An Ontario Superior Court judge has dismissed a legal challenge brought by the Niagara Falls Canada Hotel Association (NFCHA) against the City of Niagara Falls, validating a new municipal by-law that overhauls the city’s controversial hotel tax1. In a decision released September 12, 2025, Justice M.D. McArthur ruled that the City acted within its legal authority when it passed the new by-law in January and had not done so in bad faith or to illegally escape a contract with the association. The ruling brings a conclusion to a contentious chapter in the relationship between the municipality and a key segment of its tourism industry.
The dispute’s origins trace back to 2017, when the Ontario government empowered municipalities to levy a Municipal Accommodation Tax, commonly known as a hotel tax, on transient accommodations. Provincial regulations required that a portion of the revenue generated be shared with a non-profit “eligible tourism entity” for the exclusive purpose of promoting tourism. The City of Niagara Falls established its tax through a by-law in 2018. That same year, the Niagara Falls Canada Hotel Association was incorporated, positioning itself to become the designated entity to receive and administer these funds on behalf of its member hotels and motels.
On January 1, 2019, the City and the Hotel Association formalized their relationship through an agreement. The terms stipulated that the City would collect a tax of $2.00 per night, retain a five percent administration fee, and forward the remainder to the Association. The Association, in turn, was contractually obligated to use these funds to promote Niagara Falls as a tourist destination. The agreement included a clause preventing either party from giving notice of termination within the first five years and mandated that any disagreements be resolved through arbitration. The structure appeared set for the foreseeable future, and in 2021, the City passed an amending by-law to expand the tax to include vacation rentals and bed and breakfast operations.
A significant shift occurred on March 9, 2022, when the parties amended their agreement. This amendment extended the contract’s term to ten years, pushing its end date to December 31, 2029. More critically, it granted the Hotel Association the “sole and absolute discretion” to increase the tax rate. According to an affidavit from the City’s Chief Administrative Officer, Mr. Burgess, this considerable concession was made with the expectation that the Association would move toward industry best practices in destination marketing, citing peer organizations in cities like Toronto and Nashville. However, court documents show that this amendment became a point of friction. Over the next year and a half, from August 2021 to November 2023, senior city officials, including the mayor, held numerous meetings with the Association’s representative, Mr. Birrell, to discuss strategic plans, marketing strategies, and what the City viewed as the underperformance of tourism in the region.
By 2024, the relationship was strained, and the parties entered into discussions to further amend their agreement. The court found that these negotiations were happening against a backdrop of serious concerns held by the City. Citing findings from the Hotel Association’s own third-party consultants, the City believed the Association was “massively underspending” and that the accommodation tax was “significantly lower than all other destinations.” The discussions centered on increasing the tax, better linking its objectives to a strategic plan, and potentially forming a new, broader tourism entity. While the parties reached consensus on many points, they remained deadlocked on two key issues: the length of a new agreement and the Association’s insistence on retaining its unilateral power to modify the tax rate without City Council’s approval.
On June 28, 2024, the City’s solicitor sent the Hotel Association a formal Notice of Termination, stating its intent to end the agreement as of December 31, 2025. Despite this official notice, the court found that discussions did not cease. The parties continued to exchange proposals and strategic documents throughout the summer and fall. By late November, Mr. Birrell emailed the City’s CAO to ask for a draft of a new agreement, noting that only one contentious issue remained. On January 2, 2025, the City provided the Association with a draft of a completely new by-law. Just over a week later, on January 10, the Hotel Association’s counsel sent a letter to the City, warning of legal action if the by-law was passed. The stage was set for a final confrontation at City Hall. On January 14, 2025, Mr. Birrell made a presentation to City Council, urging them to defer the vote and continue negotiations. Council defeated the motion to defer and proceeded to pass By-Law Number 2025-009, repealing the previous by-laws and establishing a new framework for the tax.
In response, the Hotel Association launched its application in the Superior Court, asking the judge to quash the new by-law. It put forward two primary arguments. First, it argued that the future payments it was owed under the 2019 agreement constituted a “debt” under the Municipal Act. Section 414 of the Act prohibits a municipality from repealing a by-law under which a debt has been contracted until that debt is paid in full. The Association contended that by repealing the old by-laws, the City had violated this provision. Second, the Association argued that the City had acted in bad faith, using its legislative power for the improper purpose of annulling a valid contract to deprive the Association of its vested rights.
Justice McArthur rejected both arguments. On the issue of debt, the judge conducted a plain-language reading of the Municipal Act. He found that the sections of the Act governing the accommodation tax explicitly refer to the arrangement as “governing the sharing of revenue.” This, he determined, was fundamentally different from the sections dealing with municipal debt, which relate to borrowing money or issuing debentures. He concluded that the City’s obligation to share tax revenue with the Association was not a debt in the legal sense, and therefore, the prohibition in section 414 did not apply.
Turning to the allegation of bad faith, Justice McArthur acknowledged the legal principle that a municipality cannot use its by-law making power to unlawfully get out of a contract. However, after reviewing the extensive evidence of the parties’ interactions, he found that the City had not acted improperly. He noted that municipal by-laws are presumed to be lawful and should be interpreted generously to allow municipalities to achieve legitimate public interests. The judge found the City’s actions were part of a reasonable effort to adopt best practices and improve tourism, informed by consultant reports, strategic plans, and ongoing negotiations. This, he ruled, was not a case of bad faith. He also pointed out that the governing legislation allows a municipality to partner with “one or more” eligible tourism entities, meaning the Hotel Association was never guaranteed exclusivity.
In his concluding remarks, Justice McArthur stated that the City had not used its legislative authority for the improper purpose of annulling its agreement with the Association. He added that the validity of the original agreement and its termination provisions remain “live features” that could be determined in another venue, such as the arbitration process stipulated in the contract itself. However, the by-law that City Council passed was legal. The application was dismissed, leaving the City’s new hotel tax framework intact. The parties were given 14 days to agree on legal costs, after which they could make written submissions to the court.
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