For the past few months, the City of Vancouver has been conducting audits to verify the 2017 vacancy tax declarations filed by owners under the City’s Vacancy Tax By-Law No. 11674. Observers of the tax, which is unique in Canada, have been curious to learn how the City plans to probe compliance with respect to the first tax year.
We are now well into the second tax year, and the features of the audit program have been implemented fully. Unfortunately, it is clear that flaws in the structure and operation of the program needlessly decrease the level of fairness in the audit process and increase the risk of incorrect outcomes. Many of these features will likely surprise those who have not yet experienced them directly, including seasoned tax practitioners who might otherwise believe they have seen it all.
The purpose of this article is to examine critically the features of a standard vacancy tax audit, which essentially has three stages: notification, submission and determination.
The Notification Stage
The audit begins with the City mailing a letter to the owner’s property tax address, notifying the owner that their declaration has been selected for audit and reminding them of their obligation to provide the information and evidence requested. The letter also says that a failure to participate in the audit might result in the imposition of the tax and, alarmingly, “fines of up to $10,000 per day”.
The City’s reference to the fine, which appears in virtually all vacancy tax materials, is unnecessary and harsh. It invariably causes the owner some measure of stress and concern, even if they have done absolutely nothing wrong and otherwise intend to comply with the audit. In more established tax systems – i.e. conventional federal and provincial taxes – the tax authority does not open its communications by threatening the imposition of the most severe penalty. With respect, the City should end this practice immediately.
The letter then instructs the owner to log-on to a City web portal, complete the online questionnaire and upload all supporting documents. Requiring computer use is also unique in a tax audit, particularly where multiple steps are involved, given that it would disadvantage any owner who lacks the requisite skills or computer equipment, which is often the case for certain elderly or disabled owners. No alternative means of audit participation is described in the letter.
The letter also includes a submission deadline, which is usually a month after the date of the letter. Since, unlike a property tax notice, the letter would not be expected by the owner (and, unlike most other audit letters, is not being sent to a place of business), it might arrive when the owner is traveling or unavailable for another reason. This might cause them through no fault of their own to receive the letter very close to, or possibly after, the submission deadline, forcing them to contact the City in a panic – again, the letter emphasizes a possible $10,000-a-day fine – and request an extension, which the City appears willing to grant on a case-by-case basis.
Notably, the letter does not include the name or contact information of the auditor responsible for the file. It simply closes with “Vacancy Tax Department,” and leaves the City’s general 3-1-1 line for any questions.
This aspect of the audit program is particularly concerning. The owner is never made aware of, let alone able to speak with, the specific City official conducting the audit. Everything is directed through the web portal or 3-1-1 line, putting the owner in an almost Kafkaesque environment where they are kept in the dark about the auditor on the other side of the screen. Intake officers who staff the 3-1-1 line are generally unfamiliar with the operation of the tax yet are compelled to operate as informal go-betweens, such as in the event an owner requests an extension or has questions about the online questionnaire.
This arrangement is highly problematic. Ultimately, an audit process is significantly fairer when a taxpayer can discuss their circumstances with the auditor, even if it produces disagreement. While a vacancy tax amount at issue might be relatively low when compared to the associated administrative costs, this does not justify depriving the owner of the reasonable expectation to be able to talk to the individual examining them, particularly where the facts involved might be messy.
As well, an incorrect audit outcome might be multiplied exponentially if the same issue repeats year to year, especially given that properties deemed taxable one year are placed on a separate list for heightened scrutiny in future years.
The Submission Stage
Once the owner logs-on to the web portal, they are confronted mainly with yes/no questions that are often strung together awkwardly or rely on false assumptions about the relevant legal test.
For instance, the by-law includes an exemption for a property that was occupied by the owner because they worked in Vancouver. (Surprisingly, the exemption does not apply if you work on the other side of a municipal boundary.) The questionnaire asks whether the owner can provide “a letter from your employer confirming your employment status…” However, an employment relationship is not a requirement of the exemption. It merely refers to “work”, which could certainly encompass a sole proprietorship, for instance.
