Every year, Toronto’s budget arrives with a familiar sense of urgency. The City experiences ongoing funding challenges. Property tax increases dominate the conversation. City Council faces tough choices, working under tight timelines and intense public scrutiny. Yet so much of the coverage downplays the constraints shaping Toronto’s budget that are outside the City’s control. The Province and the federal government exert significant influence over the scope of Toronto’s responsibilities, the funding available to deliver on those responsibilities, and the mechanisms available for the City to generate more revenue.
Municipalities have no independent constitutional status. As “creatures of the province”, their powers are derived from the Province. Those powers can be given and can be taken away, leaving the City of Toronto and other municipalities vulnerable to provincial and federal decisions. Downloading of critical public services without sufficient resources to fund them has left the City of Toronto with an ongoing structural revenue problem. Intergovernmental action is needed to remedy chronic funding problems facing Toronto and other cities.
Ever-Expanding Municipal Responsibilities
Over time, what the City is responsible for has expanded, placing added pressure on its budget. Toronto’s 2026 staff-prepared net operating budget includes $1.576 billion—representing 8.3% of its total operating budget—in areas which the City describes as “extensions of federal and provincial responsibilities”: housing, social services, and health services. Funding these areas through the municipal property tax base effectively reduces the finance burden borne by other orders of government. While property tax is a stable and reliable source of revenue, it doesn’t scale with income, economic growth, or service demand. In fact, 89% of Toronto's revenue tools do not grow with the economy and are generally limited to rate increases, making it difficult to absorb added financial pressures. By comparison, the federal and provincial governments have access to major revenue tools—including income, sales, and corporate taxes—that grow alongside the economy.
Housing policy illustrates one example of how responsibilities once led by senior governments have increasingly shifted to municipalities, with significant budgetary consequences. Historically housing policy sat primarily with senior governments but over time, responsibility for housing operations, shelters, and homelessness response increasingly shifted to municipalities.
Data collected by the Association of Municipalities of Ontario estimates that funding for housing and homelessness programs in Ontario more than doubled between 2016 and 2024, increasing from $1.9 billion to $4.1 billion. In 2016, municipalities accounted for 54.5% of total housing funding. By 2024, that portion had risen to 65.1%. Municipalities have both increased the amount of funding and the proportion of funding they provide for housing programs.
In addition to cost downloading, municipalities are navigating a growing set of complex policy challenges that directly affect their financial obligations and responsibilities. Climate change, mental health crises, rising rents, and population growth are increasingly driving demand for municipal services, often without corresponding adjustments to funding frameworks.
The Cycle of Short-Term, Temporary Funding
Despite this expanded responsibility, in housing but also other areas, the City has not received matching authority or revenue. Although approximately one-quarter (24%) of the City’s operating budget ($4.485 billion) is funded from provincial and federal funds, this money is often temporary, crisis driven, and/or program specific. When that funding expires, the responsibility—and bill—remains local.
This dilemma is playing out in the 2026 City Budget with the planned sunsetting of federal funding for community safety initiatives, including the Crime Prevention Action Fund (CPAF) and the Building Safer Communities Fund (BSCF). Since 2023, the City of Toronto has received $16.6 million to support violence prevention and interruption initiatives, as well as broader community safety programs. The expiry of these funds in March will significantly undermine the City’s ability to sustain community-led initiatives serving youth and communities most affected by violence. This includes the planned conclusion of vital programs in Scarborough: TO Wards Peace and Family Well-being Program—two programs that were recently introduced to fill in gaps after another federal grant for crime prevention ended. The impacts of these program closures extend far beyond what can be easily measured. When programs end, the trust, relationships, and community capacity that have been built over time are also put at risk.
Short-term provincial and federal funding also makes planning at the municipal level difficult. While Toronto has made notable progress in addressing the housing and homelessness crisis, persistent rental affordability pressures and the cost-of-living crisis continues to drive demand across the housing system. The Canada-Ontario Housing Benefit (COHB) has been one of the City’s most effective tools to address housing need, serving as a key pathway out of homelessness through portable rent subsidies. However, uncertainty around its future funding poses a risk to this progress. Toronto is expected to receive just $7.95 million for 2026 under COHB, down from $19.75 million in 2025 and $38 million in 2024. This is a clear step in the wrong direction, impacting the lives, health, and well-being of unhoused residents while also affecting City finances with increased pressure on the shelter system. In response, Toronto City Council has requested that the federal and provincial governments increase Toronto’s COHB funding to $54 million to allow 300 households to continue to secure permanent housing each month. When a program is proven to work, the appropriate response is sustained and expanded investment—not gradual withdrawal.
Source: Copied from page 6 of City of Toronto. (2026).Budget TO: 2026 budget notes housing secretariat and housing development office.https://www.toronto.ca/legdocs/mmis/2026/bu/bgrd/backgroundfile-261369.pdf#page=6
Underfunding of Municipally-Delivered Programs
The City of Toronto also delivers many programs through cost-shared arrangements with senior governments, however these programs are frequently underfunded. Provincial or federal contributions often fall below agreed-upon cost-sharing ratios or fail to reflect actual program costs. As a result, Toronto is required to subsidize these services using municipal revenues, increasing pressure on the City’s operating budget.
For example, Toronto Public Health delivers several provincially-mandatory cost-shared programs, and the City’s financial contribution to these programs have increased over time. While costs are intended to be shared on a 75-25 basis, the City’s contribution has increased over time from 23.1% in 2019 to an estimated 30.8% in 2026.
