No 'rational chain of analysis' in tax assessment of french fry producer: Alberta Court of Appeal
Cavendish Farms Lethbridge tax fight: what 'Machinery and Equipment' is part of a French Fry Line
The Alberta Court of Appeal has overturned an assessment of what constitutes "machinery and equipment" in frozen food production facility for tax purposes for an "unreasonable chain of analysis."
In Cavendish Farms Corporation v. Lethbridge (City), 2022 ABCA 312, Cavendish produced frozen potato products in its large facility in Lethbridge, AB. The City of Lethbridge assessed the facility for taxes at USD 257,425,000.
Cavendish sought to reduce the amount by USD 28,133,231 by including more machinery and equipment (M&E) in the assessment.
M&E is a sub-class of assessment that receives preferential tax treatment over other classes. The parties agreed that processing occurred at the facility, but they disagreed on what were the operational units used for processing and whether any or all of the disputed improvements formed an integral part of the operational unit.
Cavendish argued that the entire production line, with each step being necessary and integral to the next, constituted one operational unit that should have been classified as M&E.
On the other hand, Lethbridge asserted that, for tax assessment purposes, the production line could be divided into different units and that for a unit to be classified as M&E pursuant to the Municipal Government Act, it must form an integral part of an operational unit intended for use in manufacturing or processing.
The parties brought the matter to the Lethbridge Composite Assessment Review Board, who was tasked with achieving a fair and equitable assessment so that each type of property bears its fair share of the tax burden.
The board majority concluded that none of the improvements at issue were M&E and found that only the equipment that, in and of itself, caused a material change to the raw product fell within the definition of M&E.
The board further concluded that the definition of M&E required it to divide the plant into units to determine what parts were integral to the process of converting a potato into a frozen french fry.
The board majority did not address two of the disputed improvements and appeared to conclude that each disputed improvement was its own operational unit.
Unreasonable chain of analysis
On appeal, Cavendish argued that the board’s reasons contained fundamental gaps or "reveal an unreasonable chain of analysis." The Court of Appeal noted that when a court reviews an administrative decision, reasonableness is the presumptive standard of review.
In Canada (Minister of Citizenship & Immigration) v. Vavilov, 2019 SCC 65, the Supreme Court of Canada ruled that a reasonable decision is "one that is based on an internally coherent and rational chain of analysis" that operates within the bounds set by the context.
Applying the reasonableness standard, the appeal court found that "the Board majority’s very sparse reasons in light of the record and with sensitivity to the administrative setting in which they were given does little to illuminate the reasoning process that led to the conclusion reached."
The appeal court noted that what constituted an "integral part of the operational unit" was key to the M&E determination.
However, the court found that the board majority did not resolve the dispute about the operational unit, may have ignored some of the statutory language in the definition of "machinery and equipment," and applied an unfairly narrow interpretation to that phrase.
The appeal court cannot say with any certainty how the Board majority grappled with the language used in the interpretation because no analysis was offered.
The court further said that the flaws in the reasoning process were aggravated when the board failed to give any reasons for concluding why two of the disputed improvements were not M&E.
The appeal court ultimately ruled that the board majority’s reasons failed to reveal a rational chain of analysis. The matter was remitted back to a new panel of the board for a new hearing.
In Cavendish Farms Corporation v. Lethbridge (City), 2022 ABCA 312, Cavendish produced frozen potato products in its large facility in Lethbridge, AB. The City of Lethbridge assessed the facility for taxes at USD 257,425,000.
Cavendish sought to reduce the amount by USD 28,133,231 by including more machinery and equipment (M&E) in the assessment.
M&E is a sub-class of assessment that receives preferential tax treatment over other classes. The parties agreed that processing occurred at the facility, but they disagreed on what were the operational units used for processing and whether any or all of the disputed improvements formed an integral part of the operational unit.
Cavendish argued that the entire production line, with each step being necessary and integral to the next, constituted one operational unit that should have been classified as M&E.
On the other hand, Lethbridge asserted that, for tax assessment purposes, the production line could be divided into different units and that for a unit to be classified as M&E pursuant to the Municipal Government Act, it must form an integral part of an operational unit intended for use in manufacturing or processing.
The parties brought the matter to the Lethbridge Composite Assessment Review Board, who was tasked with achieving a fair and equitable assessment so that each type of property bears its fair share of the tax burden.
The board majority concluded that none of the improvements at issue were M&E and found that only the equipment that, in and of itself, caused a material change to the raw product fell within the definition of M&E.
The board further concluded that the definition of M&E required it to divide the plant into units to determine what parts were integral to the process of converting a potato into a frozen french fry.
The board majority did not address two of the disputed improvements and appeared to conclude that each disputed improvement was its own operational unit.
Unreasonable chain of analysis
On appeal, Cavendish argued that the board’s reasons contained fundamental gaps or "reveal an unreasonable chain of analysis." The Court of Appeal noted that when a court reviews an administrative decision, reasonableness is the presumptive standard of review.
In Canada (Minister of Citizenship & Immigration) v. Vavilov, 2019 SCC 65, the Supreme Court of Canada ruled that a reasonable decision is "one that is based on an internally coherent and rational chain of analysis" that operates within the bounds set by the context.
Applying the reasonableness standard, the appeal court found that "the Board majority’s very sparse reasons in light of the record and with sensitivity to the administrative setting in which they were given does little to illuminate the reasoning process that led to the conclusion reached."
The appeal court noted that what constituted an "integral part of the operational unit" was key to the M&E determination.
However, the court found that the board majority did not resolve the dispute about the operational unit, may have ignored some of the statutory language in the definition of "machinery and equipment," and applied an unfairly narrow interpretation to that phrase.
The appeal court cannot say with any certainty how the Board majority grappled with the language used in the interpretation because no analysis was offered.
The court further said that the flaws in the reasoning process were aggravated when the board failed to give any reasons for concluding why two of the disputed improvements were not M&E.
The appeal court ultimately ruled that the board majority’s reasons failed to reveal a rational chain of analysis. The matter was remitted back to a new panel of the board for a new hearing.
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