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The Federation of Canadian Municipalities estimates that cities, towns and smaller local administrations own and operate roughly 60 per cent of Canada’s core public infrastructure, including roads, bridges, waterworks, electrical distribution networks, transit and community facilities. Given that Canada’s infrastructure shortfall would cost hundreds of billions of dollars to fix, municipalities are in a precarious position. They are being asked to shoulder more of the nation’s building burden while having fewer tools to pay for it. A stronger municipal bond market could bridge that gap.

Data on the size of Canada’s municipal bond market is limited. A 2018 Fiera Capital report estimated that the market held just over $61 billion in outstanding municipal debt at the end of 2017. By comparison, a 2025 RBC report estimated roughly $53.2 billion in outstanding bonds, excluding Quebec municipal auction issuers, whose debt is often unrated. The same RBC report estimated that municipalities issued $5.8 billion in new debt in 2024. By contrast, the United States had approximately C$6 trillion in outstanding municipal bonds as of the second quarter of 2025.

While debt is often viewed negatively, municipal bonds are typically used to finance long-term infrastructure projects such as roads, transit and utilities. A larger municipal bond market can therefore give municipalities greater access to long-term financing for projects that support economic growth and public services.

Municipalities own the infrastructure but lack the revenue

Why is there a need to grow the municipal bond market in Canada? For one, municipalities have very few sources of revenue. Property taxes account for nearly 50 per cent. Roughly another 20 per cent comes in the form of transfers from the federal and provincial governments. That’s much less than in the 1960s and 1970s when transfers accounted for 40 to 50 per cent.

Another 25 per cent of revenue comes from housing, transportation, development fees and utilities. Over the last 30 years, revenue from these sources has grown more robustly than property taxes or transfers. But, overall, municipal revenues increased at a slower pace between 2007 and 2023 than provincial and federal revenues.

Options for raising municipal revenue are limited. Increasing property taxes ranks consistently less popular in public opinion polling than other taxes, so municipalities are unlikely to go that route to dramatically boost their income.

In fact, between 1995 and 2023, the share of total tax revenue going to local governments declined, while the federal and provincial shares increased.

Another challenge is that the prospects for largesse from the provincial and federal governments have dimmed. Moreover, relying on government for sporadic capital grants is an unreliable policy solution. Raising revenue from other sources has more promise, especially as municipalities expand and the demand for more services such as transportation or utilities increases. This remains handicapped, however, by the inability of municipalities (especially small- to mid-sized) to borrow money to fund these projects.

One solution is for municipalities to borrow money for projects that can help pay for themselves. A city could issue bonds to rebuild aging infrastructure, then use revenue from the project — such as road tolls or user fees — to repay the debt over time. This concept is known as a revenue bond.

A patchwork of borrowing rules constrains municipal debt

The challenge is that a patchwork of rules and regulations governs long-term borrowing and, in turn, affects the size of the municipal bond market in Canada.

In Ontario, municipalities are not allowed to acquire debt to fund operating costs. Moreover, debt servicing cannot exceed more than 25 per cent of municipal own-source revenue coming from residents, businesses and assets (not governments). Municipalities in British Columbia are similarly limited, and municipalities which are “not well-diversified” (Fact Sheet #13, p. 2) potentially face further limitations under the Municipal Finance Authority of British Columbia. The Northwest Territories imposes a limit of 20 per cent of municipal revenue on debt service, which falls to 10 per cent for villages.

Exceptions to these rules include the cities of Toronto and Vancouver, which have their own regulations. Alberta does go a step further: Debt limits and debt servicing are calculated based on the total revenue shown in a municipality’s most recent audited financial statement.

Municipalities in Saskatchewan, Quebec, Nova Scotia, Nunavut and Newfoundland and Labrador require ministerial approval to issue debt. Nova Scotia is subject to a further rule that dictates debt cannot exceed 30 per cent of own-source revenue.

New Brunswick, Yukon, Manitoba and Prince Edward Island use a different formula. They cap borrowing at two, three, seven and 10 per cent, respectively, of the assessed value of taxable real estate within a municipality. Manitoba additionally imposes an annual debt service maximum of 20 per cent of revenue.

How to build a stronger municipal bond market

So what policies should municipalities, provinces and the federal government enact to expand the municipal debt market in Canada?

The first step would be for provincial governments to streamline regulations to make them more consistent and transparent.

The second would be to allow municipalities to issue debt in larger sizes and to improve its grading and disclosure. One option would be a federal agency that would oversee the publication of municipal financial documents and standardized reporting practices. Larger bond issues and more consistent credit assessment would improve market liquidity and help attract institutional investors, such as pension funds and insurance companies, which tend to prefer liquid fixed-income instruments.

Debt could then be sold through designated market makers, who would be responsible for grading it, possibly bundling it and selling it to individual and institutional investors. As it is, an estimated 1,000 municipal bonds (p. 3), most of which are in Quebec, are ungraded and have no credit rating.

Finally, the federal government would need to make municipal bonds, which generally have low yields, more attractive to investors. It could do that by making the interest on municipal bonds tax-free, as is already being done in the United States. Alternatively, contribution room could be added to tax-free savings accounts for anyone seeking to hold municipal bonds. Conferring tax-free status, along with grading, bundling, and marketing of debt, would also reduce the basis points paid upon debt, which in turn would reduce debt servicing costs. This would allow a municipality to either borrow more or to pass on those savings to their tax base.

Building a deeper, more liquid municipal bond market with greater transparency and less regulation would align municipal infrastructure needs with private investment capacity. With modest federal leadership and provincial reform, municipalities could finance their future on their own terms.