Several weeks ago the Vancouver city council passed a motion instructing its staff to develop a plan that would “improve the fairness and effectiveness of the Empty Homes Tax [or EHT]…”. This would require a review of “the fairness and effectiveness of exemptions and definitions [in the tax’s governing bylaw],” considering as well certain aspects of the province’s like-minded Speculation and Vacancy Tax (SVT).
Most of the surrounding media attention focused on the possibility of the city dramatically tripling the current rate of the EHT. This was one of the mayor’s key campaign promises and appears to be the ultimate goal behind a review of the tax. Yet while some dispute the present effectiveness of the tax, fairness is arguably its most concerning weakness. It is most in need of consideration before any talk of increasing the rate. This is particularly true from the perspective of homeowners who have experienced the city’s EHT program with anything but the most common personal circumstances.
The purpose of this article is to assist with the city’s stated effort by proposing several ways in which the tax can be made more fair, separate and apart from ongoing issues with its audit program (previously discussed here).
1. Broaden the building exemption
The city appears to believe that a landlord who needs to undertake a major renovation should insist that their existing tenant remain in the property until no earlier than the day a building permit is issued, or else the EHT might apply. This is unrealistic, unfair and would generally cause harm to both tenants and landlords.
As background, a rental property is essentially exempt from the tax only if it is tenanted for at least 6 months in a calendar year. Alternatively, the property may be vacant for most of the year due to substantial construction for which a permit has been issued. The intersection of these two exemptions can potentially lead to troublesome scenarios.
Suppose a landlord applies for a permit in the late winter or early spring, and eventually receives it by the summer. Under the Residential Tenancy Act, they could keep their plan to themselves and spring it on the tenant at the last minute in the form of an eviction notice based on landlord’s use. However, landlords in that situation generally inform their tenants far in advance, giving them a relatively generous period in which to try to locate new housing in a challenging rental market. The result is that the property is often vacated by the tenant weeks or possibly even months before a permit is issued, making it impossible for the landlord to find a replacement tenant for the final period before construction begins.
Here is the EHT problem. The city appears to be penalizing landlords who allow their tenants to vacate early but who only receive a permit after June 30. In that case, they seem to take the view that the tenancy exemption does not apply (i.e. because the only tenant left before the 6-month mark in the year). But they also take the view that the building exemption does not apply (i.e. because the permit was only issued with less than 6 months to go in the year). This is the case even though the entire vacancy period, which covers a majority of the year, was on account of the building activity.
There is a highly feasible solution to this problem. The corresponding provincial SVT exemption is far more reasonable and acknowledges this issue, among others. With respect, the city should broaden its approach to the building exemption accordingly.
2. A failure to file should not automatically trigger the tax
The city believes that an owner who fails to complete the EHT declaration on time (e.g. by February 4, 2019 for the 2018 tax year) should be deemed to be liable for the tax in full, even if the property happened to be the owner’s principal residence. This is an excessively harsh outcome that cannot be justified on policy grounds.
That said, the city promises to cancel the tax debt if the owner (a) makes a late declaration, (b) disputes the debt by establishing that an exemption applied; and (c) pays a $250 penalty. But, judging from the past, this will only be partially true: the city is expected to arbitrarily prohibit late-filing after the end of the declaration year (e.g. by December 31, 2019 for the 2018 tax year). Beyond that point, the tax amount and the penalty will be converted to a levy and effectively added to the owner’s property tax bill, which if left unpaid would eventually lead to a tax sale.
When compared to other taxes, it is highly unusual for non-filing to trigger the imposition of the EHT’s most severe outcome, particularly given the novelty of the tax. Under any tax system with mandatory filing, the vast majority of participants will generally satisfy their obligations on time. But there will always be others who, for one reason or another, fail to do so. They should not be punished to the fullest extent merely because of that one act of non-compliance.
This concern is especially compelling in the EHT context for two reasons. First, the percentage of non-filers has surprisingly increased since the first year of the tax: up to 3% from 2%. Second, a high number of non-filers were actually found to be exempt. For the 2017 tax year, the city reported that there were 2,132 owners who failed to declare on time. Most of them disputed the tax bill they received and paid the penalty. Ultimately, roughly half of them were found to be exempt. Their tax bills were cancelled. No information has been made available about those who did not dispute their tax bills before the city suddenly prohibited late-filing at the end of last year. Presumably, a fair number of them were also exempt and, if given the opportunity, would be able to demonstrate that convincingly.
With respect, the city should rethink how it addresses this issue both in terms of efficiency and fairness. An owner’s failure to file should not necessarily trigger the tax. The city can choose to audit those who are late to complete the declaration process. But suddenly imposing the tax in full, with a limited window for launching a dispute, is highly problematic.
3. Protect innocent buyers from being saddled with their seller’s EHT liability
One of the most significant distinctions between the EHT and the province’s SVT is that the former is a property tax while the latter is a personal tax. In other words, the EHT binds the property and is payable by the owner, even if the person whose conduct led to the imposition of the tax no longer owns the property. In contrast, the SVT binds the owner irrespective of their continued ownership of the property. If they sell, their SVT debt will trail them. It will not be inherited by whomever they sell to.
This feature creates a risk for any buyer of a home in Vancouver. For instance, someone who buys a home now might try to ascertain whether the EHT applied to the property in the past. They might insist on an affidavit from the seller, for example. Or they might demand to see a copy of the completed declaration for the 2018 tax year.
But, ultimately, even if they take all reasonable precautions, the city has 2 years to audit a property. They might request documentation that the buyer might never have had because it relates to the period before they became the owner. Worse, the city might then decide to issue a tax bill that the buyer is in no position to dispute, but which they would nonetheless be liable to pay.
There are a number of solutions available. This could potentially be addressed by the city introducing a clearance certificate system. Under such a system, the city would confirm upon application that there are no outstanding EHT debts tied to a particular property before a certain closing date and that none will be assessed for prior periods. Another option would be to adopt a blended approach. The city would be prevented from assessing a property for a period before a sale, subject to a continuing right to pursue the past owner personally (akin to the SVT).
Unfortunately, the city thus far appears to be unwilling to consider either alternative. Accordingly, we are left with a situation in which an innocent buyer might get saddled unfairly with their seller’s EHT liability.
These concerns are merely a few of those that require detailed consideration. As the provincial government and local municipalities seek to increase housing-related taxes as a method for impacting the residential realty market, it is vital for them to constantly examine their assumptions and data in a manner that maximizes fairness for all participants in the tax system.