Unlike most tax audits across the country, the pandemic has failed to disrupt audits under the City of Vancouver’s empty homes tax (“EHT”). Paradoxically, those audits appear to be increasing in recent months. More so than other audit types, EHT audits are overwhelmingly document-driven, with little tolerance for deviations from the norm. While virtually every local homeowner has a good chance of being selected for audit, the purpose of this post is to discuss those owners that confront the greatest risk of an unfavourable audit result, despite legal or policy reasons why that should arguably not be the case.
The horizontal or “skinny” audit program
The EHT was introduced in 2017 to address perceived residential vacancies at a time of extraordinary demand in the rental market. At that time, there were many unanswered questions about the audit program. Would a City auditor show up unannounced to verify occupancy? Would vacancies be detected by low utility consumption? Would there actually be audits, or would the City essentially rely on the tax revenue generated by self-reporting?
By 2018 the curtain had been pulled back to reveal a robust horizontal or “skinny” audit program. In contrast to vertical audits, which focus on fewer audit targets who are examined more deeply, horizontal audits pursue a much broader audit pool with broad audit instruments. The exact reach of the program is described each year in an annual report published by the City. For instance, over 4% of homes in the municipality were contacted for audit in 2019 alone, and historical trends suggest that this percentage will rise over the coming years. In a relatively short period, most owners may very well go through an EHT audit.
In a previous post published during the early days of the City’s audit program, we described the various stages of an audit and what owners should expect from the process. Again, the auditors essentially limit their scope to a handful of relatively common documents. What has been less clear, however, is how particular audit targets are selected. It appears that a considerable number of homes are chosen at random. One selection criterion seemingly involves pursuing any owner who claims one of the less common exemptions (e.g. the strata rental restriction or part-time occupancy due to employment).
Owners with the greatest risk of unfavourable audit results
For owners who only own one home, live in that home all year long, and use that one address for all purposes, an EHT audit should not pose any issues. Responding to the audit is, at most, an unexpected chore. For owners who do not fall into this cookie-cutter scenario, an audit may be more troublesome. Here are the more common scenarios we have seen that give rise to a difficult audit experience, often leading to an assessment of the EHT.
- Non-residential use properties
The EHT applies to properties classified only as “class 1 residential” for BC Assessment purposes. Property classification, however, is not always aligned with actual use. In some instances, a property may have originally served a residential purpose, and hence has been designated as class 1, but now serves a commercial purpose (or any purpose other than residential). Having a tenant occupy property pursuant to a commercial lease, for instance, will not avoid EHT. The Vacancy Tax Bylaw No. 11674 specifically notes that the occupancy must be “for a residential purpose.” Rather, the owner should consider requesting BC Assessment to change the classification of their property so that it is no longer class 1.
- Vacant land or uninhabitable units
Owners holding vacant land should pay special attention to the EHT. There is no automatic exemption for vacant land. Rather, an exemption is only available if the owner has submitted a complete rezoning enquiry or application or development permit application before mid-year. Owners, however, only have limited control over the timing of their applications, and may struggle to submit an application before mid-year. This is because the application process often requires extensive pre-application consultations with the City, which include negotiations surrounding construction specifications and often commence months before the application is ready for submission. As a result, many owners find themselves trapped in a situation where the application is not ready for submission by mid-year, and yet there is no chance of occupying the property because it remains vacant.
Owners in the process of acquiring or holding property that includes a structure in such poor condition that it is uninhabitable should also pay special attention to the EHT. The City’s position is that uninhabitable properties, unless occupied or undergoing construction or major renovation activity pursuant to issued permits, are taxable. Whether this position is correct is debatable.
In any event, it is often practically impossible for homeowners holding unhabitable properties to meet this requirement and avoid a tax appeal (and a tax bill that is legally payable until the tax assessment is overturned). It generally takes months to put together a permit application, and can take even longer for the City to approve that application. As such, it may be very difficult to obtain a permit in time unless the application process was started before the property became uninhabitable. Renting or occupying the property may also be unfeasible. No one wants to live in a property that is structurally unsafe, moldy, infested with pests, or with a non-functioning kitchen or bathroom. We have even seen cases where City officials shut off a property’s water supply out of recognition that it is unhabitable, and still impose the EHT.
- Lengthy construction process
We have noticed an increase in audits of properties that have been undergoing construction for a lengthy period. Often, the City’s auditors will have obtained information about the construction project from another branch within the City prior to contacting the owner. In our experience, the issue in such audits is typically whether construction was pursued diligently. This is a complicated question of mixed fact and law. Exacerbating matters further, auditors typically form a preliminary opinion on the case even before contacting the owner. In most instances, displacing that preliminary opinion requires an extensive explanation of the construction process, backed by documentary evidence.
- Use of other mailing addresses
Another scenario where complications may arise in an EHT audit is where the owner (or the person the owner allows to live in the property) does not use the property address for all mailing purposes. We have come across several situations where, for one reason or another, the owner chooses to use a different mailing address for some or all purposes. While it is completely understandable, and not uncommon, for a person to use an address other than that of the property in which they live (particularly when most of their correspondence might be received digitally), this can pose significant problems for EHT purposes. The audit process seems, in a nutshell, to be akin to a “check-the-box” procedure. Auditors essentially look for evidence of occupancy in the form of mail and the address on file with banks, the CRA, etc. Barring that, it can be difficult to avoid the issuance of an EHT assessment. Owners finding themselves in this situation should turn their minds to this issue as soon as possible, ideally even before the commencement of an audit.
- Tenant has left, refuses to provide documentation
Finally, even owners who think they should be exempt from the EHT because they rented their property to tenants should carefully consider whether they can produce the kind of evidence that City auditors look for in an audit. Providing a tenancy agreement, in and of itself, will not be sufficient. Auditors will ask for evidence that is typically only within the tenant’s possession – such as copies of government-issued identification and mail sent to the property address. To complicate matters, some tenants may refuse to produce such documentation upon request, citing privacy as a concern. In other cases, the audit is for a past year and the former tenant has already vacated the property. Landlords may not be able to contact their former tenants, let alone obtain any documentation from them. To avoid this issue, owners should make their best efforts to proactively gather this supporting evidence during the tenancy, at a time when they still have a good relationship with their tenants.
We strongly encourage owners in the situations described above to seek legal advice before providing any information in the course of an EHT audit. Given the high likelihood of an eventual audit, owners should also consider proactively seeking legal advice to prepare for an audit that may almost certainly occur.