13 Apr Analysis: Planning for a Potential Toronto Vacancy Tax

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 1^st 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 30^th of next year.