A similar issue arises with court security and prisoner transport services delivered by the Toronto Police Service for the provincial courts. Provincial transfer payments do not fully cover costs, resulting in underfunding of an estimated $33.2 million in 2025. Despite increased costs to deliver this program, provincial funding has gone down, resulting in a funding gap that is increasing year-after-year.1 Taken together, these examples illustrate how cost-shared and provincially administered programs routinely shift financial burden onto the City, reinforcing Toronto’s fiscal pressures.
Provincial Policies Shape the City’s Fiscal Capacity
Provincial legislation and policy decisions play a significant role in shaping Toronto’s fiscal capacity, both directly and indirectly. While the City of Toronto Act, 2006 (COTA) grants the City authority to introduce new taxes and revenue tools, it also places clear limits on that authority by prohibiting specific taxes such as income taxes and broad-based sales taxes.
The City’s ability to generate revenue is also affected by other legislation. Since 2019, the Province has introduced several bills affecting Toronto’s ability to ensure that growth pays for growth:
- Bill 108 (2019) replaced Section 37 with a capped Community Benefits Charge, limiting the City’s capacity to secure funding for parks, community facilities and other local infrastructure. The City estimated that this change would result in a reduction of $50 to $70 million, or 40%, annually compared to the previous Section 37 scheme.
- Bill 23 (2022) further cut development charge revenues and constrained parkland and other growth-funding tools.
- Bill 17 (2025) then reduced and/or delayed development charge revenues, creating a significant cash-flow impact that weakened the City’s ability to deliver growth-enabling infrastructure when it is needed, even though some revenues are collected later.
As a result of these changes, combined with the market slowdown, the City was forced to make almost $300 million in reductions to the 2026 capital plan and delay an estimated $1.9 billion in capital work beyond the 10-year planning period. On top of that, the combined effect of these bills is that more of the costs of growth now falls onto the City and property taxes, rather than developers.
The Financial Costs of Provincial Intervention in Local Decision-Making
Beyond formal revenue powers, provincial policy decisions across a wide range of areas also influence municipal finances in less direct ways. A recent example is the Province’s proposed amendment to Ontario Regulation 232/18 - Inclusionary Zoning, which would see this program paused in three municipalities, including Toronto, until July 1, 2027. This pause delays the delivery of much-needed affordable housing that could be delivered by private development. As a result, the City may be forced to pursue alternative approaches to meet housing needs, potentially increasing direct financial pressure on the City’s budget.
Bill 223, Safer Streets, Stronger Communities Act, 2024, which prohibited supervised consumption sites (SCSs) from operating within 200 metres of a school or daycare, is another example of a provincial policy restricting local planning with cascading consequences. The legislation mandated the closure of 10 SCS in Ontario, including 5 in Toronto. SCS save lives by preventing fatal overdoses, reducing the spread of infectious diseases, and connecting people who use drugs to health care, treatment, and social supports in a safe, non-judgemental setting. Following the forced closures, the Toronto Drop-In Network saw a 288% increase in overdoses in the three months immediately afterward, significantly impacting service delivery. Bill 223 effectively constrained Toronto’s ability to implement an evidence-based and effective response to the opioid crisis and increased pressure on City-funded social services.
The Case for New Revenue Options
Recognizing Toronto as the economic engine of Ontario and the structural deficit it faces, in 2023, the Province of Ontario and the City of Toronto reached a new deal that helped bring stability and sustainability to the City’s finances. The New Deal Agreement provided the City of Toronto with $1.230 billion in operating dollars over three years and is set to expire at the end of this year. For the 2026 Budget, this includes $200.0 million for shelters and homelessness and $110.0 million for subway-integrated provincial transit projects. It is expected that the City and the Province will resume discussions on a renewed agreement this year, though the scope of any new arrangement remains uncertain. Regardless, it is essential that municipal funding is modernized and includes an annual cost-of-living adjustment.
In the past, there have been various proposals to grant the City of Toronto with new revenue tools or sources, particularly those that grow with the economy. Among these, allocating a portion of the provincial sales tax is often viewed as one of the most promising options. Dedicating a portion of the provincial sales tax to municipalities on a per-capita basis would provide a stable, growth-based revenue source that rises alongside economic activity.
Quebec offers a useful precedent for this approach. Through Bill 39, adopted in 2023, the Quebec government amended its municipal fiscal framework to provide municipalities with a dedicated share of the Quebec Sales Tax (QST). The tax remains provincial but a portion of the revenue is permanently allocated to municipalities to support core services. This model demonstrates that sales tax sharing is feasible and effective and could also be adopted in Ontario using the provincial portion of the HST.
Toward a New Financial Arrangement for Toronto
In response to ongoing provincial interference in local decision-making, Toronto City Council passed a motion in February 2025 to establish a Program Advisory Body on Municipal Autonomy and Effective Local Governance. Drawing inspiration from Charter Cities in the United States and other jurisdictions, the task force is intended to lay the groundwork for greater municipal autonomy and communicate its benefits more broadly. This represents an important step in addressing the mismatch between municipal responsibilities, authority, and revenue generation powers.
As the City of Toronto enters the final stage of its 2026 budget process, it is worth remembering that the outcome is shaped by more than just local decisions alone. Federal and provincial governments play a central role in determining the City’s responsibilities, the policy tools at its disposal, and its fiscal capacity. While Toronto has made significant progress on improving its budget process and securing additional funding, further action is needed to break the cycle of recurring budget pressure. The case for providing Toronto with new and expanded revenue options, along with greater local autonomy, is clear—what remains missing is sustained provincial and federal commitment.
1 The funding gap was approximately $5.5 million in 2022, $13 million in 2023, and $24 million in 2024.