2,886,013 | $365,660 | $2,520,353 |
2021 | $132,996,000 | 2.08% | $2,766,317 | $265,080 | $2,501,237 |
2022 | $132,996,000 | 2.12% | $2,819,515 | Not available yet | |
Total | | | | | $36,607,528 |
This is a significant sum. Is such a subsidy in the public interest? Or are there better ways to apply that money? Should the Airport continue operating if it requires that level of subsidy?
As the issue of whether the City’s lease for a key portion of the Airport lands, expiring on June 30, 2033, should be renewed, these questions, among others, will need good answers.
[1] In addition to a very generous property tax break, the City leases three parcels it owns – 20% of the Airport lands, the parking lot on Stadium Road and the queuing lanes on Eireann Quay to Ports Toronto for nominal rent.
[2] Parks not Plans recently published a history of the Island Airport that describes how the Airport has always struggled financially, and has always required significant government support.
[3] By its own admission, Porter has been losing serious money ‑ even pre‑COVID: $18,910,000 in 2017, a projected $40M in 2018, and $30M in 2019
[4] See definition in the Assessment Act.
[5] This has resulted in huge property tax increases for existing businesses in areas that are subject to development pressure – e.g. Le Select Bistro.
[6] 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].
[7] The Federal Court then ruled
“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.”
[8] CommunityAIR objected vigorously, to no avail.
[9] Airport lands are as shown in the plan below. The assessment rolls prepared by MPAC were reviewed to determine these assessments – using Parts 1 & 3 on Reference Plan 63R‑2838 (roll includes part 7) – #1904‑06 16000‑0300‑0000
The yellow and purple areas are owned by the Toronto Port Authority
The green areas are owned by the City of Toronto and leased to the Toronto Port Authority for a term of 50 years, expiring on June 30, 2033. The yellow area is owned by Ports Toronto. The brown areas are owned by the federal government.
We have used only the assessment values for the main (yellow and purple) parcels – as the purple portion outside the Airport boundary is smaller than the City’s green parcels leased for nominal rent to Ports Toronto, the value is a conservative one, understating the amount of the subsidy.
[10] Per City Council decision, payments are based upon 80¢ per passenger from 1999 to 2012, and 94¢ thereafter. Passenger numbers to 2017 are from Airport Master Plans issued in 2014 and 2019, save for 2002, which are omitted from those publications. We have taken the midpoint between 2001 and 2003 as a fair estimate. From 2018, passenger numbers are from Ports Toronto’s Management Discussion and Analysis.
[11] Taken from Table 1 in Prof. Michael Smart paper: https://imfg.munkschool.utoronto.ca/uploads/202/imfg_no.10_online_june25.pdf
[13] Ibid
[15] Ibid
[16] From page 13 of this report.
[20] The assessment rolls for 2009, 2010, and 2011 could not be located in the City of Toronto Archives. We have therefore used the value for 2008. A conservative assumption.
[23] 2011‑17 from City Annual report page 39
[24] From 2013 City report
[25] 2018‑22 rates from toronto.ca