Ottawa looks to ‘strengthen’ vacant unit tax program with graduated tax rate

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Ottawa’s unpopular vacant unit tax generated $12.6 million in its first year, but the city believes a graduated tax rate will generate up to $4 million in additional revenue.

About half the properties charged the vacant unit tax (VUT) in 2023 remained vacant in 2024, indicating resistance to the measures in place, said a report represented Wednesday to the city’s joint finance and corporate services and planning and housing committee.

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Originally, properties that have been declared vacant or whose owners have not completed declarations are charged one per cent of the current value assessments of those properties. If the plan is approved by council, properties that have consecutive vacancies will be charged at an increased rate of one per cent for each additional year to a maximum of five per cent of assessed residential value.

A vacant unit tax (VUT) motion was passed in 2022, requiring all residential property owners to register the status of their properties annually. A residential unit is considered vacant if it has been unoccupied for more than 184 days during the previous calendar year.

The goal is to encourage homeowners to maintain, occupy or rent properties, increasing supply as the city grapples with a housing shortage. The city made a commitment to the Province of Ontario to “strengthen” the VUT program as a condition of the province’s $543-million new deal for Ottawa.

There are exemptions for a property owner, including if a property is for sale, if it’s subject to a court or government order, if the owner has died or is in care, if it’s under construction or renovation or if it’s a cottage rental or a newly-built property listed for sale.

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However, the program also created some unanticipated examples of properties that failed to get exemptions, including abandoned and uninhabitable farmhouses.

The joint committees approved a number of other changes to the VUT program on Wednesday, including a motion from Capital Ward Coun. Shawn Menard to ask the province to extend VUT taxation power to the multi-residential property class.

New exemptions will include abandoned or repurposed century farm structures, units that have become uninhabitable due to hazardous conditions or from disasters and secondary properties periodically occupied when the owners or family members receive medical treatment, plus there will be an exemption for small landlords who need additional time to complete cosmetic renovations in which permits may not be required. In that case, the exemption would apply only after a unit becomes vacant and where the property is returned to occupied within 12 months after the renovations begin.

Some councillors observed that residents in their wards had been inadvertently embroiled in a costly VUT net.

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Barrhaven East Coun. Wilson Lo said one couple in his ward had a basement unit and had a new tenant who then postponed occupancy because his contract in another city was extended. That pushed the landlords over the six-month unoccupied mark, triggering a VUT charge.

Bay Ward Coun. Theresa Kavanagh said a property owner in her ward who had approval to replace a house with 21 units was charged the VUT while waiting for a demolition permit.

Chief financial officer Cyril Rogers said the city did look at those kinds of cases. However, if a developer is going through with a site plan application with the city, the unit can remain occupied during the process.

“We’ve seen lots of units in pristine condition that continue to remain vacant because the developer is going through a site plan approval process that potentially could take several years,” he said.

Mayor Mark Sutcliffe said he always had concerns and reservations about the VUT on principle.

“However, I think staff have made a lot of effort to improve the dynamics around it and address some of the concerns that were raised,” he said.

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“To me, it’s still an imperfect solution. But we’re dealing with imperfect circumstances where our goal is to put more housing back on the market. The goal is to raise money for affordable housing as well. And, if it’s able to do those things, I can live with it for the foreseeable future.”

After completing 2023 appeals and audit phases, 3,672 Ottawa units, or 1.1 per cent, were identified as vacant — a much higher number than expected — the report said. When the VUT was first debated, city staff predicted a vacancy rate between 0.5 and 0.7 per cent.

This was the first time in Ottawa that the city had been able to measure untenable vacancy, the report said.

“The final data for the first year shows that Ottawa’s vacancy issue is worse than anticipated with vacancy levels similar to cities facing significant housing issues, such as Vancouver and Toronto,” it said.

The program produced $12.6 million in revenues, including $10.8 million in taxes plus $1.8 million in audit revenue. In audits, city staff review select declarations submitted by property owners and then verify the accuracy of the property owner’s declaration.

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The audit program has been successful in identifying vacant units that were not declared as vacant through the declaration process, yielding that $1.8 million in additional revenue. About 6,500 properties were selected for audits. The report recommends that audits continue.

The city spent $2.3 million on VUT program costs such as staffing and computer equipment, leaving net proceeds of $10.3 million, which goes towards affordable housing initiatives.

“The first full cycle has also allowed staff to recognize the true scope of the problem and understand why units are vacant,” the report said.

As expected, there were a high number of appeals: 3,357 in the first year, or 55 per cent of properties charged VUT.

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