FNTC: Proposed Amendments to the Standards Establishing Criteria for Approval of Borrowing Laws

Press Release

26th Sep 2016

Standards established by the First Nations Tax Commission (FNTC) reflect best practices in property taxation, and are designed to support First Nation economic growth, First Nation jurisdiction, property tax harmonization, and the interests of all stakeholders in the First Nation property tax system.

Under the First Nations Fiscal Management Act (FMA or the “Act”), the FNTC reviews and approves laws. Section 35(1)(a) of the Act gives the FNTC the authority to establish standards, not inconsistent with the regulations, respecting the form and content of local revenue laws. The standards established by the FNTC are additional requirements and, together with the Act and its associated regulations, form the regulatory framework governing First Nation taxation under the Act.

As a matter of policy, the FNTC seeks public input prior to introducing or significantly amending its standards. This input is critical in developing standards that are acceptable and effective for participating First Nations and their taxpayers.

One of the central features of the FMA is the debenture financing system which offers First Nations access to long-term, low-cost financing. The FMA has two distinct debenture financing mechanisms: other revenue securitization and local revenue securitization. Both mechanisms involve the First Nations Finance Authority (FNFA) pooling the borrowing requirements of participating First Nations, and selling the collective borrowing needs in the form of a debenture, to investors. However, unlike other revenue securitization, local revenue securitization is borrowing using revenue raised through FMA taxation. It also involves the FNTC which provides direct regulatory support to First Nations in the process. In addition to reviewing and approving First Nation borrowing laws, the FNTC has responsibility under the Act, to determine the maximum amount of local revenue that can be used to pay for the cost of financing or refinancing capital infrastructure.

In September 2016, the FNTC approved proposed changes to the Standards Establishing Criteria for Approval of Borrowing Laws (the “Proposed Standards”) for the purposes of seeking public input. The proposed changes concern the determination of unutilized borrowing capacity of First Nations, as well as public notification of local revenue borrowing.

Determining Unutilized Borrowing Capacity – Debt Servicing Limits

Currently, the FNTC Standards limit debt servicing costs to 25% of the previous year’s total local revenues. This means that a First Nation can take on increased borrowing to the extent that its annual total debt servicing costs do not exceed 25% of the previous year’s local revenue. The Proposed Standards (sections 1.3 and 1.4) will increase the debt-servicing cost limit to 40% where a First Nation has:

• a significant non-residential tax base (i.e., greater than 30%);
• no single large taxpayer (i.e., no single property representing greater than 50%); and
• modest local services costs (i.e., not more than 50% of revenue committed to local services).

These proposed changes reflect that some First Nations have significant and consistent annual revenue levels, and greater flexibility in servicing debt obligations.

Determining Unutilized Borrowing Capacity – Service Tax Revenue

Taxation for the Provision of Services Laws (or Service Tax Laws) enable First Nations to collect taxes for the costs associated with a capital improvement that benefits a segment of the tax base. In other jurisdictions, these taxes are known as “local improvement taxes” or “parcel taxes”. The service taxes are paid by the taxpayers who directly benefit from the project (e.g., a sewer line, a new sidewalk, etc.). Projects can be financed in several ways, including the use of monies from a reserve fund, however one option for FMA First Nations is to borrow with the FNFA, and use the service tax revenue to cover financing costs.

The Proposed Standards include a new section 2 which provides that if a First Nations uses local revenue from a service tax law to pay for the costs of a borrowing associated with the service, the First Nation will automatically have sufficient unutilized borrowing capacity to undertake the borrowing. This proposed change reflects that unutilized borrowing capacity is unaffected where service tax revenue is fully committed to finance borrowing for the service cost.

Determining Unutilized Borrowing Capacity – Payments in Lieu of Taxation

The Proposed Standards contain a new paragraph 5.2(a) which responds to the 2015 FMA amendment to include “payments in lieu of taxation” as a local revenue. Payments in lieu of taxation (or PILTs) and grants in lieu of taxation (GILTs) in the context of provinces, are typically payments made by governments or Crown corporations that are equivalent to the amount of tax that would have been paid had the property been occupied by a non-government entity. Under the Canadian Constitution, one government cannot tax another government, so the PILTs and GILTs have evolved legislatively to enable governments to pay other governments. “Payments in lieu of taxation” has a broader meaning in the FMA, and can include payments made by federal and provincial entities (e.g., Ministries, Crown corporations, agencies) as well as payments made contractually by the private sector.

Given that PILTs are discretionary and can be terminated without notice, their inclusion in the borrowing capacity calculation poses a degree of risk. The FNTC, in its proposed paragraph 5.2(a) mitigates this risk by limiting the type of PILTs to be included in determining borrowing capacity. Only PILTs made by the federal government under federal legislation would be included. There are several policy reasons that support this approach. These PILTs are determined on the basis of an assessment and current tax rate. They are legislatively-based, and currently paid to several taxing First Nations. This restriction ensures that PILTs with less certainty (i.e., those set by policy or contractual arrangement) are excluded.

Public Input Requirements

Public input requirements in section 8 and law submission provisions in section 9 have been updated to reflect similar amendments made to the FMA in 2015. For example, publication of the notice in a newspaper is no longer required.

The FNTC is seeking public input in respect of these proposed amendments to the Standards. If you wish to learn more about the proposed changes, please contact the FNTC at mail@fntc.ca or by telephone at (250) 828-9857.

An electronic version of the proposed Standards is available by clicking the button below:
Standards Establishing Criteria for Approval of Borrowing Laws (the “Proposed Standards”)

Please direct your written comments on or before October 28, 2016 to:

First Nations Tax Commission
321-345 Chief Alex Thomas Way
Kamloops BC
V2H 1H1
Telephone: (250) 828-9857
Fax: (250) 828-9858

Email: mail@fntc.ca

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