Canada Has the Capital to Build More Rental Housing. Here's the Tax Fix That Could Unlock It

By Mudit Chhura  |  Co-Founder, IndiBrick  |  Read Time: 7 Mins

Canada does not have a shortage of capital. It has a shortage of capital that stays home and gets reinvested into new rental housing. That is the core argument behind a recent op-ed from Derek Lobo, CEO of the National Apartment Council, and Mike Moffatt, Founding Director of the Missing Middle Initiative, and it points to a policy gap that could be fixed with a fairly simple tax change, one that already exists south of the border.

With the federal government preparing to host the Canada Investment Summit 2026 this month to attract international investment dollars, the authors make the case that just as much attention should go toward keeping Canadian investment dollars here at home, particularly the capital Canadians currently pour into US real estate.

The Numbers Behind Canada's Rental Housing Gap

CMHC's Summer 2026 Outlook is not encouraging. It projects rising rents and slowing construction activity at exactly the moment the country needs more housing supply of every type and size.

Metric	Figure
Federal housing starts target	500,000 units annually by 2035
CMHC-projected starts by 2028	210,000 units, a projected decline, not growth
Share of new apartments built by the private sector	More than 90%, even accounting for programs like Build Canada Homes

That last figure is the key to the whole argument. Government-led housing initiatives matter, but the overwhelming majority of new rental supply in Canada will continue to come from private developers. If private capital is not flowing efficiently into new construction, no government program alone will close the gap.

How Apartment Builders Actually Finance New Construction

A common financing strategy in the rental housing industry is known as asset recycling. A developer builds a new apartment building, operates it for several years, then sells it to a buyer who specializes in managing older rental stock. The proceeds from that sale are then used to fund construction of the next new building.

The problem is what happens at the moment of sale. That transaction triggers a one-time capital gains tax. Because the tax hits all at once, building owners often have a strong incentive to delay the sale until a year when gains can be offset by losses elsewhere. That is a rational business decision for the owner, but it has an unintended side effect, it delays the construction of the next building, slowing down the overall supply of new rental housing.

Capital is not the problem. A tax structure that punishes reinvestment at exactly the wrong moment is the problem, and that is a fixable design flaw, not a fundamental shortage.

The Proposed Fix: A Made-in-Canada 1031 Exchange

The United States has addressed this exact problem for decades through what is known as a 1031 exchange, named after the relevant section of the US Internal Revenue Code. Under this model, selling a rental property and reinvesting the proceeds into new construction is treated as exchanging one asset for another, rather than as a sale followed by a separate purchase. Capital gains tax is deferred rather than eliminated, removing the incentive to delay a sale purely for tax timing reasons.

• US research has found 1031 exchanges reduce property holding periods by up to a full year
• The provision does not reduce the total capital gains tax ultimately paid, it simply removes the penalty for reinvesting quickly
• An Ernst and Young estimate found the US 1031 provision generates roughly 13 billion dollars annually in tax revenue for US governments through the additional economic activity it spurs
• The fiscal cost to introduce a similar program in Canada is expected to be minimal, and could be revenue positive over time

A Tool That Could Be Targeted Where It's Needed Most

One advantage of this model is flexibility. Government could apply a 1031-style provision broadly, or target it toward specific outcomes, such as making the redevelopment of underused strip malls into new housing eligible for the deferral, either temporarily or permanently. That gives policymakers a precise tool to unlock capital for exactly the type of construction the market needs most, rather than a blunt, one-size-fits-all incentive.

On its own, a Canadian 1031 provision would not solve housing affordability nationwide. But the case made by Lobo and Moffatt is that it would meaningfully increase the pace of new construction, and give renters more supply and more options, at very little cost to the federal government.

Why This Matters for GTA Investors, Developers, and Renters

For anyone building, financing, or investing in rental property across the Greater Toronto Area, Brampton, and Niagara, policy conversations like this one are worth watching closely. A tax change that shortens holding periods and accelerates reinvestment could meaningfully change the pace of new rental supply reaching the market, and the financing strategies that make the most sense for property owners planning their next move.

• Investors currently holding rental property for tax timing reasons should watch this policy space closely, as reform could change the calculus significantly
• Developers planning multi-phase projects may want to model both current and potential future tax treatment into long-term financing plans
• Renters ultimately benefit from anything that increases the pace of new supply reaching the market, even indirectly through investor and developer behaviour

Frequently Asked Questions

What is a 1031 exchange?

A 1031 exchange is a US tax provision that allows a property owner to defer capital gains tax when selling a property, provided the proceeds are reinvested into a new property. It treats the transaction as an exchange of assets rather than a sale and separate purchase.

Does Canada have a 1031 exchange equivalent?

Not currently. Industry voices, including the CEO of the National Apartment Council and the Founding Director of the Missing Middle Initiative, have proposed introducing a made-in-Canada version to help accelerate rental housing construction.

Why are Canadian housing starts projected to fall?

CMHC's Summer 2026 Outlook projects housing starts falling to roughly 210,000 units by 2028, well short of the federal government's goal of 500,000 annual starts by 2035, citing slowing construction activity and financing constraints across the sector.

What is asset recycling in real estate development?

Asset recycling refers to a financing strategy where a developer builds and operates a rental property for several years, then sells it to fund construction of a new building. Capital gains tax triggered at the point of sale can create an incentive to delay that sale, slowing the pace of new construction.

The Bottom Line

Canada's rental housing shortfall is not purely a supply-side construction problem, it is also a capital efficiency problem. A relatively small tax change, borrowed from a decades-old US model, could meaningfully increase how quickly private capital moves from an aging rental building into a new one, without a large new government spending commitment.

Whether or not this specific reform moves forward, it is a reminder that the pace of new rental supply is closely tied to how efficiently private capital can be redeployed, something every investor, developer, and renter in the GTA has a direct stake in.

---