The Empty Homes Tax is a new tax on vacant or under-utilized properties within Greater Vancouver. We discussed the definitions and exemptions of this tax in an earlier blog post: The Empty Homes Tax in Vancouver.
With the introduction of the tax, some property owners have found themselves fighting for their exemptions. Today, this post will examine the rental exemptions for the Empty Homes Tax, which have been particularly problematic for many property owners.
The Audit Process
Property status declarations are subject to an audit by the City of Vancouver for up to two years. The City of Vancouver selects properties for audits based on a number of considerations. A false property status declaration will result in payment of the Empty Homes Tax, plus up to $10,000 per day of the continuing offence.
When a property status declaration is audited, the City of Vancouver will ask the property owner to provide documents that support their property status declaration and the relevant exemption from the tax.
There are a few scenarios where the City of Vancouver will likely perform an audit, which property owners should be alert to:
- when a property owner rents the property to a company;
- when a property owner leases the property to a tenant with an option to sublease the property, and the subject property is subleased; and
- when a property owner declares a principal residence exemption, but their name appears on other properties (e.g., a BC Hydro bill or internet bill).
If the subject property is rented to a company, the City of Vancouver will presume that the rental is for a business purpose. The rental exemptions only apply to properties rented for a residential purpose, and the owner is responsible for proving the residential purpose.
The Problem
The audit process places the responsibility of proving the property status declaration on the property owner. However, with rental properties, the actual use of the property and the relevant documents are often outside of the owner’s control.
With rental properties, the City of Vancouver will request documents that evidence a residential tenancy. The City will usually start with documents such as the rental contract and documents showing rental income such as bank statements or income tax returns. When a property is selected for audit, the City will demand further documentation and completion of a questionnaire.
To support a rental exemption, the City of Vancouver wants to see documents that prove that a tenant is living in the property for a residential purpose. That is, someone is using the property as their home. Such documentation may include documents that list the address of the tenant or subtenant as the subject property, such as a driver’s licence, utility bills or income tax returns.
The problem with the audit process lies with the degree of control that a landowner has over a tenant or subtenant. The property owner may not be able to access such documents as those documents belong to the tenant or subtenant. A tenant or subtenant may not want to provide their driver’s licence or income tax returns due to privacy concerns.
Beyond that, a landlord may be unaware that a tenant has breached the rental contract and is subleasing the rental property to subtenants for periods of less than 30 consecutive days, such as in the case of an Airbnb. The landlord would not qualify for the rental exemption because the subject property has not been occupied for a residential purpose for periods of at least 30 consecutive days, totaling six months.
Fighting the Empty Homes Tax
Fighting the Empty Homes Tax begins even before the audit process.
Here are a few tips on effectively fighting the tax:
- Review your tenancy agreement. If your tenancy agreement provides a right to sublet, ensure that the tenancy agreement requires that the sublease be for periods of at least 30 consecutive days and for a residential purpose only.
- Gather and prepare your documents ahead of time if you expect you will be audited. The timelines that the City of Vancouver provides for submitting documentation are tight.
- Consult a lawyer as soon as possible if you are audited. It is easier to fight the Empty Homes Tax during the audit process than to dispute a decision after an audit.
- Ask for an extension of time from the City of Vancouver if you need one.
If you are audited and disagree with the City of Vancouver’s decision, you should consult a lawyer as soon as possible to dispute the decision. You may also have further recourse against a tenant or subtenant if they have breached your rental contract.
To speak with Lewis Nguyen at DBM Law directly about real estate transactions, email him at lewis@dbmlaw.ca