Analysis: Planning for a Potential Toronto Vacancy Tax

Vacancy Tax Toronto

Toronto’s housing market is on fire—and drawing the concern of governments, experts, and real estate associations alike as prices and sales rates keep on growing month after month after month. With Queen’s Park actively considering a slew of measures to cool Toronto’s tumultuous housing market—including a tax on vacant units and homes—we’re going to focus in on some of the regulatory changes on the table for tenants and homeowners, and talk about their potential impact for investment condo owners.

This week, we’ll outline what a vacancy tax has meant for investment condo owners and landlords in Vancouver—and what it might mean if introduced in the City of Toronto.

The view from Vancouver

Vancouver’s Empty Homes Tax was approved in November as part of the city strategy to help buyers and renters get into its increasingly closed-off housing market. Coming online in December of this year, the tax will require all owners of empty homes to make a status declaration every year, and based on that, will levy an annual tax of 1% of the home’s assessed value to owners who fall under its conditions: homes that are vacant six months or more in the last calendar year.

The goal: to match Vancouverites desperate for housing in a tight market to the thousands of empty condos and apartments dotted around the city.

As an incentive, that 1% might not sound like much, but with the benchmark price—the predicted sale price—of a condo unit in Vancouver at $537,400 as of March, that 1% adds up to over $5,000 a year. With Vancouver condo prices still rising, as bidding wars move over from the detached housing market to condo units, the penalty for keeping units empty in the housing-crunched city is likely to get even higher.

Vancouver’s law has reasonable exemptions: for homes under construction, homes bought or sold that year, or homes in condominiums where the condo board—or, out west, strata council—restricts renting units, the Empty Homes Tax doesn’t apply.

It’s hard right now to gauge the impact that the Empty Homes Tax will have on Vancouver’s housing problem. With the first declarations taking place this December—requiring people to have tenants in their empty units by July 1st at the latest to avoid paying the tax—the real proof as to whether the Empty Homes Tax has worked will likely show in May and June, with the number of new leases signed for July occupancy.

The Toronto situation

The discussion around a Toronto vacancy tax is based primarily on numbers: Statistics Canada’s 2016 census numbers, to be specific, where 65,000 Toronto homes were listed in the category of “unoccupied by usual residents” while 100,000 people move to the Toronto area every year.

It’s important to break that number down. While it’s simple to picture tens of thousands of neglected units locking their doors to desperate new Torontonians, Statistics Canada’s definition of usual residents is more about who considers a space their primary residence and lives there year-round or close to it, not whether a space is housing anyone at all. With the census conducted in the summer, unoccupied by usual residents can mean anything from a student rental that will fill up again in September to a space that’s been sublet while the usual resident travels or visits family in another country. Mayor John Tory’s office isn’t troubled by that distinction, saying to the Toronto Star that if even half those units were unaffected by a vacancy tax, the gap the other half represented is still “worrying”.

The decision to bring in a vacancy tax does rest with the City of Toronto specifically, and City Hall has proven much warmer to the idea than they have a foreign buyers’ tax—at least so far. Efforts are already underway to use Toronto Hydro and Water data to winnow down those 65,000 units to a more realistic picture of vacancies, and turn that data into a feasibility report.

In the meantime, Ontario’s Finance Minister, Charles Sousa, has hinted that this year’s provincial budget is going to bring in cooling measures for the Toronto real estate market. With the budget being unveiled at the end of April, it’s not too long a wait to see which conditions will be on the table for landlords and tenants.

All in all, the impact, if a similar vacancy tax were put through in Toronto, could be significant to smaller investment owners. Vancouver’s 1% tax rate would likely be used as a model—legislation is much more easily drawn up when there’s a working model in the country—and even if a Toronto vacancy tax had its differences, it’s not a bad model to use when making your own decisions.

In Toronto, where home prices have skyrocketed a record 33% in just one year, the average condo price hit $550,299 last month with no real signs of stopping—which puts Toronto condo owners in an even tighter situation than Vancouver’s in the event of a vacancy tax. Paired with other proposals such as increasing the rent control guidelines to buildings built post-1991 and discussions around heavily regulating AirBnB in Toronto, it’s plausible that renting investment property in Toronto could quickly become an environment where making smart, deliberate choices really matters—and attention to property management becomes the core of your small rental business.

Consider why your property is empty—and make a plan

Our advice, in this shifting landscape? It’s not always a sign of failure if a property sits empty, even in a hot housing market like Toronto’s, but if your investment condo has been housing nothing but dust bunnies and air more often than it’s been housing people, it’s worth examining why—and setting a good long-term plan for that investment.

