The matter of four units as-of-right has been decided in Tecumseh.
The town was previously approved for $4.3-million under Ottawa's Housing Accelerator Fund (HAF), aimed at fast-tracking home construction.
Loosening zoning restrictions, including the four by-right policy, is a key condition by the Canada Mortgage and Housing Corporation (CMHC) to receiving $3.2-million of that federal funding.
At Tuesday night's meeting, council voted 4-3 against permitting three additional residential units on one lot, which would have allowed one more unit by-right than what is already approved provincially.
The decision came following months of pushback from residents fearing how it could change the character of the town.
Deputy Mayor Joe Bachetti encouraged council to listen to residents and vote to protect established residential neighbourhoods.
"This is wrong, and it's not what the residents are telling me they want to see, and it's certainly not my vision for the future of Tecumseh 10 or 20 years from now." Bachetti said.
Following the decision, Mayor Gary McNamara, who voted in favour of four units, spoke to reporters and said it was an unfortunate decision.
"I think it's maybe not a clear understanding in terms of what, how this procedure, and what the HAF is really all about, and, I believe a lot of fears in terms of how development was to certainly proceed," McNamara said.
McNamara said he was not sure what implications the decision could have for the town.
"We've got to be contact with our folks at CMHC and certainly the federal government in what next steps are for them, and certainly for us," he said.
Town officials will now write to the Canada Mortgage and Housing Corporation informing them of the decision made.
They will wait to hear whether federal funding will be clawed back.
A staff report showed that losing the housing money would mean a 4.15 per cent tax levy hike required to generate the town's share of funding shortfall to cover earmarked capital projects.
-With files from CTV Windsor's Robert Lothian