Is airspace subject to property tax in Ontario?
Monday, March 13, 2023 @ 12:00 PM | By Ray Mikkola
The applicant, Craft Kingsmen Rail Corp., had purchased three blocks of airspace (blocks) located above railway lands on which GO train and other trains are operated in downtown Toronto. The blocks, comprising several acres in size, are situated at their lower elevations 27 feet above the top of the existing railway tracks. They would eventually be the subject of development, as the applicant sought to build a deck covering the railway lines and serving as a base for future buildings to be constructed within the blocks. The applicant also obtained easements to enter upon the property below the blocks to construct the deck, and to affix it to the land below the blocks. Until construction of the deck, the blocks could not be accessed or used for any meaningful purpose.
The blocks were purchased in three separate transactions for a total consideration of over $43 million. The transactions closed at different times between 2018 and 2021 and land transfer tax was paid on each closing in accordance with Ontario’s Land Transfer Tax Act. Consents to sever the blocks from the surface rights of the railway lands were obtained and a requested an Official Plan amendment to build 3,500 residential units together with office and retail space in the blocks. During this time, the blocks were assessed under the Act as having an aggregate value of almost $65 million, thereby resulting in the Applicant being required to pay property tax as owner of the blocks to the City of Toronto.
The applicant brought an application to the Superior Court of Justice for an order that until the blocks are “affixed” to the ground by reason of the construction of the deck, they are not “land” within the meaning of the Act, and are therefore not assessable nor subject to property tax.
The application judge, after reviewing the provisions of the Act and the common law, held that the air parcels alone that comprise the blocks are not “land,” and that prior to the construction of the deck, they cannot be subject to an assessment under the Act. The application judge also held that the “physical connection” between the air parcels and the ground required to create “land” within the meaning of the Act could not be established even by the creation or reservation of easements by the applicant, and that until the deck is built and affixed, the easements were merely “unexercised rights.” The application judge further held that, since the common law does not recognize fee simple ownership of air parcels, even the description of such air parcels and the registration of deeds in accordance with the requirements of the Land Titles Act did not make them assessable as “land” under the Act.
The City and the Municipal Property Assessment Corporation appealed the application judge’s decision to the Divisional Court.
The Divisional Court applied the principles of statutory interpretation, which emphasize the context of the words of a statute, having regard to the scheme and object of the legislation — these principles being broadly characterized as the “modern principle” of statutory interpretation. The Divisional Court also cited the provisions of s. 64(1) of the Ontario Legislation Act, 2006, S.O. 2006 c. 21, Sched. F (which replaced the former Interpretation Act, R.S.O. 1990, c.I-11), which requires that legislation be “interpreted as being remedial” and that it be given such “fair, large and liberal interpretation as best ensures the attainment of its objects.”
Proceeding on this basis, the court was not persuaded by a technical analysis of the definition of “land” in the Act alone, finding instead that the legislature intended to use the word “land” as part of a legislative scheme regarding real property “harmoniously as a comprehensive whole” across a number of statutes, including the Act, the Land Titles Act, the Planning Act, and the Land Transfer Tax Act. The court accordingly held that the application judge erred when he based his decision exclusively on the narrow manner in which “land” was defined in the Act alone. The ways in which the concepts and definitions of land and real property are dealt with in other statutes that concern real property are, according to the Divisional Court, “at least an important consideration” in determining whether air parcels fall within the definition of “land” in the Act.
The Divisional Court also held that the application judge’s finding that until there is a physical connection to the earth, the blocks consist merely of “legally defined limits of air rights” is not correct. The Divisional Court found that at common law, the blocks constituted “land” prior to their transfer to the applicant because they consisted of “space above the ground … [that] the owner can potentially occupy or use” and that “neither severance nor the sale” of such airspace “changes this characterization.”
The Divisional Court traced the history of the Act, noting among other matters that various courts had adopted an expansive definition of “land,” and that the common law established by such court decisions continued for the purpose of interpreting this definition in the current Act. It also noted that the definition of “land” in the Act is not exhaustive, but is rather inclusive, finding therefore that the “three-dimensional concept” of land ownership established by the common law is the appropriate way in which to interpret and define “land.” Further, the inclusion of a limited number of exceptions in the definition of “land” in the Act should not be taken as limiting or narrowing the common law definition of the term.
Finally, the court considered the principal object of the Act, relying on a decision of the Supreme Court of Canada in Toronto Transit Commission v. City of Toronto  S.C.R. 746, and found that land is taxable when the new owner acquires it, even if the owner has never proceeded with construction, and that there is no requirement under the Act that an air parcel will be fixed to the ground in order to constitute it as an assessable parcel.
Importantly, the court noted that if an air parcel is not assessable as land, the owner of a property could manipulate its ownership to avoid, or significantly reduce, its property tax burden:
“If air parcels are not assessable, the owner of development land can avoid paying property taxes by stratifying the land and conveying the air parcel to another corporation. Until the air parcel is affixed to the ground, it is not assessable. And the ground parcel now has little value because the owner cannot build on the surface without trespassing into the air parcel.”
This recent decision makes clear that courts in Ontario are willing to adopt an expansive approach to what constitutes “land” in the province. Following Craft, real estate developers should be aware of and consider the tax implications of purchasing and owning air space in Ontario, taking into account that these parcels of land are assessable under the Act and therefore subject to property tax, much like other types of real property. As they are assessable whether or not the construction process in a given project has begun, land developers would benefit from working early on with experienced legal advisers, accountants and other land use experts in order to understand and navigate the financial complexities of owning air space in Ontario.
The importance of the Divisional Court decision regarding the determination of the horizontal boundary of land ownership above grade is likely to extend beyond its application to real property assessment and taxation. After all, so completely does the Act supplant equitable and common law considerations, largely by statutorily allocating the burden of property taxation across landowners by using assessed value as a proxy, that neither court considered it relevant (because it would not have been) to note that a cube of inaccessible air does not benefit from any municipal service provided by such taxes.
While real estate lawyers generally consider that an owner’s title goes from the soil “upward to the skies and downward to the depths below,” the Divisional Court has now held that this is plainly not correct. Rather, the upper horizontal limit of “land” ownership is the highest point above grade that the owner actually uses or might potentially use. The decision is authority for the proposition that fee simple ownership must be considered in three dimensions, and that ownership above grade does not consist of some unspecified type of lesser tenure, such as merely “air rights,” as compared to ownership in the “soil.” These findings may ultimately constitute the most enduring and useful aspects of the judgment.
Ray Mikkola is a partner with the firm of Pallett Valo LLP. The author thanks Saghi Khalili for her assistance with this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author's firm, its clients, Law360 Canada, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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