Taxpayers could face 1.5% hike if city loses battle over federal properties, court docs show

When the federal government came up more than $10 million short on some of its annual payments to the City of Ottawa, city staff were sent scrambling.

"Please treat this as a priority," blared an August 2021 email from a municipal finance official to her staff. 

The city was frantically trying to figure out how the federal government unilaterally rewrote their spreadsheet calculations.

"This needs to be done quickly," she emphasized in the email. 

Court documents obtained by CBC News reveal years of behind-the-scenes jockeying over what the federal government owes in annual payments for its buildings located in Ottawa, including the national capital's capstone architectural attractions like Parliament Hill. 

• City of Ottawa takes feds to court over $22M in alleged underpayments
• 'Painful' financial situation has Sutcliffe switching tone on taxes

The letters show that while all levels of government agree that policies designed to support pandemic-stricken businesses unintentionally left cities with a devastating financial shortfall, none can agree on a solution.

The city is hanging its hopes on a judicial review that could restore the slashed funding. If it doesn't get it, the city could be forced to hit Ottawa taxpayers with a permanent 1.5 per cent tax hike to make up for the lost federal revenue. 

Property payments in question

Over 600 federal properties in Ottawa receive municipal services, but the city is constitutionally barred from taxing them. 

Instead they make payments "in lieu of taxes."

City staff calculate the payments by multiplying the value of properties owned by Public Services and Procurement Canada (PSPC) and crown corporations by the appropriate tax rates — just like they do with any other property owner.

But unlike other property owners, PSPC can unilaterally decide to pay less. 

The Canadian Museum of Nature, for instance, was worth about $43 million in 2021 and subject to the 2.75 per cent commercial tax rate. The city asked for about $1.19 million, but received just $1.15 million. 

You have to pay more for everything, all because the federal government isn't paying enough.​​​​- Mayor Mark Sutcliffe

"Imagine if I told you as a property taxpayer that you could decide how much you pay.... Wouldn't that be a great deal?" Mayor Mark Sutcliffe said at his "Fairness for Ottawa" campaign launch in August. 

"You have to pay more for everything, all because the federal government isn't paying enough."

The federal government disputes that and argues that legislation actually provides it little discretionary power.

Initial panic

While the city has a host of complaints about how federal entities go about making payments — from discount periods for drawn-out renovations to questionable exemptions — this court case revolves around a specific rate. 

In the 2021 Ontario budget, the provincial government cut the educational tax for most businesses. When municipalities raised a red flag, the province told other governments the tax break doesn't apply to them.

But it didn't consult with PSPC, which refused to pay a higher rate. 

The city expected $124 million in these payments — which, together with other payments in lieu of taxes, was set to make up 4.5 per cent of its overall revenue. When only $113 million was delivered, then mayor Jim Watson stepped in. 

"Of the top 100 highest valued properties in Ottawa, 22 are federal Crown properties," he wrote in a letter to the relevant federal minister. "A revenue shortfall of this magnitude would result in a permanent 1% municipal tax increase for Ottawa's residential taxpayers." 

He wrote a similar letter to the provincial finance minister asking him to step in. 

Major revenue source on the line

Throughout the federal court documents, the city argues a similar point. 

Ottawa hosts more — and more valuable — federal properties than anywhere else, so the lower payments hit hard.

The city referenced the expense of servicing properties like Parliament Hill, CSIS headquarters and National Defence headquarters at the former Nortel complex. 

It bases hefty tax-like payments for those properties off 2024 valuations of $197 million, $139 million and $233 million, respectively. 

The city expects that the higher tax rates laid out in next year's budget will help boost that year's payments by over $8 million — though history shows these projections often prove false. 

Ottawa's chief financial officer Cyril Rogers told councillors a few months after the city made its case in court that Ottawa is uniquely challenged. 

"As the nation's capital, we are home to the largest number of government owned properties in the country," he said, arguing that the COVID-era tax issue tipped the scales to make these payments "the next significant financial challenge facing the city."

Payments expected in 2025 have shrunk to 3.7 per cent of Ottawa's overall revenue.

Time is of the essence, mayors said

Municipalities with fewer government buildings likewise panicked.

Together, they pleaded for either level of government to come through with funding and stave off a property tax hike or service cuts — losses they described as potentially "devastating." 

"Time is of the essence," they implored in an October 2021 letter. 

"We have to come together to find a solution, because the impact is just too big for our municipal budgets and our taxpayers."

The mayors suggested that if the province switched from a tax break to a rebate it could solve all their problems. 

No easy solutions

A similar argument was taking place above their heads. 

By mid-2021, federal staff had written to the province to better understand how they got into this "dilemma."

The response was firm: Provincial officials did not consult with federal stakeholders because they didn't have to, and they expected PSPC to continue making payments in line with the higher tax rate.

If that doesn't happen, the provincial finance minister suggested it was up to the federal government to provide a grant to municipalities to make up the difference. 

"A decision not to pay [payments in lieu of taxes, or PILTs] at the regulated rates would result in a $20 million windfall for the federal government at the expense of vulnerable municipalities," wrote Peter Bethlenfalvy. 

"Cutting payments to municipalities at this time would only exacerbate the financial challenges municipalities are facing as they continue to weather the pandemic." 

Case could lead to 'absurd' consequences, feds argue

Fast-forward to this year when Ottawa's current mayor took the city's case to the public. Through media events and a petition, Sutcliffe framed the case as a government unwilling to pay its "fair share." 

"What do you think would happen if you didn't pay the full amount of your taxes to the Canada Revenue Agency?" his website asks. "They'd be all over you. But the federal government gets away with it."

The government, he asserts, should be treated "like any other property owner." That argument is actually at the heart of the case — on both sides. 

The PILT Act dictates that the federal government must make payments as "if that property were taxable property." 

While the minister has powers that normal taxpayers can only dream about, the government argues that it must use the same rate as private businesses. 

If the minister decided to use their own discretion to pay more than a private property owner would, the federal government's legal team argues the consequences could be "absurd."

What's next?

No matter how compelling the political rhetoric, this case will be decided solely on how the federal government understood and applied these rules. 

The last city letter labelled as evidence makes the stakes clear. 

Just a week before giving up on the diplomatic route and filing for a Federal Court review, Sutcliffe wrote that the city was facing a deficit — a situation that has only gotten worse as the multi-million dollar transit problem has grown from a hole in the budget to a gaping chasm.

In early 2023, Sutcliffe told PSPC its reduced payments now amount to a permanent 1.5 per cent tax hike. He expressed frustration that since the province and federal governments acknowledge the issue but fail to act, "vulnerable residents" will bear the cost.

Since that time, there has been some help. 

Ontario has reached out with a $35-million, one-time grant — equivalent to what the city lost out on in the first three years under the provincial tax break. 

If the court challenge fails, there won't be another bailout, and city staff suggest that over the next decade Ottawa stands to lose between $110 and $140 million.

"Mitigating the impacts of the federal decision is a federal responsibility and we expect the federal government to meet its obligation and develop a longer-term solution," a spokesperson for Ontario's Ministry of Finance told CBC in a statement. 

PSPC has given essentially the same lines to media since the mayor began his campaign in August, recently adding that in addition to being "fair and equitable," it's also committed to adhering to "legislated requirements."