Private activity bonds work as financial bridges, which connect private investor money to projects the public relies on every day, such as roads, airports, and affordable housing.
In the United States, private activity bonds have been doing this job for decades, channelling billions into infrastructure while keeping borrowing costs low. In Canada, that bridge has yet to be built.
What are private activity bonds?
Private activity bonds (PABs) are municipal bonds issued by or on behalf of a government to attract private investment into projects that serve the public good. First formally defined in 1968 in the United States, the list of qualifying private activities has more than doubled over the decades, growing to several categories.
Today, qualifying projects include:
- funding and refinancing student loans
- airports and other transportation facilities
- private universities and hospitals
- affordable rental housing
- mortgage provision for first-time lower-income borrowers
Not every project makes the cut. Usually, PAB proceeds cannot fund health clubs, gambling facilities, golf courses, oil refineries, or liquor stores.
How a bond qualifies as a PAB
For a bond to be classified as a private activity bond, it must pass one of two tests under Section 141 of the United States’ Internal Revenue Code (IRC):
- the private business use test: more than 10 percent of bond proceeds go toward a private business, and more than 10 percent of the repayments are secured by that business’s property
- the private loan financing test: the amount of proceeds used to make loans to non-governmental borrowers exceeds 5 percent of total proceeds or $15 million, whichever is less
Private activity bonds are also subject to an annual state volume cap. In 2025, the US Congress set that cap at US$48 billion.
Here’s a video explaining PABs in the context of the USA:
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Is interest on a private activity bond taxable?
The taxation of PABs depends on whether the bond is “qualified.”
Under Section 103(a) of the United States’ IRC, interest earned on a private activity bond is taxable unless the bond meets specific exemption criteria. When Congress passed the Tax Reform Act of 1986, most private activity bond interest became subject to the Alternative Minimum Tax (AMT).
The AMT is a secondary tax calculation designed to ensure higher-income earners pay at least some minimum federal tax. However, two categories remain exempt from AMT:
- bonds issued for hospitals
- bonds issued for non-profit colleges
Because of this AMT exposure, private activity bond interest generally yields more than standard tax-exempt municipal bonds.
Private activity bonds vs. private-purpose bonds
These two terms are often used interchangeably, but they are not identical.
A private-purpose bond is the broader category, which is any municipal bond where 10 percent or more of its benefits flow to a private entity. On the other hand, PABs are the more specific legal classification, reserved for bonds with significant private sector involvement that directly shapes their federal tax-exempt status.
Another distinction is that private-purpose bonds generally do not carry the same tax protections as other municipal bonds; that is why they are sometimes called taxable municipal bonds.
As such, investors should check the bond’s offering statement before purchasing, which by law must include a qualified tax attorney’s opinion on its public- or private-purpose status.
Who buys private activity bonds, and why?
Private activity bonds are not a typical retail investment. Here, the main buyers are large institutional investors with long time horizons and a steady need for fixed-income returns.
In Canada, that institutional appetite is already substantial. According to a Bank of Canada study published in August 2026, Canada’s three largest life insurers held just over $200 billion in private credit investments in the first quarter of 2026, representing approximately 22 percent of their invested assets. Canada’s large pension funds held an estimated $215 billion in similar investments at the end of 2025, roughly 9 percent of invested assets.
Key buyers of private activity bonds
Some institutional buyers of PABs typically include:
- pension funds seeking long-term, relatively low-risk fixed income to match long-dated liabilities
- life insurance companies looking for stable yield against long-term policy obligations
- banks with community investment obligations under applicable legislation
As Aaron Fransen, a partner at Stikeman Elliott LLP in Toronto, told Lexpert in 2021: “There’s more capital to be deployed than there are deals.” Infrastructure finance, Fransen noted, has drawn strong investor interest in energy and green projects across Canada, which points to exactly the kind of asset that private activity bonds are designed to channel.
What does private bond issuance mean for Canadian law?
Canada does not currently have a private activity bond system. What it has instead is a mix of government grant programs and the Canada Infrastructure Bank (CIB), a Crown corporation that provides loans and equity to revenue-generating projects.
By the end of 2025, the CIB had committed more than $18 billion across 108 projects, prompting Ottawa to raise its original $35-billion capital envelope to $45 billion. In an April 2026 Lexpert interview, Frédéric Duguay, the CIB’s chief legal and information officer, described the CIB’s focus as financing “enabling infrastructure,” meaning the roads, broadband networks, and energy systems that make broader development viable.
The scale gap between Canada and the United States, however, is significant. Canada’s outstanding municipal bond market sits at approximately $53.2 billion, against an estimated C$6 trillion in the US as of the second quarter of 2025, according to a 2026 commentary.
“Governments can no longer bear the cost of modernizing and developing infrastructure alone,” David Tournier and Jessy Menard of Lavery, de Billy, LLP wrote in a Lexpert infrastructure financing series in April 2026. As such, “looking to private capital and financial innovation can bridge the gap between public financial needs and capacities.”
The tension between public and private risk is already being tested in Canadian courts. In Crosslinx v. Ontario Infrastructure, 2021 ONSC 3567, the court ruled that the government had pushed too much risk onto the private sector in the Eglinton Crosstown LRT project agreement. As Timothy Murphy, a partner at McMillan LLP in Toronto, told Lexpert: “You can’t consider a global pandemic as a normal risk allocation.” Any future private bond issuance framework in Canada will need to get that balance right from the start.
Hear more about the CIB’s shifting mandate from Duguay with this podcast from CL Talk:
Head over to our list of the best infrastructure lawyers in Canada as ranked by Lexpert for the top-ranking lawyers and firms in this practice area.
Private activity bonds: the bridge Canada is still building
Canada’s infrastructure funding gap is real and well documented. The private capital needed to close it already exists, sitting inside pension funds, life insurers, and investment firms across the country. Private activity bonds offer a proven model for directing that capital where it is needed most, using tax incentives rather than direct government spending. Although the bridge is not yet built, private activity bonds could become part of the answer Canada’s infrastructure lawyers and policymakers have been looking for with the right legal frameworks in place.
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