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Canadian Prime Minister Stephen Harper (C) watches as Finance Minister Jim Flaherty (L) and Toronto Mayor Rob Ford shake hands during the announcement for federal funding support for a new Toronto subway system at the International Plaza Hotel in Toronto Sept. 22, 2013.JON BLACKER/Reuters

One day after Mayor Rob Ford celebrated $660-million in federal funding for a Scarborough subway extension, another council battle is brewing over how Toronto will pay for transit expansion.

Toronto City Council will be asked next month to decide how to fill a funding gap estimated to be more than $900-million if it wishes to follow the underground route from Kennedy Station to Sheppard Avenue favoured by the TTC and city council.

City Manager Joe Pennachetti estimates it will take new development fees and a 1.6-per-cent increase in residential property taxes to finance the city's share of the transit plan. He is expected to outline financing options for council in a report with TTC head Andy Byford to be released before the October meeting.

But Mr. Ford and others on council made it clear Tuesday that support for hiking taxes to pay for subways is lukewarm at best.

The mayor was beaming as he alluded to the role played by a past fishing trip with Stephen Harper and his "good working relationship" with the Prime Minister and Minister of Finance in snagging the federal cash. But he was adamant he is not budging from his earlier commitment to hold tax increases for transit at 0.25 per cent.

"That's all that the taxpayers can afford – if that," he said.

Mr. Ford said he wants to meet Premier Kathleen Wynne as soon as possible to hash out their differences over possible routes for the extension.

The mayor said he supports the underground route to Sheppard, rather than the above-ground, shorter option to Scarborough Town Centre backed by provincial Transportation Minister Glen Murray, but said he did not want to "paint anyone into a corner" before speaking with the Premier.

That could take some time, with the Premier's office indicating her schedule is packed this week in the leadup to a major gathering of provincial Liberals Friday.

As for funding, budget chair Frank Di Giorgio pointed out that agreeing to raise taxes by even a small amount to pay for transit represents a "huge quantum leap" for Toronto's tax-cutting mayor. Mr. Di Giorgio said he can only support a 0.25-per-cent tax increase for transit in a given year, suggesting if more is needed council could phase in increases over as many as six years.

Councillor Denzil Minnan-Wong, another member of the mayor's executive, questioned the wisdom of using property taxes to finance transit expansion. "You are going down a slippery slope," he warned, predicting that closing the funding gap will be "a real challenge."

Scarborough Councillor Gary Crawford, who backs the subway extension, said the 1.6-per-cent increase estimate from the city manager is more than he is comfortable supporting. "That's a lot of extra dough that we'd have to put in," he said.

Mr. Pennachetti said council must decide how quickly to phase in the tax increase, but suggests it be done from 2014 to 2017 so that funding is in place when "significant expenditures" for the project begin.

The tax increase would cover interest and principal payments on a $745-million, 30-year loan to finance the subway extension. Mr. Pennachetti estimates another $165-million would need to be raised through development fees. Who would pay for cost over runs needs to be determined, he said.

Councillor Adam Vaughan said it is "heartbreaking" that council would consider such costs when it has a signed deal for a fully funded light rail plan, calling the subway extension a "financial disaster."

"This fear of the wrath of Scarborough has generated paralysis on the transit file," he said. "It is pandering at its worst."