How Ottawa Could Leverage the Gas Tax Transfer to Cut Development Charges
Closing a loophole that leaves new homebuyers behind
Highlights
A recent Ontario Land Tribunal ruling allows municipalities to use federal Gas Tax funds for development charge (DC)-eligible projects without offsetting reductions in development charge rates, creating a loophole that excludes new homebuyers from the benefits of federal infrastructure spending.
This loophole disproportionately benefits high-fee cities like Toronto, which can draw on both DCs and Gas Tax funds, while disadvantaging low-fee municipalities that rely more on property taxes.
The federal government could close the loophole by tying part of the Gas Tax Transfer directly to DC reductions, ensuring grants immediately lower fees for new homes and avoiding geographic bias toward the Greater Toronto and Vancouver areas.
Applying these reforms nationally would create a consistent framework, eliminate perverse incentives, avoid creating a federal DC reduction plan that disproportionately benefits two metropolitan areas, and make housing more affordable nationwide.
When federal infrastructure dollars don’t reach new homebuyers
Federal infrastructure dollars are intended to help communities grow, but in Ontario, a new loophole means that new homebuyers are excluded from these benefits, resulting in development charges (DCs) increasing more than they otherwise would.
Between 2024 and 2029, the federal government will provide multi-billion-dollar funding to Ontario municipalities through the Canada Community-Building Fund (CCBF), better known as the Gas Tax Transfer. This grant program provides funding for roads, transit, drinking water, wastewater and other core local infrastructure necessary to support existing and future residents. At the same time, municipalities also rely on DCs to fund many of the same services that support new homes.
In theory, the Development Charges Act (DCA) requires cities to subtract any external grants from the portion of infrastructure future residents pay through DCs. This provides the federal government with a potential avenue to lower DCs, but a recent decision by the Ontario Land Tribunal (OLT) makes it more challenging to utilize this tool.
In practice, a recent OLT ruling has created a major new loophole that, by default, excludes new homebuyers from the benefits of federal infrastructure dollars. While this OLT decision represents a challenge to reducing DCs, it also provides an opportunity, as it highlights a path forward that the federal government can take to lower DCs.
This issue is something the feds will need to focus on if they move forward with their promise to create a new $1.5 billion program to spur DC reductions.
The Loophole
In 2022, the OLT heard the case of the Durham Region Home Builders’ Association versus the Town of Ajax. The dispute had several issues that needed to be adjudicated, but our focus is on the $2.6 million Gas Tax grant that Ajax earmarked for its new Audley Recreation Centre.
Despite officially applying for a federal grant to a DC-eligible project, Ajax refused to reduce its DC by the amount of the grant. The Tribunal agreed with the Town’s move, finding that unless a grant is specifically made in respect of a capital project, being used in its respect does not obligate a municipality to offset its DCs accordingly.
While OLT decisions don’t carry the full weight of binding legal precedent, tribunal members rarely rule opposite previous interpretations. As a result, municipalities can continue to pocket Gas Tax money without lowering their DCs unless there is an intervention by either the provincial government reforming the deductions regulation1, or the federal government asserting itself as required by the OLT decision.
High-fee cities win, and low-fee cities lose
This interpretation of the DC deduction regulations has two major consequences. First, new homebuyers will shoulder higher fees, while existing residents enjoy relief as Gas Tax funding can be applied towards their portion of infrastructure costs instead. Second, it produces unfair gaps between municipalities.
Cities that charge DCs, like Toronto, effectively can tap into two revenue streams (DCs and the Gas Tax) before raising property taxes to pay for infrastructure, while communities with low or zero DCs, such as Thunder Bay, have no such advantage and rely more heavily on local taxpayers. Without addressing this existing imbalance, any additional federal program to lower DCs' risks will send more money to high-fee cities and leave low-fee municipalities even further behind.
Tying gas tax dollars directly to DC reductions
Fortunately, Ottawa already holds the key to a fairer outcome. By explicitly tying at least part of the Gas Tax Transfer to DC reductions for the same categories of infrastructure that they both cover, the federal government can ensure every dollar in grants immediately lowers the fees charged to new homes.
Layering the promised $1.5 billion DC reduction fund on top of a reformed Gas Tax program would further amplify its impact, increasing the leverage that the federal government has. The way the current promise of DC reductions is structured would perversely reward the worst municipalities with the highest DCs, while dinging the best ones with the lowest taxes.
This is a major issue because there would also be a geographic bias in funding towards municipalities in the Greater Toronto and Vancouver Areas (GTA and GVA), which have the highest housing taxes. Having two regions dominate a funding source does not set up a future program for long-term political sustainability.
A consistent federal framework for all provinces
The proposed reforms may not be limited to Ontario alone. British Columbia already mandates similar deductions when provincial grants fund DC-eligible projects, although we don’t know how consistently this is accounted for, as is the case with Ontario. By making this change a condition for any federal infrastructure transfer, Canada can create a fairer approach across provinces, one that eliminates loopholes, levels the playing field, and makes housing more affordable for every community.
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Development Charge Act O.Reg 82/98 section 6 (1)