ADMINISTRATIVE REPORT

TO:

Vancouver City Council

FROM:

General Manager, Corporate Services/Director of Finance

SUBJECT:

2001 Interest Rate on Property Tax Arrears

 

RECOMMENDATION

POLICY

It has been Council practice to pass a bylaw annually to set an interest rate for real property tax arrears for the coming year, in accordance with the provisions of Section 415 (2) of the City Charter.

PURPOSE

The purpose of this report is to recommend an interest rate for 2001 to be applied to arrears of real property taxes.

DISCUSSION

Section 415 (2) of the Vancouver Charter provides that:

Interest is charged on tax arrears which are delinquent taxes that remain unpaid after December 31 of the year levied. Experience has shown that an interest rate should be set above what financial institutions are charging on loans to encourage taxpayers to settle their outstanding taxes.

An interest rate which is lower than market rates provides taxpayers with an incentive to defer payment of outstanding taxes in order to finance other expenditures. This puts the City in the undesirable position of acting as a bank or a lending institution.

The bank prime rate is considered an indicator of the cost of borrowing for taxpayers. Interest rates charged by financial institutions on loans can vary anywhere from bank prime up to 3 or 4 percentage points above bank prime, depending on the nature and credit worthiness of the borrower.

In establishing the rate for the coming year it is necessary to consider forecasts of future interest rate trends in the next calendar year. We have relied upon the forecast of the bank prime rate for 2001 published by the Bank of Montreal/Nesbitt Burns on August 14, 2000 as an indicator of the interest rate trend for 2001.

This report recommends that Council establish the arrears interest rate at 11.5% per annum for 2001. The recommendation for the 2001 rate was based on the following factors:

· The bank prime interest rate set by the Bank of Montreal, the City's principle banker was 7.5% on July 31, 2000.
· The current bank prime rate as of the date of this report remains unchanged at 7.5%.
· The bank prime interest rate is forecast to increase throughout 2001 to a high of 8.25% in the last quarter.
· The forecast average prime rate benchmark for 2001 is 8.05%.

As at December 31, 1999, tax arrears as a percentage of taxes levied, after allowing for a major pending assessment appeal, increased to 4.4% from 4.0% in 1998. This is not an alarming increase, but an indication that it is important to utilize every tool possible to properly manage the level of tax arrears.

CONCLUSION

Although the recommended interest rate on arrears is the maximum allowed by legislation, it is necessary to establish a sufficient differential between our rate and the rate charged by financial institutions on loans to encourage taxpayers to pay their property taxes. The rate is still significantly less than most consumers pay on outstanding credit card balances. Therate charged is one tool used by the City to manage property tax arrears. Management of the arrears is not only important to safeguard the financial assets of the City, but also because it is one of the factors that credit rating agencies look at when assessing the credit worthiness of the City.

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