2015 SKCA 105, 2015 SKCA 105

Court of Appeal for Saskatchewan Citation: Deer Lodge Hotels Ltd. v Saskatoon (City) and Saskatchewan Assessment Management Agency , 2015 SKCA 105 Docket: CACV2724 Date: 2015-10-06 Deer Lodge Hotels Ltd. and City of Saskatoon and Saskatchewan Assessment Management Agency Fiat I.

Introduction [ 1 ] The Applicant, Deer Lodge Hotels Ltd. [the Applicant] applies pursuant to s. 33.1 of The Municipal Board Act , SS 1988-89, c M-23.2, for leave to appeal the May 20, 2014 decision of the Assessment Appeals Committee of the Saskatchewan Municipal Board [the Committee] respecting the 2013 municipal tax assessment of a hotel it owns in the City of Saskatoon [the City].

The questions raised by the Applicant concern the methodology used by the City’s assessor to calculate the capitalization rate, a key component of the equation for determining the assessed value of hotels and motels for municipal tax purposes. Also in issue is the onus a taxpayer bears in assessment appeals when alleging assessor error. The Applicant is the “lead appellant” in relation to 11 appeals by Saskatoon hotels and motels, all of which were impacted by the Committee’s decision. The City opposes the application. II.

The Legislative Framework [ 2 ] In 2006, The Cities Act , SS 2002, c C-11.1 [the Act ] was amended to change how real property is valued for municipal tax purposes. As a result of the amendments, the methodology for determining assessed values was changed from a “comparative fair value” approach to a “market valuation standard” [MVS] approach entailing mass appraisal.

The new assessment regime was first implemented in 2009. [ 3 ] Under the Act , hotels and motels are “non-regulated” properties and pursuant to s. 164.1(2) of the Act they are to be assessed according to the “market valuation standard”. “[M]arket valuation standard”, “market value”, and “mass appraisal” are all defined in s. 163 of the Act as follows: (f.1) “market valuation standard” means the standard achieved when the assessed value of property: (

i) is prepared using mass appraisal; (ii) is an estimate of the market value of the estate in fee simple in the property; (iii) reflects typical market conditions for similar properties; and (iv) meets quality assurance standards established by order of the agency; (f.2) “market value” means the amount that a property should be expected to realize if the estate in fee simple in the property is sold in a competitive and open market by a willing seller to a willing buyer, each acting prudently and knowledgeably, and assuming that the amount is not affected by undue stimuli; (f.3) “mass appraisal” means the process of preparing assessments for a group of properties as of the base date using standard appraisal methods, employing common data and allowing for statistical testing[.] [ 4 ] Pursuant to s. 165 of the Act , the “dominant and controlling factor” in the assessment of property is equity.

Equity in non- regulated property assessments is achieved by applying the MVS so that assessments bear a “fair and just proportion to the market value of similar properties as of the applicable base date.” [ 5 ] The Saskatchewan Assessment Management Agency [SAMA] is charged with managing the Province’s property assessment system. It prepared a Market Value Assessment in Saskatchewan Handbook [the Handbook] to assist assessors in valuating property using the MVS approach.

The Handbook is a non-regulated document and serves only as a guide to assessors who are responsible for preparing assessments according to the relevant legislation, accompanying regulations and SAMA Board orders. In preparing their assessments, assessors must have regard to “standard appraisal methods”. [ 6 ] Because hotels and motels are income generating commercial properties, SAMA recommends they be valued using the income approach.

This entails a calculation of net annual operating income [NOI] which is then converted into market value using a capitalization rate. [ 7 ] NOI is calculated by assessors from information such as income, expenses, and occupancy rates, collected from all of the hotels and motels located in the relevant area. The assessor uses that information to “stratify” or group hotels and motels according to their nature and function.

For example, some hotels and motels are small and rent only rooms while others may provide additional services such as dining rooms, bars, exercise facilities, retail outlets, conference centers, etc. Hotels and motels that operate similar facilities are assessed together (mass appraisal). Their NOI is determined as a group from the data collected by the assessor. Once the NOI is determined for a strata it is converted into market value using a capitalization rate. The capitalization rate is established by analyzing market data (hotel and motel sales).

According to SAMA’s handbook, the capitalization rate is calculated based on the following formula: Capitalization Rate = NOI ÷ Value (Sale Price).

[ 8 ] It is important to remember that what is being assessed for municipal tax purposes is only land and buildings. Hotels and motels often include non-realty items such as goodwill, licences, trademarks, working capital, supplies, uniforms, tableware, food and liquor, and furnishings, fixtures and equipment.

