May 26, 1999
To:Strategic Policies and Priorities Committee
Chief Financial Officer and Treasurer
From:City Clerk, Assessment and Tax Policy Task Force
Subject:Prepayment Interest and Discount on Advance Payment of Realty Taxes
Recommendation:
The Assessment and Tax Policy Task Force advises that on May 3, 1999, it adopted the report (March 29, 1999)
from the Chief Financial Officer and Treasurer recommending that no discount or prepayment interest be offered
on taxes paid in advance of the due dates.
For the information of the Strategic Policies and Priorities Committee, the Task Force thanked staff of the Finance
Department and also requested the Chief Financial Officer and Treasurer to report on the potential for administrative
savings if the City collected permit parking and other fees in a like manner as property taxes and to report on whether any
savings should be passed on to the affected ratepayer.
Background:
The Assessment and Tax Policy Task Force, on May 3, 1999, had before it a report (March 29, 1999) from the Chief
Financial Officer and Treasurer respecting Prepayment Interest and Discount on Advance Payment of Realty Taxes and
recommending that no discount or prepayment interest be offered on taxes paid in advance of the due dates.
The following motion by Councillor Flint was voted on and lost:
"That the Assessment and Tax Policy Task Force approve, in principle, a discount program on advance payment of realty
taxes for implementation in the year 2000".
City Clerk,
Assessment and Task Policy Task Force
Frances M. Pritchard/bb
990503.1a
March 29, 1999Metro Hall, 14th Floor
55 John Street
Toronto, Ontario M5V 3C6Tel:416 392-8773
Fax:416 397-5236
TO:Assessment and Tax Policy Task Force
ORIGIN:Chief Financial Officer and Treasurer
SUBJECT:Prepayment Interest and Discount on Advance Payment of Realty Taxes
Purpose:
This report provides information regarding the motion of Councillor Flint that taxpayers who elect to pay their interim
and/or final taxes in advance of the due date be eligible to receive a discount. Under current provincial legislation, the
proposed discount program is not permitted.
Financial Implications
Under the proposed discount program, a 2% reduction offered for the payment of interim and final taxes paid in full on the
first instalment dates in each of the billing cycles would result in the City losing $1.87 for every $100 in interim taxes and
$1.32 for every $100 of final taxes paid in advance. A 5% reduction offered for the payment of final taxes in full would
result in the City losing $4.32 for every $100 in taxes paid in advance. Based on a 5% take up of the proposed program, the
total loss to the City of a 2% reduction for full payment of the interim/final taxes would $2.02 million, while a loss of $2.73
million would be incurred if a 5% reduction for full payment of final taxes was offered.
Recommendations:
It is recommended that:
1.No discount or prepayment interest be offered on taxes paid in advance of the due dates.
Background:
Section 399(5) of the Municipal Act authorizes a municipality, by by-law, to allow discounts or pay interest on payments of
taxes received in advance of their due date. The Act also allows municipalities to pay interest on advance payments
received in respect of realty taxes that have not yet been levied. The maximum rate allowed is 12% per annum.
As an alternative, municipalities can provide discounts under the provisions of Section 4 of the Municipal Interest and
Discount Rates Act ("MIDRA"). MIDRA allows municipalities to pay discount at a rate not exceeding prime plus 1½%.
The Municipal Act and MIDRA do not allow for only certain prepayments to be entitled to a discount. If discounts are to be
provided, any amount of taxes paid in advance of their due date would receive a discount. The cost of the discount is borne
by the municipality, with no charge back to the school boards.
Prior to 1998, the former City of Toronto was the only area municipality which provided prepayment interest and discount
on advance payments of realty taxes. Discount rates were set annually at the same level as interest rates allowed on daily
interest bank deposit accounts. Discount was paid on realty taxes paid before the instalment date.
At its meeting on November 20, 1998, the Task Force had before it a motion from Councillor Flint recommending that
taxpayers who pay their taxes in full on the 4th instalment receive a discount of 5%, and that taxpayers who pay their
interim taxes in full on the first instalment and their final taxes in full on the 4th instalment receive a 2% discount. The
Task Force requested the Chief Financial Officer and Treasurer to report on the recommendations in the motion, including
how the request will impact on the current system of billing.
Comments:
Municipalities offer discount programs to encourage taxpayers to pay their taxes in advance. Discount programs offer the
taxpayer a convenient payment option as well as a financial incentive to improve the municipalities' cash flow. If interest
rates are high, or if a substantial number of taxpayers participate in the program, municipalities may benefit from increased
interest income and administrative efficiencies.
At its meeting on September 22, 1997, the Council of the former City of Toronto adopted a report from the City Treasurer
which recommended that the prepayment interest and discount program be discontinued, starting with the 1998 tax year.
