Law Times

Law Times • June 25, 2012 Municipal & Planning Law FOCUS ON Sign companies seeking clarity on indirect taxes at SCC Billboard battle looms BY GLENN KAUTH Law Times T oronto's billboard-tax battle the Supreme Court of Canada. " isn't over yet as the losing par- ties in the matter before the Ontario Court of Appeal are attempting to take the case to their new taxing powers to expand rev- enues, it becomes increasingly apparent that these tests, indicia, and approaches require revision and clarification," law- yers for the applicants, the Out-of-Home Marketing Association of Canada and Pattison Outdoor Advertising LP, wrote in their May 31 application for leave to the Supreme Court of Canada. The case centres largely on the distinc- As municipal governments exercise that it causes those who own and control the advertising copy to pass on the added costs to advertisers through higher rates or to landowners in the form of lower lease payments. Patrick Harrington, a partner at Aird s sign levy amounts to in Media Outdoor, under which the latter supplies street furniture in exchange for selling advertising on it. The city receives a share of the advertising revenue in turn. Pattison has complained the exemption gives Astral an unfair advantage since it doesn't pay the tax. The Court of Appeal, however, reject- ed that argument given a provision under s. 267 of the City of Toronto Act that allows the city to provide exemptions from taxes. "The fact that this arrangement may tion between direct and indirect taxes. Municipalities don't have the power to levy indirect taxes, which the applicants argue Toronto' Toronto's sign levy is 'incredibly burdensome,' says Patrick Harrington. from advertising. He concluded that it doesn't. "It is a flat annual tax imposed on the sign owner, & Berlis LLP in Toronto, notes the courts have long struggled to deal with the dis- tinction between direct and indirect taxes. Essentially, the issue comes down to whether the people charged a levy are the ones who pay it — which makes it a direct tax — or whether someone else will end up reimbursing them. The City of Toronto, by imposing a levy of between $1,150 and $24,000 per year (based on the type and aggregate face area) on those who own and control the sign copy, argued it was taxing the sign operators through a direct tax. But the applicants for leave at the Supreme Court argue that as the tax is equal to or exceeds the profits earned, owners would therefore have to pass on the costs to advertisers. But in writing the ruling on the issue in Out-of-Home Marketing Association of Canada v. Toronto (City) on April 2, Ontario Court of Appeal Justice Robert Sharpe saw things differently. The clas- sic economic distinction between direct and indirect taxes, he noted, comes from John Stuart Mill: "Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another: such as the excise or customs." But, according to Sharpe, case law has tax on the commodity sold by the sign owner and it is not imposed on, rated or rateable to a unit of the commodity or its price. It is not imposed on a commodity in the course of production or marketing and therefore it cannot 'cling' as a burden to the unit or transaction as it is presented to the market." Sharpe added: "To repeat, the annual tax at issue here may increase Pattison's " he wrote. "It is not a and OMAC's cost of doing business and those parties may therefore charge more for the product they sell. However, the annual tax is not imposed on a unit of advertising space sold by the appellants and it lacks the 'clinging' quality that is the hallmark of an indirect tax." But Harrington, who involved with the issue at the earlier stag- es, notes the need for clarity on the issue given the multitude of tests that are out there and as the Supreme Court hasn't dealt with the question of indirect taxes for several years. In this case, he suggests, the judges had likely already decided what the outcome would be and then could "simply pick the test or the criteria that will get them to that result." Harrington suspects the appeal court had been established "that the legal definition of an indirect tax is not to be determined on the basis of pure economics or on the basis of the particular financial circum- stances of the parties affected by the tax. The reason is obvious: if the argument of Pattison and OMAC were accepted, vir- tually every tax would be an indirect tax. Every business that bears a tax will treat the tax as a cost that must be factored into the price charged for its products." Sharpe went on to look at whether the tax relates to the price of or the revenue was looking for a way to validate the sign tax. "We all know that the city is in des- perate need of revenue, For their part, seeking leave propose a single test for indirect taxes: "In light