Think back: What were your goals when you signed the paperwork to buy the unit, and have you realized them? If not, what’s kept you from realizing them? A vacancy tax is meant not as a punishment, but a spur: Would your plans change if a vacancy tax came into effect in Toronto this year?

In real estate—as in most of life—it’s always best to have planned ahead. Rather than being caught in the scramble for tenants that would occur in Toronto in the months before that vacancy window closes—our own personal May and June in the City of Vancouver—building a solid divestment or rental plan now means not having to settle for a lower rent than you need to carry your mortgage or condo fees or tenants that you aren’t actually sure you can build a cooperative relationship with.

It also means time to get on top of your property management game so you can keep those good tenants year over year—or to recognize your time or skills limitations and bring a professional rental and property management firm on board. While hiring the experts does also cost money, it’s significantly less than paying a vacancy tax and the mortgage and condo fees on an empty unit.

There are very few guarantees about what the Toronto private rentals market is going to hold by this time next year, but the core principles always do stay the same: attention to detail, informed and honest business practices, and knowing what you want out of your investment property over the short and long term are usually guaranteed to get you through interesting times like these without taking a loss—or finding yourself scrambling to fill your unit on June 30th of next year.

The New Landlord’s Quick Guide to Tax Time

Tax Time

So this year, you had a great idea: You rented out that investment condo to a great tenant (or two!), built a fabulous working relationship with them, and now that condo on its way to making an income for you while providing someone a comfortable home. Trouble is, it’s tax time. And suddenly your usual T4 and a few charitable donations are just the beginning of the paperwork you’re facing as a landlord.  So, how do you deal with your rental condo when it comes to taxes?

Rental income is declarable income

It should go without saying, but Revenue Canada will be very much interested in the income you’re making from rent.  Regardless of whether you’re renting an investment property or part of your own personal home—a separate unit in your home or just a room in the condo you live in—that money needs to be formally declared as part of your taxes.

But there are a lot of things you can legally write off

Renting your condo unit means you have rental-related expenses, many of which you can claim against your income at tax time.  You can write off rental expenses that occur at any part of the rental process, including:

  • Fees you’ve paid to advertise your condo unit to prospective tenants, including listings with real estate agents, rental agencies, property listing sites, cleaners, and staging companies;
  • Fees paid to any management company you’ve hired to take care of the property;
  • Maintenance and repairs to your property;
  • Office supplies you’ve bought for administering your condo, including small stationery like pens;
  • Property insurance on your rental condo;
  • Property taxes on your rental condo;
  • Interest that accrues on your mortgage while you’re renting the property;
  • Utilities to the rental condo that are included in your lease with your tenants, including condo fees;
  • Your accounting and legal fees;
  • Travel costs, if you’re doing your own maintenance.

That’s just the run-of-the-mill stuff—your current expenses.  You can also write off a whole category of expenses called Capital Cost Allowances—the big purchases—which include any appliances, equipment, furniture, fixtures that you’ve purchased for your rental property.

What you can’t deduct: The principal on your mortgage, land transfer taxes, or your own maintenance labour.

So I hope you kept your receipts

It’s a fundamental: hold on to your receipts for any expenses that relate to income.  Going forward, create a folder for all your rental-related expenses, and hold on to any receipts or proofs of payment that come your way.

Got everything!  Now, how do I do all this stuff?

Pick up a Form T776 from your closest available Internet, and fill it out with all this assembled information.  The number it spits out at the end of that afternoon should be your net rental income, which goes on Line 126 of your personal tax return and factors into your overall total taxes owed.

This is not making all that much sense to me.

When in doubt, ask the CRA.  The great thing about Revenue Canada is that they tend to want you to succeed at your taxes, not fail, so they’re generally quite forthcoming with information and tips—and have a handy guide for everything you need to know about rental income on your personal taxes.  The CRA’s guides aren’t short, but they’re detailed, and they’re full of clear examples on how each exemption and regulation works.

No, really.  I’m lost.

If you still find yourself out of your depth, or start to handle multiple rental properties, it’s a good idea to outsource to a local accountant.  They’re worth their weight in delicious tax credits, know both your obligations and the advantages you can bring to bear on your taxes as a landlord.  And overall, it never hurts to have the peace of mind you get from a professional on the case.

Estimate for next year

Now that you’ve got that done, estimate what your expenses might be for next year—and put that against your expected year’s income.  If you do this right, and set aside what you’ll need to pay in rental income taxes as the money comes in, paying your taxes next year should be absolutely painless.