Interest Calculation

Section 193.1 of the Community Charter provides authority for municipalities to establish, by bylaw, the method of interest calculation where interest is payable on amounts owing to, or by, the municipality, unless the method has already been set by the province. The provision is paralleled for other bodies as follows:

• Local Government Act, section 363.1 for regional districts;
• Vancouver Charter, section 2.1 for the City of Vancouver; and
• Local Government Act, section 746 for improvement districts.

These provisions are virtually identical therefore they are all referred to below as Community Charter section 193.1, and the comments regarding municipalities apply to all of the bodies.
 

The bylaw authority does not relate to circumstances in which interest may be charged, or to the interest rates themselves, but rather to the “method of calculation” only. “Method of calculation” is not defined, but is intended to mean the compounding period and the calculation period. For instance, the provincial government sets out its method of calculation of interest payable on amounts due to government under the Taxation (Rural Area) Act as “…calculated on a daily basis and compounded monthly” (section 7 of the Taxation (Rural Area) Act Regulation).
 

Similarly, local government bylaws need to specify the authority for the interest as well as the calculation period and the compounding period (e.g., interest authorized under section 234 of the Community Charter is calculated on a daily basis and compounded semi-annually).
 

Municipal authority to establish the method of interest calculation is only available where that calculation is not set by the provincial government by way of legislation or regulation. For example, section 415 of the Vancouver Charter provides that interest on delinquent taxes is to be compounded annually. Therefore, the City of Vancouver would not have the power to change this compounding by bylaw. Similarly, the Municipal Act Tax Regulation prescribes the compounding period for interest on refunds of overpayment of taxes to a municipality, so municipalities would not be able to set out a different calculation method by bylaw.
 

What is Required

If the method of calculation is not otherwise specified in a provincial statute or regulation, and a municipality intends to calculate interest in any manner other than simple interest, it must do so by bylaw.
 

The authority applies both to the calculation of interest where interest is applied to money that is owed to the municipality, and where interest is applied to money that the municipality owes to another party.
 

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What to Consider

Current practice
Municipalities may want to consider current practice with respect to the method of calculation to determine if a bylaw is necessary. In circumstances where the municipality uses only simple interest or interest calculations prescribed by the province, then no bylaw is needed. However, if a municipality compounds interest that is not mandated by provincial statute, this method of calculation must be set out in a bylaw.
 

Whether the municipality has the same practice for all circumstances where interest is charged or different practices or methods of calculation in relation to different interest charge circumstances will be an important consideration. For example, a municipality may use a monthly compounding formula for interest in relation to property taxes, but a semi-annual compounding formula for interest on overdue fees. Similarly, it may have one practice with respect to money owed to the municipality and a different practice for money that the municipality owes to another person.
 

Municipalities may want to review their current practice with a view to determining whether there are inconsistencies and if these inconsistencies are appropriate and defensible. For instance, the municipality may currently have a practice of compounding interest for some fees, but not for others.
 

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How to Proceed

When developing the calculation bylaw, a municipality must decide whether to do one omnibus bylaw to establish the method of calculation for all interest, or include a calculation provision in each bylaw that imposes a tax, fee or charge, or that sets out the interest payable by the municipality on its debts.
 

The key elements of the interest calculation bylaw would likely be:

• the interest under consideration
• This will likely be in one of two forms, either
• each circumstance in which interest is payable is set out separately (e.g., for the purposes of interest payable in accordance with section 235 of the Community Charter; for the purpose of interest payable on water utility fees), or
• for all circumstances in which interest is payable and authority to compound is provided (e.g., unless the manner in which interest is calculated is prescribed by provincial legislation or regulation, for the purpose of all interest payable to, or by, the municipality)
• the calculation period (e.g., calculated daily)
• the compounding period (e.g., compounded monthly).

Please direct questions or comments to Infrastructure and Finance Division.