of the context and purpose of the tax, is the general tenden- cy of the tax such that it will be passed on? If yes, the tax is an indirect tax." The issue has other implications as well, the sign companies " he says. "It's incredibly burdensome," he says of Toronto's levy. signs," he adds, noting the tax was part of a regulatory strategy "to dissuade new signs from being erected. that surfaces in the applicants' grounds for seeking leave to appeal at the Supreme Court: "If you tax a sign where it' uneconomical Harrington also refers to another issue " interfered with freedom of expression?" The issue here centred in part on to operate it, have you whether the city could apply the tax to existing signs given a provision under s. 110 of the City of Toronto Act stating that a "city bylaw respecting advertising devices, including signs," doesn't apply to those already up. The Court of Appeal determined that provision didn't apply to the tax, but the applicants for leave are insist- ing otherwise in arguments that refer to the right to freedom of expression under s. 2(b) of the Charter of Rights and Freedoms. "Both commercial and non-commercial signs foster political and social decision-making, one of the values underlying s. 2(b) of the Charter, the application states. "Because the sign tax affects expressive content, s. 2(b) of the Charter requires that s. 110 be inter- preted so as to protect the applicants' existing signs that display commercial and other forms of expression. Contrary to the Court of Appeal' powers of " s now "It has forced the removal of lawful agreement with Astral is simply a dif- ferent arrangement, fully authorized by the act and the bylaw, that permits Toronto to advance and achieve legiti- mate municipal objectives." The sign companies, however, see give Astral a competitive advantage over Pattison renders neither the bylaw nor the exemption vulnerable to attack," wrote Sharpe. "The revenue-sharing it differently. "In the instant case, the exemption from taxation for a third-par- ty sign owner who has entered a reve- nue-sharing agreement with the City of Toronto is discriminatory, tion for leave states. "The exemption cre- ates two classes of signs in Toronto: those on private property that are taxed; and those subject to a revenue-sharing agree- ment with the city that are not taxed. The applicants argue that while the " city can differentiate between groups or classes of citizens, "it is not permis- sible for the city to self-deal" through an exemption for Astral that the object- ing sign companies claim will ultimate- ly result in increased revenues for the municipality itself. The arrangement, they assert, amounts to a "pernicious form of discrimination." Harrington expresses similar con- cerns. "There's just something that smells bad" about the city exempting the com- panies it has contracts with, he says. But Kim Mullin, co-chairwoman of the municipal and planning law practice at WeirFoulds LLP, says the courts and the legislation have moved more towards allowing towns and cities to allow for such distinctions and exemptions. "The case is entirely consistent with according to Harrington. He notes he has other clients that face various municipal fees and would like to know if they're in fact valid. Other municipalities also likely have interest in the case. If the top court upholds the sign tax, other towns and cities might seek simi- lar powers to Toronto' s, says Harrington. should not be interpreted in a 'generous fashion' when doing so conflicts with the specific regulatory authority granted to the municipality and in circumstances where the tax negatively impacts free- dom of expression." The third area of appeal deals with the city's exemptions for sign owners that have entered into revenue-sharing agreements with it. On this score, the applicants were attacking that exemption as it applies to one of Pattison' www.lawtimesnews.com s competitors, Astral a municipal government s decision, the The courts, she notes, have moved away from a tendency to overturn municipal decisions and bylaws in favour of a more deferential approach. At the same time, she adds, provincial legislation governing municipalities has followed that trend by specifically allowing them to differentiate in applying bylaws. Toronto, of course, isn't the only city s ruling. that has imposed sign taxes. Montreal, for example, has its own levy. But according to Harrington, the latest legal wranglings are a signal that the debate continues. "It' way that it has captured constitutional and Charter issues in ways that might not be expected, " he says. LT s an interesting one in the " the applica- PAGE 9 the direction the law has been going in over the last number of years," she says in reference to the appeal court'

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