+ RMA Rural Municipalities
of Alberta

Resolution 1-19F

Priority of Unpaid Property Taxes on Linear Property

Date:
November 1, 2019
Expiry Date:
December 1, 2022
Active Status:
Active
Sponsors:
MD of Opportunity
District:
4 - Northern
Year:
2019
Convention:
Fall
Category:
Energy
Status:
Accepted in Part
Vote Results:
Carried
Preamble:

WHEREAS municipalities in Alberta are dependent on property tax revenues to provide essential municipal services; and

WHEREAS the Alberta Court of Appeal decision in Northern Sunrise County v. Virginia Hills Oil Corp. (2019 ABCA 61) (the “Virginia Hills Decision”) determined that property taxes on linear property constitute an unsecured claim against the assets of the taxpayer; and

WHEREAS the Virginia Hills Decision has and will dramatically affect the ability of municipalities in Alberta to recover property taxes and property taxes on linear property in particular; and

WHEREAS municipalities in Alberta have been unable to recover many millions of dollars in outstanding property taxes;

WHEREAS the ability of municipalities to recover tax arrears in respect to oil and gas properties is compromised because of significant unfunded abandonment and reclamation costs that are a first-ranking charge in favour of the Alberta Energy Regulator; and

WHEREAS amendments to the Municipal Government Act are necessary to avoid further significant negative impacts on Alberta municipalities as a result of the Virginia Hills Decision;

Operative Clause:

THEREFORE, BE IT RESOLVED that the Rural Municipalities of Alberta (RMA) advocate for the Government of Alberta to take steps to ensure that municipalities are able to effectively recover all property taxes, including property taxes on linear property; and

FURTHER BE IT RESOLVED that RMA advocate for the Government of Alberta to address the growing concern regarding unfunded abandonment and reclamation costs for oil and gas properties and the affect that those costs have on the ability of municipalities to recover unpaid property taxes; and

FURTHER BE IT RESOLVED that RMA advocate for the Government of Alberta to make immediate amendments to the Municipal Government Act (MGA) to

  1. Clarify that the reference to “property tax” in section 348 includes all property taxes, including property taxes on linear property;
  2. Clarify the meaning of the phrase “…land and any improvements to the land…” in section 348 to specify that all of the property that is subject to assessment pursuant to Part 9 of the MGA within that municipality is subject to the special lien established in that section;
  3. Provide municipalities with improved enforcement powers, such as the specific power to apply to the courts for the appointment of a receiver to enforce a claim for unpaid linear property taxes against the assets that are subject to a special lien established by section 348;
  4. Apply the above amendments retroactively to ensure that existing linear property tax arrears constitute a secured claim.
Member Background:

In February 2019 the Alberta Court of Appeal released a decision regarding the priority of property taxes on linear property in the decision Northern Sunrise County v. Virginia Hills Oil Corp. (2019 ABCA 61) (the “Virginia Hills Decision”).

The result of that case was that the Court of Appeal determined that unpaid taxes on linear property are not a secured claim against the assets of an insolvent company. This decision was a surprise to many municipalities that had previously considered all unpaid property taxes to be a first-ranking claim against the assessed person and the decision was made despite the specific wording of section 348(d)(i) of the Municipal Government Act (MGA), which states that property taxes constitute a special lien on land and improvements.

While the municipalities that are directly affected by the decision, including the MD of Opportunity, have taken steps to attempt to appeal the decision to the Supreme Court of Canada, even if that appeal is allowed to proceed – which is not certain – it will likely be many months, perhaps years, until the Supreme Court of Canada issues a final decision. In the meantime, many municipalities, including the MD of Opportunity, will be practically unable to recover linear property taxes from insolvent oil and gas companies. The impact of this will be significant. Alberta municipalities stand to lose many millions in unrecoverable property taxes unless the issue is addressed through immediate amendments to the MGA.

