Oh No. Here comes a Federal Empty Home Tax!

Yesterday I received an email from Jumy Dapo-Ogunsola, producer of Charles Adler Tonight inquiring whether I would be available to chat with Charles that evening about an aspect of the new federal budget that looks to impose taxes on vacant homes as a way to cool the housing market. How would that impact the issue of affordable housing? Would there be more rental homes? 

As readers of this blog and the former Vancouver Courier might recall, I have often questioned whether empty home taxes are an effective and fair way to address housing affordability. A brief review on Google reveals literally dozens of articles I have written and interviews given on both Vancouver's so-called Empty Home Tax and the Province's so-called Speculation Tax. 

I say 'so-called' since the city's tax not only applies to empty homes, it impacts 'second homes' that may be occupied  up to 182 days a year. https://www.vancouverisawesome.com/courier-archive/opinion/empty-homes-tax-unfairly-targets-second-homes-3054828

In some cases it even applies to empty  lots. https://globalnews.ca/news/3923582/vancouver-woman-being-charged-empty-homes-tax-for-land-with-no-home-on-it/

Recently, Vancouver media reported on a number of cases where the province's tax applies to the empty air space above a restaurant in Kitsilano. https://bc.ctvnews.ca/taxed-on-the-air-vancouver-restaurant-dinged-by-b-c-s-vacancy-tax-for-open-space-above-building-1.5377262

Vancouver's Empty Home Tax only applies to properties within the city boundary. It does not apply to properties in Burnaby, Richmond, or on the North Shore. However, the province's tax applies in  many jurisdictions around the province, including the City of Vancouver. How much does it cost?

The amount of the tax varies. The Vancouver tax was initially 1%, then increased to 1.25% but is now 3% of the assessed value, thanks to a Kennedy Stewart campaign promise.

The provincial tax is a bit more complicated to calculate and depends on whether you’re Canadian or a foreigner. There are some other calculation nuances, but  in general, the current tax rate is:

• 2% for foreign owners and satellite families
• 0.5% for Canadian citizens or permanent residents of Canada 

If you have a $750,000 1-bedroom apt, the tax is $26,250 a year for a Canadian resident and $35,000 a year for a foreign owner.

If you have a $2 million house, that’s $100,000 a year for a foreign owner. And that’s before the new Federal Tax!

If you own property in Vancouver deemed 'empty', you may have to pay both taxes. I say MAY since different rules apply for each tax.

In November 2019, I wrote a column for the magazine published by the Notary Public Association comparing the two taxes, since there are some significant differences. You can find it here: https://www.bcnotaryassociation.ca/resources/blog/?id=1

The stated purpose of both the Empty Homes Tax and Speculation and Vacancy Tax is to encourage owners of empty dwellings (if they are empty, they cannot be homes) to rent out their properties. 

However, since their inception, I have advised people not to expect these taxes to significantly increase the supply of affordable rental housing in Vancouver or elsewhere in the province. 

When this tax was first proposed, we were led to believe there were anywhere between 10,000 to 25,000 empty homes that could be brought into the rental market.https://www.vancouverisawesome.com/real-estate/empty-homes-tax-vancouver-1934802

 According to a subsequent city report, the number of homes declared vacant, without valid reason, was 1085 in 2017 and 922 in 2018—525 properties were declared vacant for both years.

The City expected to receive $38 million from the vacant properties. That equates to an average of $41,215 that equates to an average $4.1 million in property. Even if those property owners could be forced to rent their homes, they are not going to be affordable rentals.

So how many properties did return to the rental market? According to a City staff report, a significant number of formerly vacant units returned to the rental stock.

How many? One hundred seventeen. Yes, 117.

While I and many others can understand why the City would want to encourage owners of empty apartments and houses to rent them out, one of my major concerns with the EHT is it applies to many people just because they are fortunate enough to own second homes in Vancouver. They include wealthy Americans who live in the city for 3 months during the summer or Albertans whose children are studying at UBC and want to keep a small apartment downtown for when they visit.

They also include the Sunshine Coast doctor who volunteers in Vancouver and the midwife who lives on Saltspring Island but keeps a small condo in Vancouver for when she’s working.

My concern is that their properties are not empty. They are fully furnished homes that are lived in, albeit for less than 6 months a year. In most instances, it is not feasible to rent them out when the homeowner is away, except perhaps as an AirBNB or other form of very short-term accommodation that is generally no longer allowed in Vancouver.

While many people caught in this situation have been urging the City to make changes to this tax to exclude legitimate second-home owners, since their homes are not empty, instead the City made only a few minor bylaw amendments for the 2019 tax year.

As an aside, while much fanfare is given to how much money is being collected by those taxes, we are rarely told how much the programs are costing to administer. Which brings me to the proposed Federal Tax.

“Houses should not be passive investment vehicles for offshore money. They should be homes for Canadians.” said Chrystia Freeland. This is very powerful rhetoric and as we have learned from recent surveys, very popular with most Canadians. However, if we go back to Jumy's questions will a federal tax address rental housing and increase the supply of rental homes?

Somehow, I don't think so, based on the experience in British Columbia. For one thing, many of the homes that are truly empty are expensive properties. Secondly, many foreign buyers have come up with clever schemes to evade or avoid the tax. I also worry that the costs of administering a federal program could be significant.

During last night's interview with Charles, I was asked what I would do instead. As a former CMHC employee, I suggested it might be wiser to bring back some of the tax incentives the federal government once offered to encourage private investment in rental housing. I even suggested the return of some of the previous CMHC rental housing programs. I also agreed with additional funding for non-profits, as set out in the budget. 

While I won't be able to bring myself to listen to my conversation with Charles, you can if you want. You can find it here. https://omny.fm/shows/charles-adler-tonight/how-the-feds-empty-home-tax-impacts-home-affordabi

Thanks again Charles for inviting me onto the show. I always enjoy the challenge of knowing what I might be asked next!