Jogajog.ca, Toronto Bureau:

The federal government is currently exploring changes to the Canadian tax code to entice significant foreign institutional capital into the domestic real estate market, with a focus on boosting new development. This push for reform has received backing from the CEO of the government’s new housing agency, Build Canada Homes, which is tasked with scaling up the construction of affordable units.

Housing Agency Head Calls for Capital Injection

Ana Bailão, appointed as the chief executive of Build Canada Homes in September, has been actively meeting with stakeholders across the country to demonstrate Ottawa’s commitment to solving the affordability crisis.

Speaking at a panel discussion at the Canadian Club in Toronto on Monday, Ms. Bailão proposed solutions that went beyond common suggestions like cutting municipal development charges. She argued that the federal government must address tax policy to effectively unlock the necessary funding.

“We urgently need more capital flowing into the housing system,” she stated. “This requires us to make some necessary changes in how we tax these projects and how we structure the financing.” She affirmed her support for “some tax reform to attract more capital to this country.” Ms. Bailão also advocated for greater access for developers to low-cost financing tools, such as the Apartment Construction Loan Program provided by the Canada Mortgage and Housing Corporation (CMHC), which helps lower construction debt rates.

The Withholding Tax Hurdle

While Ms. Bailão did not specify the exact reforms she is seeking, sources close to the negotiations indicate that large foreign investors frequently request two key changes: adjustments to the withholding tax on Canadian-earned income and specific tax incentives for investments targeting purpose-built rental apartment construction.

When major foreign investors inject funds into Canadian real estate projects and earn a profit, they are often hit with a withholding tax, sometimes as high as 25%, before repatriating their earnings. While Canada has tax treaties with several countries (like the U.S.) that lower these rates, sovereign wealth funds from key regions like the United Arab Emirates or Singapore often do not benefit from the reduced rates.

Low Returns Deter Rental Investment

Attracting foreign capital to fund rental apartment construction is critical, but the current financial landscape makes the returns inadequate for many institutional backers.

Historically, investors were drawn to high returns and rapid exit timelines (often within five years) offered by Canadian condominium projects. However, a cooling condo market has pushed developers toward rental buildings. This shift presents a challenge: rental projects involve money tied up for decades, and current development yields in cities like Toronto and Vancouver are reported to be around 4.5 per cent.

For large institutional investors, this yield is too low given the risk, especially when alternative low-risk options, such as U.S. Treasury bonds, offer comparable returns. Tax reforms could significantly enhance the profitability of Canadian rental development, making it a more competitive destination for foreign funds.

Need for Governmental Alignment

Beyond federal tax issues, Ms. Bailão emphasized the critical need for “alignment” among all levels of government—federal, provincial, and municipal—to end counterproductive policies.

She pointed out the inefficiency of simultaneous actions, noting: “You can’t have the federal government removing the HST on rentals and then municipalities increasing their development charges.” Such measures, she argued, effectively offset each other.

As evidence of successful collaboration, Ms. Bailão highlighted a recent agreement in Ottawa to construct up to 3,000 mixed-income and affordable housing units. In this project, the City of Ottawa agreed to reduce or waive development fees and property taxes, while Build Canada Homes committed to financing a portion of the units. This model, she concluded, demonstrates the power of municipalities coming to the table with proposals and incentives, rather than simply asking for money.