Feds Miss Chance to Create Stimulus Strategy for Cities

By Patrick Gill

Most Canadian cities will have finalized their budgets by this point in the year. This annual process of city councils determining what gets funded and how reveals a perpetual problem that must be addressed if cities are expected to continue driving economic growth for Canada. Whether it’s Winnipeg or Ottawa, Canada’s largest cities have unfunded infrastructure projects. In Toronto’s case, the city has an unmet need of $29 billion over the next 10-years alone. To be clear, the funding that’s needed is for vital things that make cities good places to live, inclusive for residents or attractive to run a business.

The recent federal budget should have been used to help Canada’s largest cities, home to over half the country’s population and responsible for over half the country’s GDP, finance their unfunded capital projects. One idea that would partially resolve this perennial problem, but that hasn’t received enough attention in Canada yet, is putting private capital sitting on the sidelines to better use. This past year U.S. lawmakers changed America’s tax code to incentivize individual investors and corporations to put their unrealized capital gains toward city-building projects. The strategy is refreshingly innovative and worthy of consideration here in Canada.

Unrealized gains are investments that have increased in value on paper, but have yet to be sold for cash. As a result, the capital gain on such investments remains unrealized by investors and not taxable. (In Canada, 50% of capital gains are taxable when realized, and added to investors’ income.) An estimated $6.1 trillion in unrealized gains is currently being held by American investors and corporations according to the Economic Innovation Group. While there is no recent estimate of unrealized capital gains held by Canadian investors and corporations, previous research by TD Economics suggests the total would be in the hundreds of billions.

The changes introduced in the U.S. last year offers American investors and corporations a tax break on capital gains that are reinvested in economically struggling areas through specialized funds. These so-called “opportunity zone funds” are mandated to economically support struggling communities, which are identified by state authorities, by investing in qualifying community-building projects. Such investments can be used for new social housing, infrastructure upgrades or local businesses. While it’s early days for opportunity zone funds, the Canadian federal government should consider if aspects of the strategy could be used to help Canada’s financially struggling cities.

From an outsider’s perspective, the Canadian federal government appears agreeable with offering tax breaks on capital gains. For example, in response to other U.S. tax cuts, the Canadian federal government announced through the 2018 Fall Economic Statement it will allow corporations to accelerate the tax depreciation of certain capital investments. If businesses can now immediately write off the cost of equipment for clean energy, why can’t investors, or corporations for that matter, be given the opportunity to invest in the cities they live, or operate?

If opportunity funds were established for Canadian cities, the federal government, working in partnership with provincial governments, could begin reducing the long list of unfunded infrastructure cities must build and refurbish. They could also help fund important activities that facilitate inclusive economic growth. Such an approach would leverage private sector funding to stimulate Canada’s sluggish economy. This week’s federal budget was filled with stimulus measures. However, it’s disappointing these measures rely heavily rely on public funding and don’t address the greatest glitch of Canada’s economic engine, its cities.

Patrick Gill is an urban affairs researcher. Follow @PatrickNGill on Twitter for more urban affairs ideas.