The discount program was discontinued for the following reasons:
-Experience indicated that the discount feature did not encourage taxpayers to pay earlier. Analysis showed that the
number of taxpayers receiving discount remained relatively constant regardless of the discount rate. For example, the
number of taxpayers that received discount in 1990 (when the rate was 8%) was 79,729 compared to 76,831 taxpayers that
received discount in 1997 (when the rate was 1%). Approximately 20% of the realty tax accounts that earned discount were
paid by mortgage and property management companies to reduce administrative costs. Taxpayers who spent the winter
months out of the country and other taxpayers found it more convenient to write one cheque for the interim tax bill and one
cheque for the final tax bill.
-The reduction in interest rates in the 1990's resulted in a corresponding decrease in discount rates, from 8% in 1990 to
1% in 1997. The average annual discount earned by each taxpayer dropped from $19.23 in 1990 to $2.66 in 1997. On an
average tax bill of $2,500, the total annual savings earned through the discount program was 0.11%.
-The installation of the new tax system in the spring of 1998 would allow taxpayers in the former Toronto to pay their
taxes through a preauthorized payment plan, an alternative and convenient payment option that was not previously
available due to system limitations.
-Elimination of the program resulted in savings for the city of $200,000 per annum, with additional savings being realized
through reduced administrative costs and business process efficiencies, such as reduced staff time spent on processing
journal entries related to the discount.
-Toronto was the only municipality which offered a discount. Discontinuing the program, starting in 1998, established a
uniform policy for the new City of Toronto which was in line with the practices of the other former area municipalities.
Given the decision to discontinue the discount program in the former City of Toronto, the tax system for the new City of
Toronto did not incorporate a discount feature for the prepayment of taxes.
Existing Tax Billing and Payment Options:
Residents of the new City of Toronto currently have many options available for the billing and payment of taxes. These
currently include:
Billing Options:
- Taxes billed by instalment: Taxpayers who choose not to enrol in the preauthorized payment plan have their taxes
billed in three instalments for the interim tax bill (February, March and April) and three instalments for the final
tax bill (June, July and August);
- Preauthorized payment plan: Taxpayers who enrol in the preauthorized payment plan can choose to have
payments for taxes automatically withdrawn from their bank account on the due dates for the six instalments, or
in equal payments over 11 months (February through December).
Payment Options:
- Telephone or other bank payments;
- Post-dated cheques;
- Through their mortgage company;
- Through drop boxes located at all civic centres and most libraries;
- At cashier or tax office inquiry counters; and,
- By mail.
A discount plan under Councillor Flint's motion would provide another payment option where taxpayers would be required
to pay their interim and/or final taxes in full on the first due date for each of the billing cycles in order to receive a discount.
Proposed Discount Program:
The motion before the Task Force recommends that taxpayers who pay their taxes in full on the fourth instalment (usually
June in each year) receive a reduction or discount of 5%. The motion also recommends that taxpayers who pay their interim
taxes in full on the first instalment (February) and their final taxes on the fourth instalment (June) receive a 2% reduction.
The table below shows the tax payments under the various payment options, as well as the annual savings under the
proposed discount program, for a taxpayer owning an average residential house assessed at $220,000.
|
Table 1
Discount Earned under Proposed Discount Program
for Average Home Assessed at $220,000 |
| Month |
Regular
Instalments |
Pre-Authorized Payment |
Proposed Discount Program |
|
6 Instalments |
11 Months |
2% Reduction on
Interim and Final Taxes
if paid on 1st & 4th
Instalments |
5% Reduction on Final
Taxes if paid in full on
4th Instalment |
|
|
|
|
|
|
| Total Taxes Levied |
$2,771.34 |
$2,771.34 |
$2,771.34 |
$2,771.34 |
$2,771.34 |
| Taxes Paid - Various Payment Options |
|
|
|
| January |
|
|
|
|
|
| February |
$461.89 |
$461.89 |
$251.94 |
$1,357.96 |
$461.89 |
| March |
$461.89 |
$461.89 |
$251.94 |
|
$461.89 |
| April |
$461.89 |
$461.89 |
$251.94 |
|
$461.89 |
| May |
|
|
$251.94 |
|
|
| June |
$461.89 |
$461.89 |
$251.94 |
$1,357.96 |
$1,316.39 |
| July |
$461.89 |
$461.89 |
$251.94 |
|
|
| August |
$461.89 |
$461.89 |
$251.94 |
|
|
| September |
|
|
$251.94 |
|
|
| October |
|
|
$251.94 |
|
|
| November |
|
|
$251.94 |
|
|
| December |
|
|
$251.94 |
|
|
|
|
|
|
|
|
|
Total - |
$2,771.34 |
$2,771.34 |
$2,771.34 |
$2,715.92 |
$2,702.06 |
|
|
|
|
|
|
| Savings - $ |
$0.00 |
$0.00 |
$0.00 |
($55.42) |
