The Tale of VHT Hike: Toronto Property Owners, their Homes and the Big Bad Vacant Home Tax

Toronto's city council recently voted decisively to increase the vacant home tax from 1% to 3% of the property's assessed value. This significant hike, effective for the 2024 tax year, aims to address the growing housing crisis in the city.

The tax, initially introduced in December 2021, targets vacant properties, compelling owners to either sell or put them on the rental market. The hope was to alleviate the housing shortage by encouraging the circulation of these underutilized spaces. The due date to file your declaration is looming as residential property owners must declare occupancy status by March 15, 2024, or face fines.

The City claims the success of the tax is evident in the city's reported 95 % compliance rate by the end of February. Approximately 2,160 homes were declared vacant as of August 1, with the city identifying a total of 17,400 vacant properties, resulting in $54 million in revenue during its inaugural year.

However, not everyone welcomes the tax. Some homeowners find themselves frustrated, feeling the burden of the levy, which amounts to one percent of a property's current assessed market value if left unoccupied for six months in a year or not used as the owner's principal residence.

In response to concerns about the tax's impact on housing supply, Mayor Chow proposed allocating at least $10 million of the additional revenue to a city housing program. This program would offer grants to non-profit housing operators, facilitating the acquisition of private market rental housing.

Despite the tax's general acceptance, challenges and uncertainties arise in its implementation. For instance, many key terms are not properly defined. The term “every owner” creates uncertainty for individuals who may own a property jointly with another person or entity. A “residential unit” is defined as a property that includes at least one self-contained unit with a dedicated washroom and kitchen. However, the lack of clear and detailed definitions for terms like “dwelling unit,” “washroom,” and “kitchen” leaves room for interpretation.

A key question remains unanswered: how does the definition of principal residence under the Toronto Vacant Home Tax align with the definition under the Income Tax Act of Canada, which is used to report the principal residence exemption on the sale of real estate for Canadian tax residents? How would authorities view a situation where someone who declares their Toronto home as their principal residence for purposes of the Toronto VHT but then sells another home outside of Toronto and claims that home as their principal residence on the income tax returns for the same year? Would this scenario be subject to review by either the City of Toronto or the Canada Revenue Agency (CRA)? Would a Canadian tax residency review be triggered when someone does not report to the CRA as a Canadian tax resident but reports to the City of Toronto that their Toronto home is their principal residence for more than six months of the calendar year? The crucial question of data sharing between the City of Toronto and the CRA remains unanswered, adding to the list of uncertainties that stakeholders hope will soon be resolved.

Now, Toronto is set to triple its Vacant Home Tax to 3% of a home's assessed value. However, a critical examination reveals potential unintended consequences. Drawing comparisons with international standards, Toronto's VHT hike raises questions about its potential negative impact. In countries like France, vacant property taxes do not apply if residential property is used for at least three months a year. Similarly, Oakland, California, provides exemptions if the property is occupied for 50 days a year.

In addition to the increased tax rate, residents face a stringent deadline, with a filing cutoff on February 29th (now extended to March 15, 2024). Failure to comply results in a fee of $21.24 and a possible penalty of $250. While the intention is to encourage property owners to declare occupancy status promptly, critics argue that this approach may be burdensome for taxpayers and governments alike. Deadlines can be missed for a variety of legitimate reasons: sickness and being away overseas. One Toronto condo owner was at the hospital with a serious illness and upon emerging from the hospital was hit with a nice $4K fine from the City for a 3 bed condo in which she has been residing with her family for over 22 years. Trying to resolve the issue with the City has been a bureaucratic nightmare.

The narrative that vacant properties are a result of ruthless speculators aiming for quick profits should be challenged. Property is often held vacant for valid reasons, such as matching buyers and sellers on housing markets, owning second homes, or undergoing extensive renovations. The perceived economic cost of holding vacant property may not align with the reality, as demonstrated by the average annual capital gain on housing in Vancouver over the past decade.

Contrary to expectations, the introduction of such taxes in Vancouver had a minimal effect on vacancy rates and did not demonstrate any improvement in housing affordability worthy of noting. Otherwise, we’d be hearing of it.

Vacant home tax introduces additional financial burden which impacts residents and developers. The increased tax rate, when combined with maintenance, insurance, depreciation, financing, and municipal taxes, poses a significant financial burden on property owners. For a Vancouver resident, the combined tax rates could reach up to 6%, translating to substantial annual costs. This raises questions about the feasibility of developing residential properties, as the financial investment may outweigh potential gains, especially considering the time required for the entire development process.

Critics argue that vacancy taxes, despite good intentions, may not significantly impact rental and housing prices. Examining Vancouver's experience, the introduction of such taxes resulted in a marginal decrease (not increase) in vacancies, and the typical vacant property released to the market proved more expensive than the median home.

We are yet to see any reliable and unbiased data from the City of Toronto that would demonstrate concrete results or positive effects of VHT on housing affordability.

The aforementioned statement regarding earmarking $10M of VHT revenues for social housing in GTA needs to be further scrutinized due to the fungibility of funds and the government's ability to redirect resources based on perceived priorities.

The City of Toronto is not known for impeccable transparency and staunch accountability when it comes its use of taxpayers’ funds. Once funds are collected, they become part of a larger pool of money that can be used for various purposes. When critics mention the fungibility of funds, they are highlighting that money collected through a specific tax, such as the VHT, can be redirected or reallocated by the government for different initiatives, even if the initial intention was to allocate it to a specific cause like social housing. In simpler terms, earmarking VHT revenues for social housing might not guarantee that the collected funds will exclusively go towards addressing housing-related issues.

As governments worldwide grapple with housing affordability, the unintended consequences of vacant home taxes raise important considerations. While these taxes may be implemented with good intentions, the potential to discourage long-run residential development challenges their efficacy in achieving the desired outcomes. Critics argue that by making second homes less attractive to potential owners, these taxes may inadvertently worsen the housing crisis by reducing the overall housing supply. Policymakers must carefully evaluate the impact of such measures to ensure they contribute positively to housing solutions without unintended drawbacks.