The City of Ottawa has suffered a significant legal setback after the Federal Court dismissed its appeal in a long-running dispute over how much the federal government owes for municipal services.
Court Upholds Federal Government's Discounted Rate
The legal battle centered on Payments in Lieu of Taxes (PILTs), which the federal government pays to municipalities for services like roads, water, and emergency response on its properties, since these lands are exempt from direct property taxation. The Federal Court has now sided with the federal government, affirming its earlier decision that the government made a "reasonable" decision to pay a discounted PILT rate.
This ruling, which followed an appeal hearing on January 12, 2026, upholds a trial decision from February 2025. The city had challenged the federal government's method of calculating its payments, specifically its reliance on a rate reduction applied to provincial business education taxes.
Financial Impact on the City's Budget
The financial stakes for Ottawa are substantial. According to a memo from interim city solicitor Stuart Huxley, the federal government's interpretation has led to an annual reduction of approximately $11.5 million in PILT revenues since 2021.
Cumulatively, this represents a total revenue reduction of $58 million from 2021 to 2025. The city has managed to offset $35 million of that shortfall through one-time provincial funding, but the remaining $23 million is considered "foregone revenues" for municipal coffers.
Huxley noted that the city's base budgets have already been adjusted since 2024 to account for the lower PILT income, so there is no immediate impact on currently approved spending plans.
City's Reaction and Next Steps
Ottawa Mayor Mark Sutcliffe had previously called the initial trial decision "disappointing," arguing there was clear evidence of federal underpayment for years. Following the appeal dismissal, city staff and external legal counsel will conduct a detailed review of the written decision to determine if any further legal recourse is advisable.
As a result of losing the appeal, the City of Ottawa has also been ordered to pay $5,000 in legal costs to both the federal government and Canada Post.
This case highlights the ongoing financial tensions between municipalities and other levels of government over the funding of essential services, with Ottawa now forced to absorb a multi-million dollar loss in expected revenue.