($69.28) |
| Savings - % |
0.00% |
0.00% |
0.00% |
-2.00% |
-2.50% |
The table below shows the cost to the City of providing discount under the proposed program for every $100 of taxes paid
in advance:
|
Table 2
Cost to City of Proposed Discount Program
per $100 in Taxes Paid in Advance |
|
2% Discount - Full Payment on 1st & 4th Instalments (Interim/Final) |
5% Discount - Full
Payment on 4th
Instalment (Final) |
|
Income earned on full Interim
paid |
Income earned on full Final paid |
Income earned on full
Final paid |
| Gross income earned per $100 of taxes
paid in advance |
$0.41 |
$0.96 |
$0.96 |
| Less: Current income earned through
regular instalments (with no discount) |
($0.28) |
($0.28) |
($0.28) |
| Additional income per $100 of taxes
paid in advance |
$0.13 |
$0.68 |
$0.68 |
| Less: Discount paid |
($2.00) |
($2.00) |
($5.00) |
| Net loss per $100 of taxes paid in
advance |
($1.87) |
($1.32) |
($4.32) |
Assumptions:1.Collection of $100 in taxes split between City and education (57.4% and 42.6% respectively) based on preliminary tax billing estimates for 1999.
- City expenditures of $.574 assumed to occur evenly throughout the year.
Assumed investment interest rate of 5%.
Table 2 shows that a 2% reduction offered for the payment of interim and final taxes paid in full on the first instalment
dates in each of the billing cycles would result in the City losing $1.87 for every $100 in interim taxes and $1.32 for every
$100 of final taxes paid in advance. A 5% reduction offered for the payment of final taxes in full would result in the City
losing $4.32 for every $100 in taxes paid in advance. Based on a 5% take up of the proposed program, the total loss to the
City of 2% reduction would $2.02 million, and $2.73 million if a 5% reduction was offered.
It should be noted that, under existing legislation, discounts are set by the municipality at a rate per annum, with discount
calculated on advance payments based on the number of days received prior to the due date. For example, the discount that
would be earned on $100 received in advance would be calculated as follows:
$100 H Discount Rate H Number of days received prior to due date ) 365 = Discount earned
In 1994, the former City of Toronto considered changing its discount policy so that discount would be earned only if
interim taxes were paid in full on the first instalment, or final taxes were paid in full on the fifth instalment. However, at
that time, the City Solicitor of the former city advised that there is no express authority in either piece of enabling
legislation (the Municipal Act or MIDRA) which would permit Council to allow discounts only on those prepayments of
instalments made by the 1st (interim) and 5th (final) due dates and there is no express authority in the legislation which
permits Council to draw distinctions in respect of which prepayments are entitled to discounts and which are not.
In the former City of Toronto, approximately 50% of the realty tax accounts were credited with discounts in 1997. The
average discount earned in 1997 was $2.66 or 0.11% of taxes levied for that account. As required under current legislation,
discount was paid on any payment received prior to an instalment date. Therefore, if a payment was made on February 11th
for a February 15th due date, the taxpayer's account would be credited with discount, although it would not be significant.
Similarly, where a taxpayer overpaid an instalment by $5.00, discount was paid on that amount for the number of days it
was received in advance of the next due date. Consequently, while the number of accounts that received discount may
appear significant, it is not a true representation of the number of taxpayers who intentionally pre-paid their taxes to take
advantage of the discount.
The new City of Toronto may institute a discount program under the provisions of the Municipal Act or MIDRA. However,
in accordance with the legislation, any discount must be applied to all payments made in advance of any due date and
cannot be provided at differing rates depending on when the payment is made. Therefore, the proposed discount program as
set out in the motion is not currently allowed under existing legislation.
Discount Rates:
Discount rates in the former City of Toronto were set annually, based on the prevailing interest offered by financial
institutions on daily interest savings accounts. However, during the mid-1990's, when daily interest savings rates were less
than 1% per annum, the City set its discount rate at 2% as a discount rate of less than 1% would not encourage taxpayers to
make prepayments of taxes.
Councillor Flint's motion states that there may be financial advantages, such as additional investment interest earned, when
the full tax amount is received at the beginning of a billing cycle. However, as noted in Table 2 above, such a discount
program would result in a net financial loss to the City.
Table 3 below shows the discount that would be earned by a taxpayer owning an average home assessed at $220,000 using
discount rates of 1%, 2%, 3%, 4% or 5% per annum.
