Overview

The Ontario government has enabled municipalities to enact a tax on vacant residential units in their regions (Granted under Part IX.1 of the Municipal Act).[1] Each municipality has to pass a By-Law stating the tax rate and conditions of vacancy that, if met, make a property subject to the tax. The Council of the City of Toronto enacted their By-Law, deeming it to have come into force on January 1, 2022.

In Toronto and Ottawa, the vacant home tax is the value of 1% of the “Current Value Assessment” of a property (the Municipal Property Assessment Corporation determines the Current Value Assessment). The tax may apply where, inter alia, properties are vacant for greater than six months in a given year. A property is vacant when it is not occupied by the property owner, an authorized occupant, or long term tenancies and short term tenancies that meet certain criteria as outlined in the City of Toronto By-law 97-2022, (“Toronto’s By-law”)[2].

Toronto and Ottawa have such taxes in place pertaining to the use of residential units from 2022 going forward. Hamilton has passed their vacant home tax for 2023 going forward and we soon may see other regions, such as Halton, Peel and York implement similar measures.

Why Does This Matter In Estate Planning?

General

The tax is an annual levy to be determined each year. There are some exemptions available, such as if the home owner has died or moved to a long term care facility.

If an owner dies, there is an exemption for the year of death and the following year. For example, if an owner dies in 2022 owning a condominium in Toronto, there should be an exemption for that property for 2022 and 2023. We suggest referring to the municipalities’ respective By-Laws for eligibility criteria.

Does this Impact Use of the Principal Residence Exemption?

All property owners in Toronto must complete a form on an annual basis. The form requires a property owner to designate the property’s usage, including if that property was used as a principal residence. Consider a client who owns two homes, one in downtown Toronto and one in mid-town Toronto. One question I had is whether designating home #1 as your “principal residence” on the Form titled, “Vacant Home Tax – Declaration of Occupancy Status”, will impact your ability to claim the principal residence exemption permitted under the Income Tax Act (“ITA”)[3] (such exemption, the “PRE”) on home #2 (provided both properties would qualify as a principal residence under the ITA). Put another way, will a designation at the municipal level in a given year restrict you or your executor at the federal level in claiming the PRE for such given year when such property is sold, despite the Municipal Act and the ITA having different definitions of “principal residence” and different purposes underlying provisions dealing with principal residences?[4]

The issue is that if the tax regimes are to align (i.e. a designation of a principal residence municipally needs to match that made federally for the principal residence exemption for a given year), there would be significant implications for estate planning. I will highlight two implications. First, an owner would need to give thought to anticipated increases in their properties’ values overtime within the context of considering on which property, in what year(s), it may be best to claim the principle residence exemption available federally and pre-emptively designate such property in such given year as their principal residence municipally. Second, an executor of an estate that let’s say is selling a deceased’s downtown home and midtown home in Toronto would need to be attune to the designations that the deceased made at the municipal level. Not only would this require additional attention, but it may force an executor’s hands in a way that may impact post-mortem tax planning opportunities (specifically in optimizing the use of the PRE available under the ITA), as well as liquidity needed on death (i.e. more liquidity may be needed if the PRE could not be used optimally).

Currently, there does not seem to be a requirement for a designation at the municipal level (i.e., for the purposes of determining a property’s occupancy status and thereby a vacant home tax) to be the same as a designation at the federal level in claiming the PRE. However, a “match” may be required someday, or, the CRA may try to rely on a municipal designation of a property as an owner’s principal residence in respect of certain years (e.g. 2005-2010) as evidence in support of rejecting a PRE claim of a different property in respect of those same certain years (i.e. 2005-2010).

That said, the above approach would give rise to irregularities, two of which are as follows. First, the definitions of “principal residence” in Toronto’s By-law and the ITA are different and the underlying purposes of the legislation are different. There is greater latitude under the ITA as you can choose at the time of disposition if a principal residence is such for the purpose of claiming the PRE. Second, let’s say a client has a property in Toronto and in Hamilton. Unless the respective municipal By-Laws and Forms are very clear, could your client designate their Toronto home as their principal residence on Toronto’s Form and their Hamilton home as their principal residence on Hamilton’s Form. If ‘yes’, then how would that impact a later use of the PRE claim? Toronto’s Form provides, “This property was used as a principal residence and occupied for at least six months by the owner in 2022.” Toronto’s By-Law provides the definition of “principal residence” as meaning, “A residential unit in which a person is ordinarily resident. A person may only have one principal residence…” Have one principal residence where? Arguably in Toronto as this is a municipal By-Law? As the wording provides “for at least six months” theoretically could your client reside in their Toronto home for six months and Hamilton home for six months and possibly claim both of the respective municipal forms as their principal residence?

As discussed above, because the rules, purposes, definitions and guidelines are different as between municipal By-Laws and the ITA, notwithstanding having the same term (i.e. “principal residence”), these differences taken into account  and the current lack of clarity surrounding the vacant home tax should mean that one designation (i.e. at the municipal level) should not be determinative of the other (i.e, at the federal level in claiming the PRE).

Perhaps we will gain clarity when Income Tax Folio T4037 Capital Gains 2021 is updated.[5]

If you are interested in reading more about the principal residence exemption, my colleague, Corina Weigl, wrote the following post that relates to individuals, https://www.allaboutestates.ca/sale-of-your-principal-residence-by-individuals-but-not-trusts/, and I wrote the following post that relates to trusts, https://www.allaboutestates.ca/a-review-of-the-use-of-a-principle-residence-exemption-by-a-trust/.

 

[1] Municipal Act, 2001, S.O. 2001, c. 25.

[2] City of Toronto, by-law No 97-2022, To enact a new City of Toronto Municipal Code Chapter 778, Taxation, Vacant Home Tax and amend City of Toronto Municipal Code Chapter 169, Officials, City (10 Feb 2022), s. 778-21.

[3] R.S.C., 1985, c. 1 (5th Supp.).

[4] “principal residence” is defined in the Income Tax Act at s. 54 and is defined in Toronto’s By-Law at Ch. 778-1.1.

[5] Income Tax Folio T4307(E), Capital Gains 2021, CRA (which can be found at: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4037/t4037-21e.pdf).