The Canadian government is exploring options for a surtax on vacant residential land through a newly launched public consultation. Development industry stakeholders, provincial/territorial and municipal governments and the general public are invited to comment on the rationale for and potential design of a levy that could be applied on idle lands that have been zoned for residential or mixed-use development.

Plans for the consultation were initially announced in the 2024 federal budget, released on April 16, as part of a package of proposed initiatives aimed at stimulating new housing production. In doing so, the budget document impugns landholders’ business motives and suggests they are falling short of the government’s example and expectations.

“There is a concern that some landowners in Canada may be sitting on developable land, hoping to profit from rising land values when the land could instead be used for immediate residential development,” it states. “The government is taking significant action to resolve Canada’s housing crisis, and the federal government believes owners of vacant land in Canada must also do their part to unlock unused land for homes.”

Development industry advocates counter that the government is voicing an unrealistic interpretation of how market economies function.

“People are sitting on land that they can’t build on because the costs are too high relative to what the market can bear,” says Richard Lyall, president of the Residential Construction Council of Ontario (RESCON). “I’ve had people ask me why developers can’t just reduce their profits so they can build more housing, and my response is: There are no profits now. Developers are not going to build something and lose money on it intentionally. That’s how you go out of business.”

The government sets out its premise and some guiding parameters in a brief consultation paper. It proposes that provincial/territorial and municipal governments would be the levying agents with federal funding to support implementation costs. Jurisdictions that indicate interest would be engaged in subsequent consultations.

The surtax is presented as a means to: encourage housing development; discourage “speculative holding” of lands that have been zoned for housing; and generate revenue that “various orders of government” could reinvest in housing. Vacant residential or mixed-use lands would have to be free from contamination, accommodate suitably sized lots for development and have access to municipal water, sewerage, roads and electricity grids to be subject to the surtax.

Respondents to the consultation are asked to offer reasons why they believe lands zoned for residential development remain vacant and/or to outline any potential negative or unintended consequences that could arise from a new surtax. The consultation paper also seeks input on:

• how to define vacant and/or serviceable land;
• circumstances that would trigger exemptions or lifting of the surtax; and
• the appropriate tax rate.

It’s acknowledged that special rules may be required for certain circumstances and/or certain markets, and that differing tax rates may be needed from region to region.

“Canada is a vast country with differing local needs and land availability,” the consultation paper states. “The federal government recognizes that each jurisdiction in Canada is unique and a one-size-fits-all approach to the taxation of vacant lands in Canada would not be appropriate.”

Levying complexities and assessment appeals foreseen

The federal government has constitutional authority to devise and impose tax, but, in practice, it would be cumbersome to levy this one without the cooperation of provincial/territorial and municipal governments that control land registration, property assessment and land use planning. Canada Revenue Agency (CRA) already calculates the federal underused housing tax based on 1 per cent of a subject property’s current assessed value as determined by the applicable assessment authority, but many more permutations would come into play related to what’s classified as vacant land and/or how the residential portion of vacant mixed-use sites might be determined.

“There are provincial Assessment Acts and/or municipal taxing statutes for the whole country that cover off the treatment of vacant land, and these rules are different in each province. So there would be a whole lot of complexities in terms of actually working this through,” advises Almos Tassonyi, senior associate with the Institute of Municipal Finance and Governance at the University of Toronto. “In Ontario, for example, there are vacant land provisions; there are provisions for farmland pending development; there are optional classes; and there’s also a portion of commercial/industrial properties that gets treated as excess land. In British Columbia, there are separate tax class rates; you’ve got to look to the specifics of the Assessment Act as to what is covered in the class.”

A new surtax could be expected to trigger an uptick in assessment appeals if it is to be applied on the property’s existing assessed value (as is the case with the underused housing tax). Across Canada, the interval between reassessment cycles typically varies from one to three years depending on the province. However, Ontario has notably fallen far behind schedule, with 2016 market values still in place thus far this decade.

“Most assessing authorities in Canada assess property to the market value standard, and there is an argument to be made that a tax like this would be an impairment on the value of development land,” notes Giselle Kakamousias, vice president, property tax, with the Atlantic Canada based real estate advisory firm, Turner Drake & Partners. “As well, challenges would undoubtedly be launched based on tax classification, particularly in jurisdictions where vacant lands are taxed at other than residential rates.”

There is also a risk that such a tax would ultimately flow through to consumers. Kakamousias and Lyall lump it with a range of other upfront costs that developers factor into their business calculations and prices. Nor is there much available evidence that other similar punitive instruments have been effective.

“I’d be interested to see a cost-benefit analysis on the underused housing tax. Has it accomplished what it was intended to do?” Kakamousias muses.

“Why is the government’s answer, typically to just about anything, to raise a tax? What we need are incentives to help make the numbers work and get people to go ahead and build on some of these sites,” Lyall asserts. “We tax new housing like we tax alcohol and cigarettes. It’s like a sin tax, and sin taxes are designed to reduce consumption.”

The public consultation will be open for submissions until December 31, 2024.