In order to rectify the issues created through the Virginia Hills Decision, the MGA should be amended to:

  1. Clarify that the reference to “property tax” in section 348 of the MGA includes all property taxes, including property taxes on linear property;
  2. Clarify the meaning of the phrase “…land and any improvements to the land…” in section 348 to specify what property is subject to the special lien established in that section;
  3. Provide municipalities with improved enforcement powers, or sufficiently reinforce existing powers, to enforce a claim for unpaid linear property taxes against the assets that are subject to a special lien established by section 348;
  4. Apply the above amendments retroactively to ensure that existing linear property tax arrears constitute a secured claim.

 

  1. Clarify “property taxes”

In the Virginia Hills Decision, the Court determined that the phrase “property taxes” in section 348(d)(i) of the MGA does not include taxes on linear property. In order to resolve this apparent ambiguity, section 348(d)(i) should be amended to clarify that “property taxes” means all taxes imposed pursuant to a property tax bylaw, including linear property taxes.

  1. Clarify property that is subject to the special lien

In the Virginia Hills Decision, the Court specifically rejected the municipalities’ interpretation that the special lien attaches to linear property that is subject to assessment itself.

In order to avoid this issue, the MGA should be amended to:

  1. Expand the definition of assessed person in respect to linear property as set out in section 304 to include both the operator and the owner of linear property; and
  2. Amend section 348(d)(i) to clarify that a special lien attaches to all of the debtor’s property that is subject to assessment within the municipality.

3.Enforcement Powers

In the Virginia Hills Decision, the Court noted an apparent ambiguity that arises in the MGA due to the fact that the MGA provides a specific enforcement mechanism to sell land that is subject to a special lien for unpaid property taxes in Part 10, Division 8, but that no such enforcement mechanism is established that would allow for a municipality to sell linear property.

To rectify this, the MGA should be amended to create or recognize a specific enforcement mechanism, such as the appointment of a receiver through the courts, that would allow municipalities to sell linear property that is subject to a special lien for unpaid taxes.

  1. Retroactive Affect

While the amendments discussed above would resolve the issues that arise from the Virginia Hills decision going forward, they may not allow municipalities to assert a secured claim for existing tax arrears.

In addition to these specific amendments to the MGA, the issue of unfunded abandonment and reclamation costs that are often left unresolved until an oil and gas company becomes insolvent often make it impossible for municipalities to recover unpaid property taxes because a company’s remaining assets are often rendered worthless because of the unfunded abandonment and reclamation costs that attach to them. If the Government of Alberta does not effectively address this issue soon, the problem will continue to grow and Albertans will ultimately bear the burden of both the end of life abandonment and reclamation costs and the burden of increasingly large amounts of unrecoverable property taxes on oil and gas properties.

Because of the significance of these issues to all Alberta municipalities, immediate action by the Government of Alberta is warranted to amend the MGA to confirm the existence, scope and application of a special lien for unpaid linear property taxes. While the process of preparing the necessary amendments is complex, and no doubt deserve further consideration, the amendments proposed above provide an overview of the type of amendments the MD of Opportunity believes should be considered and a starting point for further discussions aimed at resolving the issues that arise from the Virginia Hills Decision.

RMA Background:

6-18F: Securing Municipal Property Taxes in the Event of Bankruptcy or Insolvency

THEREFORE, BE IT RESOLVED that the Rural Municipalities of Alberta partner with Alberta Urban Municipalities Association to advocate to the Government of Alberta to amend section 348 and other relevant sections of the Municipal Government Act to ensure that municipal property taxes are legally assured a status as a secured claim in the event that the property owner enters bankruptcy or receivership.

DEVELOPMENTS: RMA appreciates the recent actions taken by the Government of Canada to alleviate the ongoing challenges that rural municipalities are facing regarding the collection of unpaid property taxes on linear properties. However, both the Provincial Education Requisition Credit (PERC) Program and allowing municipalities to place a $0 assessment on linear properties owned by defunct companies are relatively small measures that attempt to alleviate the negative impacts that an unclear tax recovery regime has on rural municipalities.

