Incentivizing finance capital.
On March 21, 2025, Prime Minister Mark Carney announced that he was reversing the timid change to Canada's capital gains inclusion rate Justin Trudeau's government introduced on April 16, 2024 (consecutive page 350).
According to CRA, the "inclusion rate" on capital gains is the percentage of a taxpayer's capital gains included in computing his or her income.
The inclusion rate stood at 50% from 1972, when a capital gains tax was introduced in Canada, to April, 2024, when the Trudeau government altered it slightly. With Prime Minister Carney's reversal, it stands at 50% again today. A capital gain is the profit from sale of an asset which has increased in price while it was held.
Mr. Trudeau explained the changes he was proposing, now reversed, in a May 13, 2024 video, the main points of which were:
• The income, as of 2024, of "only 0.13% of Canadians" included more than $250,000 in capital gains, above which 2/3 would have been taxed.
• The Trudeau government estimated that this change would have generated "$20 billion in new revenue."
Curious turns of phrase
Mr. Carney's announcement includes two rather curious turns of phrase. Here is the nub of his statement:
"Cancelling the increase of the capital gains inclusion rate is a recognition of the vital role that builders and small businesses play in shaping Canada's future. It will strengthen Canada's ability to catalyze the enormous private investment needed to create jobs and opportunities and to build a stronger future …
"The new government is focused on catalyzing investment, incentivizing builders for taking risks, and rewarding them when they succeed …
"Cancelling the hike in capital gains tax will catalyze investment across our communities and incentivize builders, innovators, and entrepreneurs to grow their businesses in Canada, creating more higher paying jobs."
Note Mr. Carney's claim that reinstating the 50% capital gains inclusion rate will "incentivize builders" (a phrase mentioned twice) and his assertion that "risk" should be rewarded.
To fully understand how these words are used in this statement, one must understand how housing construction is financed because it is "enormous private investment" in housing construction that Mr. Carney's change to the capital gains inclusion rate is explicitly intended to incentivize.
(Note that there is a distinction between a developer, who among other tasks lines up financing for a housing construction project, and a builder, who physically constructs buildings. Some developers are themselves builders; others hire or otherwise collaborate with builders to implement their plans.)
How housing development is financed
House and apartment-building developers access private financing through through pension funds, insurance companies, real estate investment trusts (REITs) and wealthy individuals seeking investment opportunities.
These sources provide private construction loans, usually offering more flexible terms and a faster approval process than traditional banks but at higher interest rates. Builders also leverage capital from equity partners, private equity funds, and through venture debt for large projects.
Condo developers in particular access financing by pre-selling units to individuals or entities wishing to rent out, resell, or inhabit the units, once built, that they buy.
Interest payments to lenders add to the cost, and thus the price, of each unit built. Pre-buyers, in addition, add markup to the price of units they rent out and their capital gains to the price of units they resell. Thus, restoring the capital gains inclusion rate to 50% "incentivizes" pre-buyers who resell the properties they buy, and holders of equity in housing developments who sell their interests, by taxing away less of their capital gains.
Hence the prime minister's claim that more housing will be built if the inclusion rate is 50% than would be if the rate were not changed back. It is difficult, however, to see how incentivizing finance capital equates to "incentivizing builders."
A publicly owned housing-construction bank
Assuming that former prime minister Trudeau's numbers are correct and that his change to the capital gains inclusion rate would have increased government revenue by $20 billion per year, this amount would have been more than enough to capitalize in one year a publicly owned housing-construction bank (a publicly owned bank that finances housing construction) that could extend no- or low-interest loans to builders sufficient to meet the housing needs of Canadians into the indefinite future.
Such a bank would eliminate not only the necessity for privately-held capital to finance housing construction, but also the compensation that creditors demand for the "risk" they claim is involved in financing housing construction.
To clarify: A housing-construction bank does not accept deposits, pay interest, issue credit cards, or perform any of the other functions of a commercial bank. Its sole purpose is to create and issue fiat money at the direction of elected government in the form of no- or low-interest loans to finance housing construction. Paydown of the loans it issues is made to the housing-construction bank, which retires each as it is repaid in full.
Loans issued by a publicly owned housing-construction bank can improve the affordability of housing further by including covenants that require the units built to rent or sell in perpetuity for what it costs to build and maintain them.
Using the Basel III minimum leverage ratio, which is 3%, a publicly owned housing-construction bank can theoretically leverage $20 billion in capitalization to carry on its balance sheet $666.67 billion in loans – more than six times the total invested in constructing housing of all types in all of Canada in 2024.
By the same measure, a publicly owned housing-construction bank capitalized with $3.07 billion and leveraged to the Basel III minimum leverage ratio could finance the entire $102.4 billion invested in housing construction in 2024.
Minimizing versus maximizing housing prices
Loans issued by a publicly owned housing-construction bank would be repaid in monthly instalments, as all construction loans are repaid now, by the occupants of the housing built; so dollars loaned could be loaned again and again forever. Note also that everyone who performs useful work constructing housing, including builders and the businesses and individuals they hire, would be fairly compensated with the dollars loaned by a publicly owned housing-construction bank.
This model minimizes housing prices by limiting them to what it costs to build and maintain housing. Privately financing housing construction, in contrast, maximizes housing prices, as evidenced by defining "market rate" as the maximum price a holder successfully demands for their property.
Mr. Carney's announcement makes no mention of housing affordability, his assumption being apparently that increasing the "supply" of "market rate" housing – which increases in price by the maximum its holders successfully demand each year (and whenever a tenancy ends and a new tenancy begins) in the case of rentals or each time a unit changes hands in the case of houses, condos, and townhouses – will decrease its price.
Borrowers from a publicly owned housing-construction bank would include non-profit NGOs (non-governmental organizations) and federal, provincial, and municipal agencies that would oversee the construction of, own, and manage the housing built. Most of the day-to-day operations involved would be contracted out, as they are now in the private sector.
For an example of how publicly owned and managed housing works in the real world, see a Sept. 3, 2019, New Statesman article, "Inside the Vienna model of social housing."