COVID-19 Developments and Legal Updates
Applicability of business tax where operations limited
There is no obligation upon a municipality to reduce a business tax due to limited operations secondary to the COVID-19 pandemic.
A municipality does, however, have the discretion to offer business tax relief. If a municipality were to consider such a policy, they should seek further legal advice in preparing the necessary resolutions to insulate itself from claims of ultra vires or discrimination.
Municipalities have no obligation to reduce business taxes due to limited operations
Section 120 of the Municipalities Act (“Act”) reads as follows (emphasis added):
- A council shall impose an annual tax, to be known as “the business tax”, on all businesses carrying on business in the municipality.
This mandates that Towns impose a business tax on businesses within the municipality. Paragraph 2(1)(c) of the Act defines “business” in a broad and completely non-restrictive manner as follows (emphasis added):
- (1) In this Act
(c) “business” includes
(i) a commercial, merchandising or industrial activity or undertaking,
(ii) a profession, trade, occupation, calling or employment,
(iii) an activity which provides goods or services, and
(iv) a credit union, co-operative, corporation, sole proprietorship or association of persons,
whether or not it is for profit
Taking together the requirement for a municipality to charge a business tax and the broad definition of business, then the default rule for municipalities should always be to charge a business tax.
The question arising then is where businesses are limited from operating due to restrictions secondary to the COVID-19 pandemic, is there an obligation for municipalities to reduce business taxes since individual businesses are no longer “carrying on business”?
Based on the statutory provisions above, there is no such obligation. The discretion of a municipality to waive such a tax is a separate matter that is discussed later in this client update.
This conclusion is supported by Petty Harbour-Maddox Cove (Town) v Peerless Fish Co.¹ In that case, a fish processing company operated as a seasonal business and argued its business taxes should be reduced to about 25% of the tax, which was approximately the proportion of the tax relative to the percentage of the year it was in operation. The Court relied upon section 120 of the Municipalities Act and found municipalities are under no obligation to impose taxes in a particular fashion to meet the particularities of “any business” (emphasis added):
22 I was not referred to any authority for the proposition that the Town had an obligation to treat seasonal businesses differently. While it would certainly be advantageous from the perspective of the business to have its seasonal nature taken into account, and it might be good economic policy for the Town to encourage such businesses, it appears to me that there is no obligation on the Town to do so. I prefer the view that the Town has the right to impose tax, and is not obligated to impose it in a particular fashion to meet the peculiarities of any business. It may make good business sense to support economic activity in the town, but based on my reading of the legislation, it may impose the tax without reference to the seasonal nature of the business.²
This conclusion also makes sense from a policy perspective. The threshold is whether the entity is “carrying on business” – not the portion of the year that the business is in operation. By way of example, a store that that is opened on Sundays is not charged more business tax than one that is not. Or a business that opens at night is not charged more than a business that only operates during the day.
It is quite different, however, if a business stops operating entirely. While Peerless Fish stands for the proposition that the time of operation is irrelevant in the determination of business tax, section 120 of the Act states that the tax may only be applicable to businesses “carrying on business” in the municipality. Therefore, should any business’ operation cease for an entire tax year, then they are not liable for business taxes at all.
Municipalities have the discretion to reduce business tax, but must not discriminate
Section 111 of the Act provides municipalities with a mechanism through which it may reduce the business tax:
111 (1) A person may apply to a council for, and the council may, by a vote of 2/3 of the councillors in office, grant an exemption, remission or deferment of taxes and interest on the taxes, either in whole or in part, for those periods of time that the council decides and the council may determine the evidence which it shall require to warrant the exemption, remission or deferment.
(2) A council may, by a vote of 2/3 of the councillors in office, enter into tax agreements and offer tax incentives which vary existing rates of tax.
While there is no obligation on a municipality to reduce business taxes due to the COVID-19 pandemic, section 111 above provides a mechanism whereby a council may, in its discretion, create an exception to taxes they are otherwise obligated to charge, so long as they obtain a 2/3 majority vote of the council. Further, the council may only provide these reductions based on “evidence” warranting the exemption. Council has discretion in determining the evidence required.
That discretion is not limitless, especially when discrimination is at issue.³ In order to avoid discrimination issues, the policy would have to be carefully crafted, and the municipality would have to apply it objectively. The policy, then, would serve as the evidentiary basis required under section 111 of the Act to warrant an exemption, remission, or postponement of business tax.
Section 111 refers to a “person”, meaning each case would have to be considered on its own merits. In other words, the council cannot simply issue a resolution in respect of its policy and then begin applying it – the council would have to satisfy itself that each applicant has met the objective criteria depicted in the policy and then explicitly vote to approve the application.
If a municipality were to consider tax relief under section 111 of the Act, it should seek further legal advice in respect of drafting its policy and how best to apply it to insulate the municipality from claims of ultra vires or discrimination.
¹ 2005 NLTD 187, 2005 Carswell Nfld 299 [Peerless Fish].
² Ibid at 22.
³ In Peerless Fish the Court enunciated the principles applicable to tax discrimination in the municipal context:
29 From the Long Harbour analysis I take two principles: first, that without explicit statutory authority, the municipality is not authorized to treat taxpayers in the same category differently; second, the issue of good faith is irrelevant to a finding of discrimination. Since there has been no assertion of a statutory power to discriminate, then it is clear the Town is not authorized to do so.
This article is provided for general information only. If you have any questions about the above, please contact a member of our Municipal group.
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