On March 21st, 2011, the development industry and new home buyers likely let out a long sigh of relief as the Divisional Court of Ontario upheld an Ontario Municipal Board decision regarding the setting of development charges under the Development Charges Act, 1997.8 Practically speaking, the stakes were high. The Court’s decision helps ensure that the cost of building and purchasing a new home will not increase solely due to the methodology that municipalities use when calculating development charges.

The Orangeville District Home Builders Association appealed the Town of Orangeville’s development charge by‐law9 to the Board on the basis that it contravened various sections of the Act. Included in the By‐law were development charge rates which were determined using what the Town’s consultants called the “gross population method”. In short, this method established development charge rates by referencing the estimated gross population of a new development and then estimating the costs of services for the new development. Specifically the Board was asked to decide whether using this methodology for the purpose of establishing development charge rates in the By‐law contravened the Act. The Board ruled in favour of the Association and the Town appealed its decision to the Divisional Court. The Board found the Act requires the following principles to be applied:

  1. Development charges must be derivative and not original. They are for the increase in costs arising from the increased needs of the service and not for the entitlement or privilege of using the service;
  2. Development charges must not result in the level of service exceeding the average level of service provided in the municipality over the 10‐year period immediately preceding the preparation of the municipality’s background study that is relied upon in setting the development charge rate; and
  3. Development charges must be an estimate of service needs over the future planning period and must take into consideration the excess capacity of services in the municipality as a whole in order to avoid over building and to ensure the appropriate use and capacity of services is maintained

Development Charge Rates Are Derivative, Not Original

The Board concluded that for development charges to be assessed, the Act requires that development result in an increased need for services and there must be an increase in the capital costs associated with the service because of the increased need.10 The Board, perhaps unsurprisingly, found all new development requires services, but that determination was not sufficient for the purpose of the Act. Instead, the Act requires that development charges are for the increase in costs arising from increased needs of the service and not for the entitlement or privilege of using the service11 Accordingly, the Board found municipalities may only use development charges to fund the incremental needs arising from development over and above existing bundles of services already available in a municipality.12 This theme of connecting increased costs with increased needs is repeated throughout the Board’s decision and ultimately the Board concluded the calculation methodology used to set the development charge rates in the By‐law went further than what was allowed under the Act.

In its reasons, the Court found the Board did not “read words into” the Act nor did it “read words out”, and, accordingly, felt the Board’s interpretation of the Act was reasonable and not open to serious debate in this regard.13

Funding of Service Increase Must Not Exceed Level of Service for Previous 10 Years

Central to the Town’s argument was the idea that the gross population of the number of residents living in a new development should be the standard from which capital costs for services are derived. In opposition, the Association maintained that relying on the gross population of the residents in the new development meant the Act would again be contravened. Relying on the “gross population method” meant the funding of a service increase would result in the level of service exceeding the average level of service provided over the 10‐year period immediately preceding the period examined in background studies relied on by the municipal council when it established its development charge rates.

The Board agreed with the Association. The basic principle behind the Board’s decision was simple despite the complexity of various funding formulae. When deciding on a development charge rate, a municipal council must consider the impact of the projected decline in the municipality’s population over the planning period during which the increased needs for services are created as a result of development. The Board concluded that a failure to consider the net population growth of the entire municipality meant the per capita cost for the service associated with the new development would exceed the previous 10‐year average per capita cost of the service at the time the capital cost was incurred and would therefore contravene the maximum allowable funding for the service permitted under the Act.14 To put it another way, the Board concluded that relying on a “gross population method” will have the effect of funding a service increase with development charges that will provide a level of service higher than what is permitted under the Act. The Board was not persuaded by the Town’s argument that municipal councils can never know whether future service levels will mirror population forecasts: “the fact there may be uncertainty does not allow one to abdicate from the responsibilities of properly estimating the future level of service…”.15

Even though the Divisional Court found the Board’s conclusion on funding formulae was a finding of fact and not law, and therefore not properly within its jurisdiction16, the Board’s reasoning is instructive of its purposive reading of the Act. Setting development charge rates is a balancing process of looking backwards and forwards in order to maintain the Legislature’s intention as expressed in the statute.

Excess Capacity of Existing Services Must Inform Development Charge Rates

Finally, the Board’s conclusion regarding the role excess capacity of services plays in setting of development charge rates was closely tied to its findings regarding the derivative nature of development charges and the maximum funding of a service through the collection of development charges.

Under the Act, the increase in a service attributable to a new development must be reduced by the part of the increase that can be met using a municipality’s excess capacity. While the Act does not define the meaning of excess capacity, the Board felt an understanding of the term which did not rely on an analysis of the net population of the municipality in the course of establishing population growth forecasts was seriously flawed. Practically speaking, a municipality reduces the risk that infrastructure will be over‐built and excess capacity never reduced when it considers declining population numbers in determining the excess capacity of services.

Related to this risk mitigating approach is the notion that determining excess capacity must be related to future estimations of population growth or decline and are not “snap‐shots” of surplus capacity that exists at the time the capital cost is incurred by the municipality. The Board rejected this latter narrow interpretation of excess capacity that was advanced by the Town. Regulations pursuant to the Act describe “committed capacity” ‐ a case of over building which will later be funded by development charges ‐ as the only exception where a reduction of excess capacity is not required.17

The Divisional Court concluded the correctness of the Board’s reasons with respect to excess capacity were not open to substantial doubt.18