From rebates to taxes: The evolution of tax treatment for vacant properties in Ontario

In Ontario, the system for managing property taxes has undergone major changes in the last three decades. Several of these changes are aimed directly at tax programs regarding vacant properties to ensure that municipal policy objectives are met.

In recent years, we have seen two specific changes. First, to ensure businesses are appropriately taxed and not receiving unintended reductions, many municipalities have removed a longstanding Vacant Unit Rebate Program. Second, in an effort to address concerns over the availability of affordable housing, municipalities are beginning to implement taxes on vacant residential properties.

Below is a review on how taxes and rebates have been and will continue to be used as mechanisms to address municipal objectives regarding vacant properties.

The rise and fall of the vacant unit rebate program

Prior to the mid-1990s, property valuation and taxation policies in Ontario were much more opaque than they are now. The Province administered the property taxation policy and, rather than a predictable valuation procedure, property value assessments reflected the policy objectives of the government.

During this time, businesses were required to pay a separate levy called the Business Occupancy Tax. This tax was assessed against any commercial or industrial entity that occupied a taxable property. Business owners were billed directly and were responsible for paying the levy. The owners of the property had no responsibility for payment or collection of this tax.

In 1998, the introduction of Current Value Assessment ("CVA") changed Ontario's property tax system. Under CVA, assessment values reflect the realizable value that an owner could obtain from selling their property in an arm's length transaction, rather than a value that was reflective of government policy objectives.

Simultaneously, the Provincial government decentralized the administration of property tax policy to municipalities. However, municipalities were still restricted when choosing which policy options they could employ. The Provincial government maintained certain province-wide tax requirements that municipalities were required to include in their policies. For example, the Province required that the portion of property tax that was previously recovered in the form of the Business Occupancy Tax would be rolled into the regular property tax payable on commercial and industrial properties.

This requirement was significant as it shifted the responsibility for paying the Business Occupancy Tax away from business owners and onto property owners. Even if a commercial or industrial business was not actively being used in a business operation, the property owners were still required to pay the Business Occupancy Tax.

In order to compensate for this, in 2001, the Province of Ontario introduced the Vacant Unit Rebate Program to owners of vacant commercial and industrial buildings. This program allowed owners of vacant commercial or industrial property to apply to their municipality for a temporary reduction in property tax owed, lasting for as long as the property remained unoccupied.

This policy was intended to replicate the previous practice, where the Business Occupancy Tax would not be paid if there were no active businesses operating on a property. As property owners became used to these new practices, their practices changed as well. In fact, many property owners began to actively manage the assessment and taxation of their properties.

When the Vacancy Rebate Program was introduced, it was the practice of the Municipal Property Assessment Corporation (MPAC) to set assessment values on the basis that the property was fully occupied. Therefore, the method of rebating or reducing the taxes payable when the property was not fully occupied made sense. However, over the past two decades, this valuation practice has changed.

As property owners began to actively manage the assessment of their properties, it became common for an owner to file an appeal. Through these appeals, multiple property owners across the Province were able to successfully argue that the value of their properties should not be based on the assumption that their properties would be 100% occupied at all times. A growing number of these successful appeals led MPAC to gradually change its valuation practices and to factor in what portion of a property would be vacant on average. As a result, the assessment value of commercial and industrial properties with tenants gradually decreased to reflect what portion of a specific property was normally unoccupied. In other words, property owners were seeing their taxes rebated or reduced without the need to apply for vacancy rebates.

Even though property owners were now having their "base amount" of taxation reduced automatically to reflect occupancy levels, the Province continued to require municipalities to provide the Vacancy Rebate Program. As a result, commercial and industrial property owners could obtain reductions and tax savings for vacancy via two separate reductions: the Vacancy Rebate Program and the now common practice to adjust taxes to reflect average vacancy.

