In a recently released decision, the Manitoba Court of Queen’s Bench quashed the City of Winnipeg’s Impact Fee Bylaw and Resolution, ordering the City to refund in excess of $32 million to those who had paid the fee.
In 2017, Ladco Company Limited filed an application in the Manitoba Court of Queen’s Bench to quash the Impact Fee Bylaw and Resolution which was approved by the City of Winnipeg Council on October 26, 2016, and came into effect on May 1, 2017. The impact fee was to be paid as part of the process for obtaining a building permit. The city defended the fee as “growth paying for growth” notwithstanding concerns from the development industry that the city did not take proper account of the contributions that developers already make to both onsite and offsite infrastructure.
Ladco argued that the fee was a tax with no proper nexus to costs of growth-related development. The fee, as recommended by the city’s consultant, Hemson Consulting, was calculated based on square footage with a different rate applying to residential, commercial and other types of development.
By way of example, for an 1,800 square foot home, the fee would cost approximately $18,803 once fully implemented. Ladco raised additional concerns with respect to the manner in which the impact fee was to be phased in, arguing that it was discriminatory in the sense that certain areas were selected to pay the fee and others were not, without any principled justification.
MLT Aikins partner Keith Ferbers represented Ladco on the Court application. Other industry participants also commenced proceedings to quash the bylaw. Extensive evidence was filed on behalf of Ladco setting out the development process in Winnipeg and Ladco’s position that growth-related development already pays for all onsite infrastructure and that agreements had been made with respect to offsite and regional infrastructure. Ladco also expressed concern with the methodology used by the city’s consultants in that it did not give proper credit to contributions made by Ladco, causing homeowners or others paying the fee within their developments to effectively “pay twice.” Ladco also argued that given the manner in which the Fee was calculated and the lack of restriction on use of the reserve fund, fees collected in their developments could never be used to fund any costs associated with their developments.
Several arguments were advanced as a basis to quash the bylaw including that: the city did not have statutory authority to implement the bylaw; the impact fee was a constitutionally invalid indirect tax; and the bylaw was discriminatory.
After hearing submissions and considering the evidence, the Court granted the application and quashed the Impact Fee Bylaw and Resolution on the basis that it was a constitutionally invalid indirect tax which could not be justified as a valid user fee or regulatory charge.
In reaching its decision, the Court considered the recent Supreme Court of Canada decision in Vavilov, which reformulated the legal test for review by a Court of an administrative decision. The Court determined that the constitutional issue should be determined on a standard of correctness (i.e. deference need not be shown to city council). On the issues of statutory authority and discrimination, deference was to be shown to city council with Vavilov directing that the Court should undertake a “contextual inquiry” and that there was a presumption that city council had acted reasonably.
With respect to statutory authority:
The Court determined that it was reasonable for city council to rely upon the consulting reports it had obtained, and that the City did have the authority under the city Charter to pass the Impact Fee Bylaw and Resolution. However, the Court commented that there was a “basis to question some of the Hemson opinions and, particularly, the calculations contained in the Technical Report….” The Court provided a list of concerns including: with respect to Hemson Consulting not properly taking account of contributions for off-site infrastructure; the city not giving any credit to developers for their off-site contributions (as had been recommended by Hemson); and with respect to neither Hemson nor the city taking account of the fact that water and waste utilities are independently funded.
Regarding the discrimination argument:
The Court accepted the principle that bylaws may only discriminate where authorized by statute. The Court also accepted that, on the evidence, the city did not provide a principled explanation for the approach taken with respect to initially imposing the impact fee only in areas defined as “New Communities and Emerging Communities.” The city argued that it had express statutory authority to deal with areas of development in different ways and to divide them into different classes, and that it was incumbent on the applicants to establish an element of bad faith. The Court accepted that the bylaw was discriminatory in its application and that the manner in which it had been implemented was inconsistent with Hemson’s recommendations to implement the bylaw on a city-wide basis. Notwithstanding, the Court determined that the decision of the City to do so was reasonable based upon its authority pursuant to Section 174 of the city Charter.
With respect to the constitutional argument:
The Court analyzed previous cases including a number of Supreme Court of Canada decisions providing guidance to determine whether the impact fee was an indirect tax (i.e. passed on to homeowners) and whether there was a sufficient nexus between the fee and the regulatory scheme to save the fee. The Court disagreed with the city’s broad definition of the regulatory scheme and said if anything, the city’s explanation supported the notion that the city was intending to raise revenue for general purposes and not for the purpose of regulation. The Court was satisfied that there was a relevant regulatory scheme but stated that:
“In my view, the imposition of the Impact Fee is not regulating development or growth or trying to alter the behavior of individuals or the manner in which homes or buildings are constructed. Instead, the Impact Fee is aimed at raising revenues to support the operations and infrastructure of the City as a whole and also without any definite or clear requirement that the monies collected be tied back to growth caused by the developments from which the monies are collected.”
Because the primary purpose of the fee was to raise revenue to be deposited into the reserve fund “and used for discretionary spending as the CFO recommends and city council approves,” the Court determined that the fee was, in substance, “an indirect tax not a regulatory charge.”
The evidence before the Court showed that there was no requirement that the city provide any credit for developer contributions made to named capital projects paid pursuant to development agreements or as a condition of specific planning approval. There was also insufficient evidence that there was a matching between the impact fee revenue and the cost of growth within the regulatory scheme.
The Court therefore determined that the impact fee should be refunded to the taxpayers together with any interest that has accrued while the fees have been deposited in the reserve fund.
In the result, the city has been ordered to return in excess of $32 million that has been accumulated in the reserve fund. The decision indicates that, while the city has the power to impose growth fees, it must do so in a careful and purposeful way, ensuring that the fees being charged recognize the contributions made by the development industry and taxpayers, and are linked to the purpose for charging the monies.
As at the writing of this summary, the process for refund has not yet been determined. There has also been no formal indication whether the city will appeal the decision. Mayor Bowman has publicly stated that he will not support an appeal and rather, intends to work with the industry to draft a fee within its statutory authority and taking account of the findings of the Court.
This article first appeared in Build Manitoba, a publication of the Winnipeg Construction Association.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.