Unlike the alleviation measures identified above, the resolution calls for fundamental changes to section 348 of the Municipal Government Act to clarify the tax recovery powers of municipalities for taxes not related to land, including linear property. As the outcome of current legal proceedings involving three RMA members will inform whether section 348 currently provides municipalities with adequate tax recovery powers on linear property.

As the Government of Alberta is currently unwilling to revisit section 348, this resolution is assigned a status of Intent Not Met, and RMA will continue to advocate on this issue moving forward.

2-17S: Amendments to Section 348 of the Municipal Government Act

THEREFORE, BE IT RESOLVED that the Alberta Association of Municipal Districts and Counties request that the Government of Alberta amend Section 348 of the Municipal Government Act to reflect that no Crown lending institutions be allowed to take priority over any claims due to the municipality.

DEVELOPMENTS: RMA members have been facing considerable challenges collecting unpaid taxes from property owners. A 2019 RMA member survey indicated that rural municipalities are facing a liability of between $81 million and $96 million in unpaid property taxes. These efforts are further frustrated by the hierarchy of claims that places municipalities at a significant disadvantage to collect unpaid property taxes against other liabilities that the property owner possesses. Three RMA members are currently involved in legal action as to whether the special lien provisions in section 348 are applicable to linear property. Should section 348 be deemed not applicable to linear property, municipalities will be even more challenged in claiming uncollected taxes. RMA is also planning to work directly with Municipal Affairs to clarify what options are available to municipalities under section 348 and other areas of the Municipal Government Act, both in cases where tax-owing companies are bankrupt or continue to operate.

As indicated in the response from Alberta Municipal Affairs, amendments to Section 348 are not being considered and therefore, this resolution is assigned a status of Intent Not Met.

Government Response:

Alberta Municipal Affairs

The Government of Alberta recognizes the ongoing concern from municipalities regarding unpaid property taxes on oil and gas properties. With the downturn in the energy industry in recent years, municipalities are finding it increasingly difficult to collect municipal and education property taxes, often due to insolvency or receivership of oil and gas properties.

The provincial government has taken measures to help alleviate the financial burden on predominantly rural municipalities, including establishing the Provincial Education Requisition Credit program for uncollectable taxes on oil and gas properties. The Provincial Education Requisition Credit is extended until the end of the 2021 taxation year.

Alberta Municipal Affairs is working with Alberta Energy, the Rural Municipalities of Alberta, and other partners to review legislative options relating to special liens, as well as other potential options.

Recommendations are expected to be brought forward for consideration for potential spring 2020 amendments.

Alberta Energy

  • Alberta Energy is aware that the number of inactive oil and gas wells is growing across Alberta.
  • The Government of Alberta wants to ensure that the economic environment exists for private industry to be successful and able to bear the costs of well abandonment. The Government of Alberta wants industry to be in a position to build on the province’s strong record of responsible environmental reclamation.
  • Alberta Energy is working with the Alberta Energy Regulator (AER) and industry to review the liability management framework in Alberta, to ensure producers address liabilities without discouraging new investment.
  • Industry will remain financially responsible for bringing land back towards its original condition, protecting Alberta taxpayers.
  • Alberta Energy is working with industry to prioritize the key remaining recommendations in the Roadmap to Recovery report, and is seeking feedback on Alberta’s vision for natural gas.
  • This work will help create an economic environment for industry to be successful and meet their environmental and financial obligation.

