If some Canadian municipal and provincial jurisdictions already have an empty homes tax, why not implement a vacant land tax as well to help address housing affordability and supply issues?
The federal government is currently in the process of considering a new federal tax that financially punishes property owners for keeping residential-zoned land vacant. The consultation process for this proposed tax concludes at the end of this month.
According to the federal government’s consultation materials, the new tax could apply to vacant land that has residential-only zoning or mixed-use residential zoning, is serviced by municipal infrastructure (roads, water, sewage, and electricity), and physically developable (a lot that is large enough for development and with no site contamination).
The goal is to encourage the private sector to develop vacant land into homes more swiftly rather than holding these properties inactive for extended periods.
“First, such taxes would be intended to encourage the development of land into housing rather than leaving it unused. Second, such taxes would be intended to discourage speculative holding of land by making it more costly to keep land undeveloped. Third, such taxes could provide a source of revenue for various orders of government, which could be used to fund the construction of more new homes,” reads the federal government’s consultation materials.
But if the tax goes ahead, the federal government notes that it would not create a “one-size-fits-all approach” to broadly applying the policy across the country.
Instead, it would provide the framework and tools for lower levels of government to implement such a tax measure.
“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,” reads the materials.
“For this reason, the federal government is exploring a model that would provide support to provinces, territories, and municipalities for the implementation of provincial, territorial, and municipal-level tax measures designed to apply to lands that could be considered suitable for housing development.”
However, experts in the real estate industry assert that such a policy would only produce the unintended consequence of the opposite effect that the federal government intends to have.
Ian Brackett, a senior broker for Vancouver-based real estate firm Goodman Commercial, told Daily Hive Urbanized that private developers generally do not want to hold onto vacant properties, given the high opportunity costs of leaving such properties under-utilized over an unnecessarily longer period of time.
“The number of ‘speculators’ buying up land only to intentionally sit on it is marginal and should not be a major concern for policymakers. The vast majority of viable development sites are being acquired by builders who make every effort to move them forward as quickly as the system and market conditions allow,” Brackett told Daily Hive Urbanized.
“Holding on to a vacant development site longer than necessary, racking up property taxes and interest costs along the way, is not the business model of any competent developer.”
Currently, private developers are already constrained from actualizing new housing developments at a greater pace due to poor market conditions for both ownership housing demand and high borrowing costs to cover design work, permit applications, and the hard construction costs of materials, labour, and equipment. Moreover, there continues to be significant inflation of such hard construction costs.
Such a tax would layer on to the costs of developers, who have been “dealt blow after blow,” adding that “foreclosures are piling up and new home starts are dropping.”
This tax would only reduce the supply of new homes over the longer term, he says.
“Adding another tax on developers while they work their way through entitlements and raise the substantial funds required to move forward will discourage investment and increase costs. With fewer developers buying land and higher costs for those that do, supply will fall and the condo values or rents required to break even will rise,” said Brackett.
Furthermore, this tax would compound the impact seen to date from the federal government’s new increase in capital gains taxes.
The capital gains tax changes have “effectively reduced the supply of land since the incentive for landowners to sell for redevelopment is no longer as attractive, continued Brackett, adding that the federal government “now wants to also reduce the incentive for developers to buy land” with its vacant land tax.
Instead of adding costs, he says, there is a need for governments to reduce costs and enable more projects to move forward.
“This is just further proof of a fundamental lack of understanding about the industry and an inability to create policies that actually help deliver more homes where they are badly needed; it’s no wonder affordability has eroded to the crisis level we find ourselves in today,” continued Brackett.
In November 2024, Beau Jervis, president and CEO of Vancouver-based Wesgroup Properties, wrote a letter to the federal government highlighting the challenges facing the development industry. This letter was addressed to Chrystia Freeland, who resigned on Monday from her role as Deputy Prime Minister and the Minister of Finance in Prime Minister Justin Trudeau’s Liberal cabinet.
Jervis notes that his company’s land debt is based on floating interest rates, which has “already imposed a significant financial burden on those holding land intended for housing development.”
He points to the issue that land is often kept vacant because of the long timeline to receive the necessary approvals and permits from municipal governments. During this elongated timeline within the court of the municipal government, the cost of construction also increases from market inflation.
Developers may choose to hold onto land in a vacant state until there are optimal market conditions to support a sufficient level of pre-sales to finalize construction financing and ultimately enable shovels to hit the ground on a project.
Moreover, new housing developments in Canada are already facing rising costs due to increased development fees imposed by municipal and regional governments, especially in Metro Vancouver and Greater Toronto.
“To suggest that taxing vacant land will stimulate housing construction is simply illogical,” wrote Jervis. “This proposed tax reflects a lack of understanding of the ecosystem in which housing is delivered. It will only slow the already challenging process and increase the cost of housing supply. Policymakers must recognize that the private sector requires risk-adjusted returns to invest capital in housing. If we cannot do so while maintaining a reasonable return, the project becomes unviable and does not proceed.”
“This is why housing starts are declining. Projects are increasingly unviable because the cost of delivery is too high. Adding another tax will further inflate these costs, making housing even less affordable and exacerbating the very crisis the government seeks to address.”
However, the federal government’s proposal also comes at a time of uncertainty for the governing Liberal party, with falling public support and an upcoming federal election that could be held before October 2025.