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By Kevin Fettig
Special to Financial Independence Hub
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 U.S. 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.
Complements existing Renter Support Initiatives
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 U.S., 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 U.S., 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 U.S. 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.
Kevin Fettig is president of CMI Financial Group. With more than 30 years of experience in capital markets, including more than 15 years in the mortgage industry, Kevin has held senior executive positions with several mortgage insurance companies in Canada and the U.S. While at CMHC, he developed and managed several National Housing Act (NHA) Mortgage-Backed Securities (MBS) products, including the Canada Mortgage Bond (CMB) program. Prior to CMHC, he was at the Bank of Canada. Kevin holds an Honours Bachelor of Arts in Economics, a graduate degree in management, a master’s degree in Economics and an MBA.
