Vast funds are needed to fund national affordable housing needs, RBC says
Faced with a growing housing shortfall and increasing affordability pressures, Canada is being urged to consider US-style tax tools to attract private capital into housing and infrastructure development.
According to Royal Bank of Canada’s (RBC) latest report, nearly $2 trillion in capital will be needed over five years to add 3.5 million housing units—representing a fivefold increase in annual investment.
While Canada has leaned on grants and concessionary financing to spur affordable housing, the US approach has focused on tax incentives to engage institutional and retail investors. Two major tools—tax-exempt municipal bonds and low-income housing tax credits (LIHTC)—are at the centre of that strategy.
Tax-exempt municipal bonds, which fund public infrastructure such as roads and utilities, provide tax-free interest income to investors. This benefit allows municipalities to borrow at interest rates 100 to 160 basis points lower than comparable taxable debt.
In 2024, the US had $4 trillion in outstanding municipal debt, and these bonds were credited with attracting $10 in private investment for every $1 in foregone tax revenue.
In the US, private activity bonds (PABs)—a subset of municipal bonds—are used for projects with both public and private benefits, including affordable housing. About 44% of 2022’s $41 billion PAB allocation supported such housing initiatives.
Meanwhile, the LIHTC has helped finance 3.65 million affordable housing units since 1987. Projects qualify for either a 4% or 9% tax credit, which is passed on to investors in exchange for equity financing. On average, $0.90 in equity is raised per $1 of credit. The structure often involves forming a limited liability company where investors provide capital and receive the tax benefits.
This model has produced after-tax internal rates of return between 3.5% and 8%, making it competitive with US Treasury yields.
In 2024, LIHTC-related investments and municipal bonds together drew in close to $500 billion, while costing the US Treasury $59.1 billion—roughly 1.2% of total federal revenue.
For Canada to implement similar tools, changes would be required in the federal Income Tax Act, including exemptions for bond interest and provisions for housing tax credits.
Canada Mortgage and Housing Corporation (CMHC) would likely need an expanded mandate to oversee compliance, and municipalities would need to develop borrowing frameworks to issue bonds aligned with housing goals.
Is adopting a tax-based strategy a viable path for Canada's housing market? Share your thoughts in the comments.
