Municipal debt in Ontario

Municipal debt is governed by provincial legislation in Canada.

Municipalities in Ontario can take on debt

The Municipal Act, 2001 allows municipalities to take on debt:

Subject to this or any other Act, a municipality may incur a debt for municipal purposes, whether by borrowing money or in any other way, and may issue debentures and prescribed financial instruments and enter prescribed financial agreements for or in relation to the debt. 

Section 401 of the Municipal Act

They do not require prior approval of debt issuance by provincial authorities provided they do not surpass the financial limits set by regulation.

Debt can only be used to fund capital projects

Long-term debt can be issued only for capital projects, not to finance day-to-day operating costs:

A municipality may issue a debenture or other financial instrument for long-term borrowing only to provide financing for a capital work.

…

The term of a debt of a municipality or any debenture or other financial instrument for long-term borrowing issued for it shall not extend beyond the lifetime of the capital work for which the debt was incurred and shall not exceed 40 years.

Section 408 (2.1) and (3) of the Municipal Act

Municipalities use long-term debt to fund larger capital expenditures. It is similar to a homeowner’s mortgage and is repaid over time through payments which include interest. Long-term debt charges are paid for from the Capital Reserve Funds.

Debt limit is 25% of annual “own-source” revenues

Municipalities are limited to pay no more than 25% of their annual “own-source” revenues (property taxes, user fees, and investment income) to service long-term debt as per Ontario Regulation 403/02: Debt and Financial Obligations. This is known as the Annual Repayment Limit (ARL).

Some municipalities set more conservative debt limits. For example, Belleville limits its Annual Repayment Limit (ARL) to 12% of own-source revenue in its Debt Management Policy.

Excessive indebtedness can compromise financial sustainability and flexibility of municipal governments.

Long-term debt alternatives

Long-term debt is one of the tools that municipalities have available to pay for capital budget projects. Other options include:

• Reserves and Reserve Funds – Savings set aside over time for specific purposes (e.g., capital replacement, infrastructure renewal).
• Development Charges (DCs) – Fees collected from developers to help pay for growth-related capital infrastructure.
• Grants and Transfers from Other Levels of Government – Including federal and provincial infrastructure programs (e.g., Canada Community-Building Fund, Ontario’s OCIF).
• Pay-as-you-go Financing (Current Revenues) – Using funds from the tax levy or user fees collected in the current year to pay for capital expenditures directly.
• Public-Private Partnerships (P3s) – Collaborating with private sector partners to finance, build, and sometimes operate public infrastructure.
• Donations and Contributions – Capital contributions from community groups, businesses, or individuals, often used for parks, libraries, or cultural facilities.

Example debt management policies

Many Ontario municipalities have voluntarily created Debt Management Policies.

• Belleville
• Blue Mountains
• Innisfil
• London
• Peterborough
• Waterloo