Best left on the shelf
With $1.9 trillion outstanding in municipal debt in the United States, debt financing is the single most important means of funding state and local public infrastructure. Although there are many different types of municipal bonds in the U.S., the one that is grabbing considerable Canadian attention is tax-exempt bonds (TEBs). In effect, tax-exempt bonds represent a federal subsidy, in which the interest earned by the holders of these debt instruments is not subject to federal income taxes (and may even be exempt from state and local taxes). In theory, the municipality can extract the entire amount of tax deduction in the form of lower interest rates, thereby reducing the cost of borrowing. In Canada, municipalities currently do not have authority to issue these bonds and doing so would require some legislative tweaking. However, there are hybrid versions of TEBs in existence. For example, the Ontario provincial government in 2002 made the necessary legislative changes to permit Opportunity Bonds - in which the income earned by the bondholder is exempt from provincial taxes only. Nevertheless, TEBs are in their infancy stage in Canada and are not permitted in other provinces, not to mention that there does not appear to be any appetite for them at the federal level.