Just when we thought the recent tax storm had ended, the Canadian government is back at it again. This time they are proposing a tax on vacant land to address the housing crisis, inspired by similar policies in Ireland. The goal is to get unused land developed faster to meet housing demands. However, while the intention is good, we believe there are better approaches.
Why a Tax on Vacant Land Could Backfire
While a vacant land tax might initially seem like a push for faster development, it could create unintended consequences. Free-market economists argue that such taxes can distort economic behaviour, particularly affecting smaller developers who may struggle with the added financial pressure. Larger developers could pass the costs onto homebuyers, worsening the housing affordability crisis. Studies in other countries show that, while the tax might initially encourage more land to be developed, this effect is likely temporary. Over time, developers may hold less vacant land, reducing their flexibility and the overall responsiveness of housing supply, exacerbating the housing shortage rather than solving it.
The Reality in Canada
Some studies on vacant land reveal that the reason for land remaining vacant was not as a result of owners holding it for speculative purposes rather that the cost of development was often too high. Evidence shows that government policies limiting the supply of housing are among the key causes of higher house prices. Studies show that, a single-detached home in Vancouver cost the home buyers $1.3 million more than it would have in a market without barriers to supply. Similarly, homes in the Toronto area now cost homebuyers an additional $350,000.
Instead of taxing real estate developers, it would be smarter to offer tax incentives to build sooner. Immediate tax breaks would motivate developers to start projects now, rather than holding out for higher returns in the future. One example is to reduce the tax rate for developers who successfully build homes, allow them to deduct interest costs during the period of construction, especially for those who reinvest the profits back into the business.
Canada’s Poor Track Record with Recent Tax Policies
Canada’s own history with new tax measures has shown inefficiency. The Underused Housing Tax and new bare trust reporting rules, for example, were poorly implemented, leading to confusion and last-minute relief measures. These didn’t raise much government revenues, and the costs to administer the UHT could “significantly reduce” revenue generated. Given these experiences, adding another layer of red tape with a vacant land tax could bog down the system and hurt productivity, instead of solving the housing crisis.
Recent tax measures like the UHT reveal that the CRA may not be equipped to handle the administration of this tax. There are fundamental grey areas that CRA employees need to make a judgement on:
- What is considered “Vacant” Land?
- Does someone’s extra large backyard count as “vacant land”?
- What if a person can’t develop due to ongoing estate litigation or other hurdles?
- What if a person can’t develop due to the costs?
- What is the fair market value of the vacant land?
The CRA will need to employ people who understand zoning laws inside out and add another department filled with agents, auditors, administrators, lawyers, accountants, professional appraisers, and real estate experts. What is all this going to cost the average taxpayer?
Let’s Learn from Ireland’s Example
Ireland’s Vacant Site Levy was introduced in 2017 and phased in gradually. Initially set at 3% of the site’s market value in 2018, it was increased to 7% from 2019 onward. The levy applies annually to vacant or underutilized land in designated residential and regeneration zones, with landowners assessed based on the site’s market value.
Ireland’s experience with the Vacant Site Levy, as outlined in a report by the Parliamentary Budget Office (Challenges in Implementing and Administering the Vacant Site Levy), provides vital lessons for Canada. The report highlights issues like inconsistent enforcement, unclear definitions of “vacant land,” and administrative complexity, which undermined the policy’s effectiveness. If Canada proceeds with a vacant land tax, it will face similar challenges, leading to inefficiencies rather than solutions.
A Tax Incentive: A True Partnership Between Government and Taxpayers
A tax incentive approach represents more than just policy—it’s a partnership between the government and real-estate developers. Offering tax breaks to developers acknowledges their role in solving the housing problem while also providing mutual benefits. Developers receive immediate financial relief and are more likely to act quickly, while the government sees faster housing development and increased economic activity. By working together, both sides align in achieving a common goal: increasing the housing supply to meet the urgent needs of the population.
Why Tax Breaks Are a Better Solution
Tax incentives, such as reduced development costs or tax deductions/holidays, can speed up the decision-making process for developers. They would feel encouraged to start building immediately, knowing they’re receiving direct benefits for doing so. This avoids the potential drawbacks of punitive taxes and keeps housing development on track, with benefits flowing to everyone involved. The UK provided tax incentives such as Land Remediation Relief, which offered a 150% tax deduction for developers dealing with contaminated land, making redevelopment more financially attractive. Such relief will help offset cleanup costs, encouraging the use of previously neglected or derelict urban land.
Conclusion
Canada needs actionable solutions to address the housing shortage, but a vacant land tax is unlikely to provide the results the government hopes for. Examples from other countries show the pitfalls of such policies, and Canada’s recent tax missteps with the underused housing tax suggest a similar risk. Instead, tax breaks and incentives offer a practical way to work in partnership with developers, ensuring mutual benefits and a faster path to more housing. This collaborative approach could be the key to addressing Canada’s housing crisis effectively.
The government is seeking consultations on this new tax, so feel free to email your comments and feedback to VLT-TTV@fin.gc.ca.
