The federal government will contribute $7.5 million to repair the old E&N railway line that runs from Esquimalt to Courtenay on Vancouver Island.
The federal funding matches the $7.5 million committed by the province last June to restore the railway.
The deal was brokered by the Island Corridor Foundation, which has been attempting to restore passenger rail service to the route after it was suspended last year.
Foundation CEO Graham Bruce says work on 234 kilometres of track will begin this winter and the foundation will now work with VIA Rail to restore passenger service to Courtenay and a new commuter service for southern Vancouver Island.
"We can start to actually look at what would a commuter system actually look like between Victoria and Langford and the Cowichan area, and we'll start to put together a business plan."
Some freight trains use sections of the tracks with speed restrictions, but $15 million in restoration work is required on the trestles and rail bed in order to restore the full passenger service.
Bruce said service could resume in 18 months.
"The restoration of the Vancouver Island Railway will create local jobs and economic growth, re-establish important passenger rail service for Island residents, and offer another route for visitors to this beautiful region," federal Minister of Aboriginal Affairs John Duncan said in a statement.
Part of Confederation deal
The E&N railway — once known as the Esquimalt and Nanaimo — has a long history that dates back to 1871, when the federal government agreed to build a railway as part of the colony of British Columbia's decision to join Confederation.
The line, which is now officially called the Southern Railway of Vancouver Island, runs from Victoria north through Nanaimo to Courtenay, with branch lines to Parksville and Port Alberni.
In recent years, however, the route has changed hands several times as a range of companies tried and failed to make it profitable. The once daily passenger service was operated by VIA Rail.
In 2006, the route was donated to the Island Corridor Foundation, a registered non-profit foundation created by local municipalities and First Nations to preserve the rail corridor.
In 2008, Transportation Minister Kevin Falcon announced a half-million-dollar study to look at the options for commuter rail and freight on the historic route.