In determining the capitalization rate, sale prices must be adjusted to account for these non-realty items so that only land and buildings are subject to municipal tax. [ 9 ] The capitalization rate is an important component of the valuation equation, as relatively small differences in it can significantly affect the assessed value. The higher the capitalization rate, the lower the market value for assessment purposes. III. Background [ 10 ] The Applicant owns a hotel in the City of Saskatoon which was valued in 2013 for municipal tax purposes at $31,472,600.

In calculating that assessed value, the assessor relied on two hotel sales—the Westgate Inn and the Delta Bessborough—to determine the applicable capitalization rate. Those sales included non-realty items—supplies, furniture, fixtures and equipment—and accordingly, the assessor made a “back end” adjustment by reducing the capitalization rate calculated according to SAMA’s formula by 15 percent to account for those non-realty items. [ 11 ] The Applicant was able to obtain a copy of the agreement for sale pertaining to the Westgate Inn.

That agreement assigned values to supplies, furniture, fixtures and equipment (non-realty items) equal to 21 percent of the sale price. That percentage is significantly higher than the 15 percent used by the assessor to adjust for the non-realty items included in the sale. Relying on the agreement for sale, the Applicant appealed its assessment to the Municipal Board of Revision [the Board] asserting the assessor erred in calculating the capitalization rate by failing to use the actual percentage of the sale price attributed to non-realty items for the Westgate Inn sale.

This “error” resulted in a lower capitalization rate and hence a higher assessed value for the Applicant’s hotel. Neither the Applicant nor the assessor produced the Delta Bessborough’s agreement for sale, nor was there any documentation verifying what percentage of the purchase price of that hotel was allocated to non-realty items. [ 12 ] At the hearing before the Board, the assessor testified that the 15 percent rate used by him was an “industry standard” though he acknowledged that standard was not to his knowledge published anywhere.

To derive that percentage the assessor had conducted a survey of several assessment jurisdictions across Canada. Six jurisdictions responded to his survey. Of those six, three—New Brunswick, Ontario and Winnipeg—advocated deducting a fixed percentage from the capitalization value to account for the value of furniture, fixtures and equipment. The assessor testified he used the survey and also sought out the opinion of a hotel evaluation expert when selecting the 15 percent used by him in his calculation. [ 13 ] The assessor did not have a copy of the Westgate Inn agreement for sale when he did his assessment.

He indicated that the agreement would not have affected his calculations as he did not know “any of the background information” leading to the breakdown of the sale price between realty and non-realty items. He did not believe the valuation of the non-realty items contained in the agreement could be relied upon (see transcript at pp. 87–96). [ 14 ] The Board of Revision dismissed the Applicant’s appeal. In doing so, it stated: The Panel has a concern for the reliability of information of the FF&E [furniture, fixtures and equipment].

The FF&E information supplied by the Appellant, in the AFS [agreement for sale], and by the Respondent, in the QVR [question verification report], could not be relied upon. It is the Panel’s opinion, that in the absence of perfect information, it is reasonable to use a percentage of the capitalized value to adjust for non-realty or FF&E. This methodology is supported by an industry expert as well as it is maintained in other jurisdictions.

The Panel also considered that to adjust the FF&E based on a single sale would not be consistent with the mass appraisal requirements of the market valuation standard. [ 15 ] The Applicant then appealed the Board’s decision to the Committee alleging the Board erred by failing to recognize the Applicant had established a prima facie case of assessor error by producing the Westgate Inn agreement for sale, and that the onus had shifted to the assessor to establish the rate he used to adjust for non-realty items complied with the law and standard assessment principles.

The Applicant also argued the Board erred by holding the assessor’s methodology in calculating the capitalization rate was in accordance with the Act . [ 16 ] The Committee dismissed the Applicant’s appeal concluding the Board did not err in upholding the assessor’s methodology. In rendering its decision, the Committee did not address the question of onus. [ 17 ] The Applicant now seeks leave to appeal the Committee’s decision to this Court. Its proposed grounds for appeal may be summarized as follows, namely, that the Committee erred in law: (

i) by upholding the assessor’s method of calculating the capitalization rate, and (ii) by failing to address the issue of the Applicant’s onus. The first issue subsumes a number of sub-issues including: an assessor’s obligation under the Act to obtain information for assessment purposes, and whether, if the assessor did not err in using a fixed percentage to adjust for non-realty items as opposed to the actual percentage used in relevant agreements for sale, the 15 percent used by him was appropriate. IV.