Municipalities brought this anomaly to the attention of the Ministry of Finance. The Ministry of Finance responded by initiating a review of the Vacancy Rebate Program in 2015. The review led to a new legislative framework that increased the flexibility awarded to municipalities in administering property tax schemes. As highlighted in the 2018 Ontario Budget, most municipalities have taken the opportunity to remove the vacant property rebate altogether:

In the 2016 Budget, the Province introduced a legislative framework to give municipalities broad flexibility to refine their vacancy rebate and reduction programs. This greater flexibility enables municipalities to tailor these programs to best reflect local circumstances, while considering the interests of local businesses. While municipalities that decided to modify their vacancy programs have implemented a variety of changes, 80 per cent of those municipalities will phase out the municipal component by 2020.^[1]

Multiple municipalities have chosen to eliminate the rebate, including but not limited to the following:^[2]

For those municipalities that still provide the Vacancy Rebate, generally, a property owner must meet the following criteria to qualify:

1. Pay provincial land tax on land located in a non-municipal area, or pay property tax on land located in a municipal area and their municipality has a vacancy rebate program; and
2. The property/building qualifies for the municipality's particular vacancy rebate program. The following buildings will likely qualify for a vacancy rebate:
   1. Entirely vacant buildings – A commercial or industrial building that was entirely unused for at least 90 consecutive days.
   2. Partially vacant commercial buildings that are unused; clearly delineated or physically separated from the used portions of the building; and either:
      1. capable of being leased for immediate occupation, or
      2. not capable of being leased for immediate occupation because it was undergoing or in need of repairs or renovations, was under construction, or was unfit for occupation.
   3. Industrial buildings that are unused and clearly delineated or physically separated from the used portions of the building.^[3]

While these criteria generally apply, individual municipalities may have different criteria for their particular rebate program.

The rise of vacant residential property taxes

As commercial property vacancy rebates are being phased out, we are now seeing municipalities turn their attention to a different type of vacancy: vacant residential properties.

In 2017, the provincial government implemented Ontario's Fair Housing Plan. This plan made changes to the Municipal Act (the Act) to provide interested municipalities with the option to introduce a tax on vacant residential units.^[4] This tax is intended to encourage property owners to sell unoccupied units or rent them out to address concerns about residential units potentially being left vacant by speculators and affecting the availability of affordable housing.

For a municipality to implement a vacant residential unit tax, the Minister of Finance must first pass a regulation designating the municipality as permitted. Once the regulation has been passed, municipalities are enabled to introduce the tax.  

Currently, Vancouver is the only municipality in Canada that has an active vacant home tax program. However, with the changes that came in 2017, municipalities in Ontario are now making moves to replicate Vancouver's program. For example, the City of Toronto has approved a plan to implement a vacant home tax beginning in 2022. The City of Ottawa has also approved the implementation of a vacant home tax beginning 2022. While exact details for the plans are still forthcoming, it appears Toronto and Ottawa both intend to levy a 1% tax for properties that are vacant at least 6 months in a calendar year.

On July 5, 2021, the City of Hamilton followed in the steps of Toronto and Ottawa by voting to approve the drafting of a bylaw addressing the taxation of vacant residential properties. According to a report to Hamilton's City Council, "The main objective of implementing a Vacant Home Tax (VHT) is to encourage owners to rent out empty properties in order to increase the supply and affordability of housing."^[5] As with Toronto and Ottawa, specific details about Hamilton's plans will become available in the coming months.

It is unclear to what extent municipalities will take advantage of their new potential authority to implement such a tax. However, additional municipalities, such as Mississauga have already expressed interest in implementing a similar program.

As municipalities endeavor to change and implement programs to manage the commercial and residential property markets, it can be difficult to stay up to date. Where property owners may be used to receiving a rebate for the vacancy of their property, this may no longer be the case. For instance, owners of residential properties may soon be facing additional taxes or obligations for failure to maintain occupancy of their properties, and some municipalities have already implemented licensing requirements for vacant properties over a specified duration.  

If you are a commercial/industrial or residential property owner requiring guidance on how vacancy may affect your tax bill, please reach out to the authors or a member of our Real Estate Group.