Catalyst Paper v. District of North Cowichan: Can Taxes Be Unreasonable?  

by
James Yardley
Barrister & Solicitor
jgy@murdymcallister.com
November 9, 2009

 In Catalyst Paper Corporation v. District of North Cowichan (2009 BCSC 1420), Mr. Justice Voith of the B.C. Supreme Court dismissed the first of several claims that have been brought by industrial property owners challenging municipal property tax bylaws. 

Catalyst claimed that the District’s tax rate for industrial properties was illegal because the taxes sought bore no relationship to the municipal services used.  Catalyst noted that while it paid $6.7 million in municipal taxes in 2008, the municipal services it received that year were worth only $1 million and that the tax rate on its property was 20 times greater than the municipality’s rate for residential property.  The company stated that high municipal taxes impeded its ability to compete globally and proposed a “municipal sustainability model” under which a “sustainable” level of taxation would lead to proportionality between consumption and taxation for each property class.  On the basis of the model, Catalyst paid only $1.5 million of the $6.8 million in taxes it owed to the District for 2009.  Catalyst’s basic argument was that the taxes imposed on it were unlawful because they were unreasonable, and they were unreasonable because (1) there was no rational basis by which the rates were established and (2) they fell outside of “the range of possible and acceptable outcomes”.

Mr. Justice Voith rejected the District’s argument that taxation decisions were purely political and could only be reviewed for compliance with formalities or lack of jurisdiction.  Instead, court review should be “meaningful and effective”, and there was at least “some obligation” on the District to disclose “some of the factors and considerations that underlay” the tax bylaw.  Mr. Justice Voith emphasized that municipal decision making must be “transparent and intelligible”, and rejected as “hollow” the notion that councils should only be accountable at the ballot box (especially since Catalyst was not an elector in the municipality).  While reasons justifying the rates did not have to be provided in a “formal sense”, Mr. Justice Voith held that there must be evidence upon which the Court could reach “some understanding” of how and on what basis the rates were assigned, in order to determine if the process setting the rates was “rational”.

Mr. Justice Voith agreed that the bylaw approval process was transparent because it was open to the public, and that the rates came within a “range of reasonable outcomes”.  He noted that courts should be cautious about interfering with municipal decision-making where the issue was discretionary and with few statutory limits, and that the Community Charter provides that local governments need “adequate powers and discretion to address existing and future community needs” and the power to set taxes “appropriate for their purposes”.  As such, councils are to weigh and balance community interests.  In response to Catalyst’s argument that a consumption of services model should be used to set tax rates, Mr. Justice Voith held that while councils are free to consider consumption of services by property class, the Charter did not require councils to do so except where it specifically provides for user-pay regimes (e.g., local service areas).  He also noted that a consumption model was inconsistent with the nature of decision-making contemplated by the Charter, which does not have to be empirically based and which may discriminate and be based on a council’s judgement about its community.  Mr. Justice Voith further held that reliance on a consumption model as advocated by Catalyst would be problematic because it also would be subject to challenge.  In effect, the model would not create the certainty claimed by Catalyst.

Mr. Justice Voith observed that the North Cowichan Council considered Catalyst’s model along with many other diverse factors (including increases in residential rates and other options to apportion taxes), and that while the Council did not use Catalyst’s model, it did propose to shift a share of taxes over time from industrial to residential classes, which was “the type of weighing of competing interests that properly lies in the purview of Council and to which a court will defer”.  The fact that the ratio of industrial to residential tax rates in the District was the highest in the province and that its residential rates were among the lowest was not found to assist Catalyst’s case because this did not, in itself, show that the rates were not a “possible or acceptable” outcome.

In his decision, Mr. Justice Voith described the North Cowichan case as a “central framework” for addressing the issues raised in the challenges of the tax bylaws of several other municipalities that were also heard by him, and in which decisions are expected to be released soon.  To the extent that the facts in those cases are similar to the North Cowichan decision, similar outcomes may be expected; otherwise, the outcomes are less certain.

The North Cowichan decision is generally well-considered and provides useful guidance about the often difficult-to-define process followed by local governments when exercising discretion, whether in setting tax rates or in relation to other matters.  However, it does raise some interesting questions about the extent to which bylaws need to be justified and be based on  "rational" considerations.  To that end, it highlights the importance that may be played by records of the factors considered in the process of enacting bylaws.