Analysis [ 18 ] Pursuant to s. 33.1 of The Municipal Board Act , any person affected by an order, decision or determination of the Saskatchewan Municipal Board may apply to the Court of Appeal for leave to appeal the same. Appeals under s. 33.1 are limited to questions of law or jurisdiction. [ 19 ] The seminal decision of this Court with respect to such applications is Rothmans, Benson & Hedges Inc. v Saskatchewan , 2002 SKCA 119 , 227 Sask R 121 [ Rothmans ]. At para. 6 of that decision, Cameron J.A. described the criteria to be considered on applications for leave to appeal as follows:

The power to grant leave has been taken to be a discretionary power exercisable upon a set of criteria which, on balance, must beshown by the applicant to weigh decisively in favour of leave being granted: Steier v. University Hospital, (SK CA),[1988] 4 W.W.R. 303 (Sask. C.A., per Tallis J.A. in chambers). The governing criteria may be reduced to two—each of which features asubset of considerations—provided it be understood that they constitute conventional considerations rather than fixed rules, that they arecase sensitive, and that their point by point reduction is not exhaustive.

Generally, leave is granted or withheld on considerations of meritand importance, as follows: First: Is the proposed appeal of sufficient merit to warrant the attention of the Court of Appeal? • Is it prima facie frivolous or vexatious? • Is it prima facie destined to fail in any event, having regard to the nature of the issue and the scope of the right of appeal, for instance,or the nature of the adjudicative framework, such as that pertaining to the exercise of discretionary power? • Is it apt to unduly delay the proceedings or be overcome by them and rendered moot? • Is it apt to add unduly or disproportionately to the cost of the proceedings?

Second: Is the proposed appeal of sufficient importance to the proceedings before the court, or to the field of practice or the state of thelaw, or to the administration of justice generally, to warrant determination by the Court of Appeal? • does the decision bear heavily and potentially prejudicially upon the course or outcome of the particular proceedings? • does it raise a new or controversial or unusual issue of practice? • does it raise a new or uncertain or unsettled point of law? • does it transcend the particular in its implications? (Emphasis in original) [20] Rothmans involved an application for leave to appeal an interlocutory (interim) order made in the course of ongoingproceedings in the Court of Queen’s Bench.

This Court has applied Rothmans criteria to applications for leave pursuant to s. 33.1 of TheMunicipal Board Act, albeit, with some modification. Those modifications were described by Jackson J.A. of this Court in Saskatoon(City) v North Ridge Development Corporation, 2015 SKCA 13 at paras 49–55, 451 Sask R 265 [North Ridge Development]. [21] Based on Jackson J.A.’s comments, the modifications to the Rothmans criteria applicable to s. 33.1 applications may besummarized as follows: (

i) The Rothmans analysis contemplates an ongoing proceeding which generally is not the case with respect to appeals pursuantto s. 33.1, hence the question of whether an appeal would unduly delay proceedings in the court below, or add unduly ordisproportionately to the costs of the proceedings are not applicable issues when assessing whether leave should be granted pursuant to s.33.1; and (ii) How importance of the proposed appeal is assessed is also different.

It will be measured not with respect to its effect on theongoing court proceedings, but rather with respect to its effect on the impugned order or decision, and whether it raises a new orcontroversial issue of practice, or a new, uncertain or unsettled point of law. The focus of this analysis is on whether the issues raisedhave general as opposed to limited application. [22] Applying the Rothmans criteria as modified by North Ridge Development to the case at hand, in my view, leave should begranted. [23] First, the proposed appeal is neither frivolous nor vexatious, nor is it prima facie destined to fail.

Second, while the Cityargued the proposed grounds of appeal do not raise questions of law as required by s. 33.1 of The Municipal Board Act, I cannot agreewith that proposition. Whether the assessor complied with the Act in conducting his assessment is a question of law, as is the appropriateonus to be applied to the taxpayer. Third, in my assessment, the proposed appeal is of sufficient importance to the municipal taxassessment process generally to warrant a determination by this Court.

As Cameron J.A. of this Court pointed out in Sasco DevelopmentsLtd. v Moose Jaw (City), 2012 SKCA 24 at para 28, 385 Sask R 287, when considering the new tax assessment provisions, “[m]uch inthe way of contending with the provisions of the new scheme lies ahead of us”. How the capitalization rate is to be determined is a keycomponent of the assessment process relating to hotel and motel properties and thus warrants comment by this Court. Moreover, theissues pertaining to the burden of proof are of general application to municipal taxpayers and require determination and clarification. V.

Conclusion [24] Deer Lodge’s application for leave to appeal is granted. Costs with respect to this application shall be left to the panel hearingthe appeal. “Ryan-Froslie J.A.” Ryan-Froslie J.A. Counsel: Leonard Andrychuk, Q.C. for Deer Lodge Hotels Ltd. Kim Bodnarchuk for City of Saskatoon