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Is a Tax Credit a Better Way to Support Social Housing?

18 June 2024

One of the biggest challenges in Canada’s rental housing crisis is the lack of new affordable housing units being built. Despite efforts through the National Housing Strategy’s five programs, only 17,000 units were delivered after four years. This disappointing outcome is only a modest improvement over Ottawa’s track record in the past 30 years. For example, between 1996 and 2013, fewer than 7,000 new units were provided by federal and provincial governments.

In contrast, the United States built 3.5 million subsidized rental units from 1987 to 2021. Adjusted for population, this is equivalent to building 11,000 units per year in Canada. Both countries have tightened the tax benefits of rental real estate, but the US offset this policy shift by introducing the Low-Income Housing Tax Credit (LIHTC) to mitigate the impact of these changes on low- and middle-income renters. 

A Canadian LIHTC would offer an alternative method of federal funding by leveraging private sector expertise in owning, building, and managing low-income rental housing. The LIHTC would provide tax credits to both for-profit and nonprofit owners of rental housing, with nonprofits having the option to sell these tax credits. A key aspect of the program would be its efficient resource allocation, achieved by creating competition among developers for tax credits and using a market-based test for the viability and need for low-income housing.

The program could be designed to complement existing renter support initiatives, such as local government programs, housing allowances, and rent supplements. It would work by providing tax credits to developers, who would then pass them on to investors to offset their income tax. Unlike earlier tax credit programs like the Multiple Unit Residential Buildings (MURB) provision, this program would have a cap, with credits allocated annually to each region based on population. The credits would be federally funded and awarded according to provincial objectives.

The Canada Revenue Agency (CRA) would be responsible for ensuring that projects meet the program requirements. To finance their projects, developers would enlist the services of a syndicator, whose key role would be to advise on pricing the credits.

In the US, syndicator fees were initially too high but decreased as they gained experience and scale, and as the process became more transparent. At least two major Canadian banks are active in this process in the US and could apply their experience to a Canadian program.

In the US, the tax credit is delivered over 10 years. Deciding whether a 10 or 15-year time frame makes sense for Canada is a design question, but individuals with steady and large taxable incomes would clearly benefit from such a program.

More details on how this program could work are available in the 2009 study by Marion Steele and Francois Des Rosier,Building Affordable Rental Housing in Unaffordable Cities: A Canadian Low-Income Housing Tax Credit,” published by the C.D. Howe Institute.

Implementing a Canadian Low-Income Housing Tax Credit (LIHTC) could significantly boost the creation of affordable rental housing by leveraging private sector expertise and resources. By learning from the successful US model, Canada can create a more efficient and effective system for developing low-income housing. Such a program would not only address the current shortfall but also provide long-term benefits for low- and middle-income renters across the country.


Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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