Tax Incentives for Municipal Bonds

Year: 2015


Whereas municipal governments are restricted in their range of infrastructure financing; and Whereas municipalities in the United States have seen considerable success with issuing bonds under the Build America Bond Program, which offers certain tax incentives; Therefore be it resolved that the SUMA advocate with the Province of Saskatchewan and the Government of Canada to make provisions for the issuing of tax-free Municipal Infrastructure Bonds by individual municipalities. Background Information: Municipalities are looking for alternative ways to fund capital projects in their communities. Bonds appear to be a desirable option as they can attract investment from sources other than local taxpayers. Legislation permits municipalities to issue bonds. However, the same criteria for accessing loans must be met before a municipality is approved by the Saskatchewan Municipal Board to issue a bond. In addition, the municipality must also have a credit rating in order to issue the bond. Small municipalities that are not rated or do not have good bond ratings may not be able to issue bonds. Therefore, implementation potential in small communities without good bond ratings is restricted unless the province has a centralized agency. For example, the Municipal Finance Authority of British Columbia is a centralized agency that can borrow on the capital market at lower interest rates and lend the funds to municipalities. Another example is the Ontario Municipal Economic Infrastructure Financing Authority, which issues tax-exempt Ontario Opportunity Bonds to support local infrastructure. The interest that investors earn from Ontario Opportunity Bonds is exempt from provincial income tax. In the United States bonds are proving to be a viable source for municipalities to assist in meeting various demands on both their operational and infrastructure challenges. Most recently they have garnered a lot of attention as part of the Government of the United States stimulus package to address the current recession. Labeled as Build America Bonds, these municipal bonds carry several tax incentives and federal subsidies that are attractive to investors. In many cases these bonds are being purchased by large institutions such as the Bank of Montreal Capital Markets. Several municipalities have taken advantage of this program, for instance the City of Phoenix’s Civic Improvement Corporation sold approximately $550 million of tax-exempt revenue bonds to refinance water-system debt and fund local improvements. In contrast to the American situation where municipal bonds are immune to certain income taxes, Canadian municipalities’ interest is taxed as straight income. This subject was debated in the House of Commons in 2009, under a private member’s bill. Changes were not made to the system at that time.

Provincial Response

Regarding the resolution concerning the provision of tax-free Municipal Infrastructure Bonds, I note that Saskatchewan and other provinces which have Tax Collection Agreements with the federal government have agreed to adopt the federal determination of taxable income in order to achieve a common national tax base. Federal administration of a provincial income tax system is contingent on adherence to the national tax base. As a result, the Government of Saskatchewan is not able to approve these types of exemptions.

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