This type of concern would be relatively minor if not for the pressure placed on the owner because of the potential fine.
Furthermore, if an owner’s information and evidence does not fit within the one-size-fits-all expectations in the design of the questionnaires, there is no clear venue through which the owner might be able describe any extraordinary reasons for why the relevant legal test has been met. This issue is made more acute by the City denying the owner the ability to contact the auditor directly.
After submitting the information and evidence, the owner receives an email confirmation that the submission has been received and will be reviewed by the City. The owner will be contacted if additional information is required. Otherwise, they will eventually receive an audit determination letter.
Following the submission, the owner is not given any indication by the City of how long they might be required to wait until their submission is reviewed. (In many cases, it will take months.) Like the notification letter, the name and contact information of the auditor is not revealed in the email confirmation.
The delay, compounded by the absence of any communication about the expected length of the delay, is especially problematic because the tax continues from year to year. Generally, the issues under audit do not revolve around a one-time event. If, for instance, the City believes an owner’s home is not their “principal residence” because the owner happened to have given another mailing address to their bank and to the CRA, but it takes the City three or four months to share that view with the owner, then the delay might cause the owner to be liable in the City’s eyes for an additional year of tax if the delay crosses the mid-year threshold. In that case, had the owner been notified of the City’s position earlier, they could have easily taken the necessary steps to address the issue. As well, had they been told to expect the delay, they might have sought advice and realized the issue in the interim, rather than letting it sit until the City returned to them.
The Determination Stage
At some point, the owner will receive a letter confirming that the audit has been concluded. If the City determines that, based on the submission, the declaration is compliant, then no assessment of the tax will follow.
However, if a contrary determination is made, then the letter will include one or more reasons for the “non-compliant conclusion”. This usually involves “insufficient [or inappropriate] evidence”, namely that the City does not believe the evidence submitted supports the basis of relief declared by the owner. Again, no contact information is provided for the auditor, and the owner is generally unable to obtain more specific information about the City’s decision.
In that case, a vacancy tax notice is issued shortly thereafter, setting out the amount of the tax due and a payment date (a late payment triggers a 5% penalty). The notice also includes instructions on how to dispute the determination, which essentially requires a notice of objection or “complaint” to be filed through the web portal. No alternative format for disputing the assessment is described in the notice.
The dispute process is still very new. It will need to be examined and discussed separately from the audit program, though a short description here is useful. Briefly, it essentially involves two levels of review. The first is conducted by another City employee, who is tasked with reviewing the complaint, making a determination on whether the complaint should succeed and notifying the owner accordingly. The second level of review involves a panel external to the City, specifically one formed by the Alternative Dispute Resolution Institute of British Columbia.
Notably, if the panel concludes that the owner is liable for the tax, then the by-law provides explicitly that no appeal lies from that decision. This sense of finality is echoed on the City’s website. However, it will still be open to an owner to seek judicial review of the matter in court, which could result in the panel’s decision being cancelled. The standard of review that will be applied by the court remains to be seen.
Best Practices for Addressing the Vacancy Tax
Given the concerns with the audit process, it is important that before owners file their annual declarations they become familiar with the specific legal basis in the by-law for the relief on which they intend to rely, and that they consider the information and evidence that might be requested from them in the event of an audit. As well, if they are subject to an audit, then they should contemplate obtaining professional advice as soon as they receive the notification letter, particularly if they might have unique circumstances, rather than seeking assistance only after a negative outcome has been produced. Too often owners are saying “this can’t be right”, and then answering the questions without appreciation of the actual legal tests, only to find that they have unwittingly confirmed the application of the vacancy tax to their property.
Ultimately, the tax continues to be popular politically, with one mayoral candidate recently announcing that if elected he would triple the tax rate to 3% of the assessed value of a home. Accordingly, it will increasingly be important for owners to treat the tax as one of a handful of property-related issues requiring their focus and attention at least once a year.