Alberta Energy Regulator

  • The AER works to protect Albertans and the environment by ensuring that an insolvent oil or gas operator’s assets are transferred into the hands of responsible operators or, where no responsible party can be found, to the industry-funded Orphan Well Association (OWA).
  • Limited funds exist in insolvencies. Following the Supreme Court of Canada’s Redwater decision, the AER upholds its existing regulatory requirements to ensure that any remaining funds in an operator’s estate are used to address end-of-life obligations (i.e. abandonment and reclamation) before creditors receive financial recovery.
    • The AER upholds these requirements regardless of who applies (i.e. creditor or municipality) to the court to appoint a receiver.
  • During insolvencies, court-appointed receivers and trustees are responsible for coordinating a claims process where creditors, including municipalities, can apply to recover funds that are owed to them by insolvent companies.
  • Ultimately, receivers and the courts determine the validity and priority of claims and determine which claims are paid and by how much. The AER is not responsible for the claims process, outside of upholding its requirements to ensure end of life obligations are addressed first.
  • The Government of Alberta is currently reviewing the liability management framework to ensure that liability remains with industry and not the Alberta taxpayer. The AER is working with the government – which is responsible for setting policy – to broaden our processes to allow for a more holistic assessment of a company’s ability to address its end-of-life obligations.
    • The AER has also provided the Government of Alberta with information on gaps and opportunities within the liability management framework, including analytical data to support their assessment of options for liability policy changes.
    • The AER is prepared to implement any policy changes that the Government of Alberta makes to manage liability in the province.
Development:

The Government of Alberta response acknowledges the challenges being faced by rural municipalities related to unpaid property taxes on oil and gas properties and indicates that multiple Government of Alberta ministries are working to develop solutions to the issue, including special liens and other options. In June 2021, Alberta Municipal Affairs and Alberta Energy reached out to RMA for legislative suggestions to address this issue. RMA’s submission included recommendations contained in this resolution, as well as others. At this point, RMA has not received a response from the Government of Alberta or an indication of possible next steps.

In terms of the first operative clause, Alberta Energy’s response indicates the importance of designing an abandoned well remediation approach that supports industry competitiveness. However, this approach must also consider industry accountability and the impacts that municipalities are facing due to the lack of municipal input into the current liability management system. A 2022 RMA member survey indicated that rural municipalities face $253 million in unpaid taxes from the oil and gas industry, which illustrates the seriousness of this issue and the need for both short-term fiscal support for municipalities and long-term legislative and policy change to prevent the continuation of this issue.

Following an October 2020 announcement by the Minister of Municipal Affairs of several short-term oil and gas property assessment changes intended to support industry competitiveness, former RMA President Al Kemmere stated in a media article (https://calgaryherald.com/opinion/columnists/varcoe-after-providing-tax-relief-to-oilpatch-province-must-tackle-unpaid-taxes-to-municipalities) that “unpaid taxes is our number one concern. It has got some of our member municipalities on the cusp of not being able to pay their bills.” In the same article, industry organizations also acknowledged the seriousness of the issue, with an Explorers and Producers Association of Canada representative stating that “from an oil and gas perspective, property taxes have to be paid. We understand there’s a problem.” The Canadian Association of Petroleum Producers stated that “the fix is to find a path, some tool, that would enable government to compel companies to pay.”

In 2022, the Government of Alberta passed Bill 77: Municipal Government (Restoring Tax Accountability) Amendment Act, 2021, intended to clarify that municipalities can apply special lien powers found in the Municipal Government Act (MGA) to linear property. Bill 77 does the following:

  • Confirms that municipalities are secured creditors for unpaid taxes on linear property.
  • Clarifies that both the owner and operator are responsible for tax payment.
  • Clarifies that a special lien on all assessable property within a municipality exists once a company or owner is in arrears.
  • Retroactively applies to all existing arrears owed to a municipality.

It is important to note that Bill 77 is not a complete solution to the issue if unpaid oil and gas property taxes, as it will likely only address possible tax recovery during insolvency proceedings, and does little to address tax recovery from still-operating companies. However, Bill 77 does address all four specific legislative requests made in the third operative clause of the resolution:

  • It adds s. 348.1 to the MGA to clarify that all assessable property is subject to special lien provisions when the property taxes are in arrears.
  • It provides municipalities with improved enforcement powers, including those requested in the operative clause.
  • It applies the amendments retroactively.

As a result of Bill 77, this resolution is assigned a status of Accepted in Part, as the unfunded abandonment issue (operative clause #2) is ongoing.

Provincial Ministries:
Energy,
Municipal Affairs
Provincial Boards and Organizations:
AER
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