In an effort to alleviate the pressure on Canada’s affordable housing market, the federal, provincial, and municipal governments have all turned their attention to vacancy in residential real estate properties. This includes the new Vacant Home Tax (the “VHT”) implemented by the City of Toronto which came into effect in 2022 with tax payable in 2023. If your property falls under the VHT, the tax owed in 2023 is calculated as 1% of the current value assessment of the property.
What is VHT?
VHT is applicable to all residential homes that are underused or not used as the owner’s principal residence. In Toronto, homes will be considered vacant and will be subject to VHT, if for more than 6 months the property has not been occupied by its owner or a permitted occupant as a principal residence, or by one or more tenants each having a lease period of at least 30 days.
Are there any exemptions available for the VHT? Yes, VHT will be exempt if one of the following criteria is met:
- The registered owner died in the year or prior year;
- The unit is undergoing renovations or repairs with several conditions;
- The principal resident is in care for at least six months of the year with the exemption capped at two consecutive years;
- Legal ownership has been transferred to an arm’s length buyer in the year;
- The vacant property is required for occupation for employment purposes for a total of at least six months, and the owner has a principal residence outside of the Greater Toronto Area; and
- A court order prohibits the occupancy of the vacant property for at least six months.
Mandatory Declaration of Occupancy Status
Reporting requirements include a self-declaration that must be filed for each property by February 1 of the following year. The payment of VHT is due on May 1 of each year. This means the first deadline for self-declaration is February 1, 2023, with payment of the corresponding tax due by May 1, 2023.
The declaration applies to all residential property owners in Toronto, even if they live in the property or are exempt from VHT. The declaration will determine the occupancy status of the property for VHT purposes. A failure to file will result in severe consequences such that the property may be deemed vacant and assessed the VHT, along with a fine of between $250 and $10,000.
The declaration will be filed through the City’s secure online declaration portal, which will open in mid-December 2022.
Tax Implications
As discussed above, the tax on vacant residential properties is payable early 2023, based on the occupancy status during the prior year. VHT is calculated at 1% of the property’s current value assessment (CVA) for the year in which the home is vacant. The current CVA was assessed by Municipal Property Assessment Corporation (“MPAC”) in 2016 but is expected to be reassessed in 2024. Therefore, we expect to see a significant increase in the new CVA and the VHT payable in calendar 2025.
Consider the following example. John purchased a property in the City of Toronto in 2015. The property has been used as a residential rental property. In 2016, the CVA of the property was assessed at $800,000 by MPAC. If John failed to rent out the property for more than 6 months during 2022, he will be subject to a VHT of $8,000 ($800,000 x 1%) unless an exemption applies.
Similarly, if the CVA of John’s rental property increases to $$1.3 million in 2024, his potential VHT exposure will increase to $13,000 ($1,300,000 x 1%).
GG Observations
The self-declaration by all property owners in Toronto is a significant administrative burden and one that carries significant cost if missed. In addition, the VHT will be a significant tax for short term rentals, such as “Airbnb” and should be factored into the cash flow analysis of the property. Lastly, other major municipalities in the GTA have expressed interest in establishing a VHT, and may implement one in their jurisdiction.
Grewal Guyatt LLP has extensive experience in assisting clients with tax planning strategies for real estate investments. If you are looking for more information about potential tax implications on VHT how to structure your real estate investments, please contact our tax team.
Authors
Rick Grewal, CPA, CA, TEP
Managing Partner
Contact Rick
Email: rick@grewalguyatt.ca
Direct: (905) 597-1701
Mandeep Khosa, CPA, CA
Partner – Tax
Contact Mandeep
Email: mandeep@grewalguyatt.ca
Direct: (905) 780-3117