Fullscreen

Urban Development Institute Taxing Growth: Analyzing the Taxes and Fees on New Housing Development

Welcome to interactive presentation, created with Publuu. Enjoy the reading!

Taxing Growth:

Analysing the Taxes

and Fees on New

Housing Development

Across British Columbia (B.C.), developers of new

housing navigate taxes, fees, and the policies that

drive them, generated by all levels of government.

These taxes and fees are levied to fund services

and amenities that support complete communities.

However, these same taxes and fees make it more

costly to build the housing that communities need,

and can ultimately restrict the amount of new housing

that is built. We are already failing to build enough

new housing in B.C. and homes remain unaffordable

for many British Columbians. In a June 2022 report,

CMHC calculated that 570,000 new homes would

need to be built in the province to restore affordability.1

There are high barriers to new development and one

of these obstacles is the layers of government taxes

and fees charged on housing. This is an impact seen

across jurisdictions and housing types, from a new

condo development in Kelowna to a purpose-built

rental building in Vancouver.

In this report, UDI examines the taxes and fees

associated with building new housing in British

Columbia. UDI has engaged experienced multi-

family developers and tax experts to analyse three

hypothetical condo project budgets from Vancouver,

Kelowna and Saanich, and a purpose-built rental

project from Vancouver. The tables for each of these

examples are included in the appendix. Each analysis

uses current cost estimates that would be calculated

by builders in their budgeting process.

Introduction

Introduction

Taxing Growth

in government charges. The updated Vancouver condo

analysis demonstrates a project that is not viable in

today’s environment if the purchase price for a 700

sq. ft. one bedroom unit were set at $980,000. The

estimated hard costs and contingency, land costs, and

government taxes and fees nearly exceed the total

market value revenue for the project. The project is

facing viability challenges even before the estimates

of soft costs, financing, and the margin for risk is

factored in. This renders the project unviable and

would likely not be financeable.

The market-driven cost increases,

in combination with higher taxes

and fees, has led to a significantly

more risky environment for

builders to provide much-needed

housing in British Columbia.

The condo example from Saanich illustrates that

between 8.66% and 10.32% of the cost of housing

is attributed to taxes and fees, while a comparable

project in Vancouver could have government charges

nearly three times as high.In the condo example from

Kelowna, 12.97% to 14.63% of the potential purchase

price is attributed to taxes and fees. Both the Saanich

and Kelowna examples demonstrate that despite the

lower percentage of taxes and fees relative to the

price of a new unit, there are still challenges in both

regions. The layering of these charges along with other

costs will still impact project budgets. Jurisdictions

across B.C. are seeing supply unable to keep up with

demand, putting pressure on home prices of all types

and the availability and affordability of housing.

In the City of Vancouver, there are additional taxes

and fees on new housing development such as the

recently increased Empty Homes Tax (EHT) and the

Public Art fee. There are also regional charges such

as the TransLink DCC, the newly increased Greater

Vancouver Sewer DCC, and the Water DCC, which

is pending approval from the Province. These line

Taxing Growth

Summary Analysis

Summary Analysis

The analysis in this report of four mid-rise housing

projects in B.C. shows that the layering of taxes and fees

can create cost barriers and added risk for builders.

For a new condo unit in Vancouver, the value of the taxes

and fees paid by the builder as part of the development

process can total over $250,000, not including taxes the

buyer pays at the time of purchase. These costs form

part of the purchase price paid by the buyer, along

with the additional taxes paid at time of sale. In total,

these taxes equate to 29% of the potential purchase

price in our example. The developer must determine

whether the market can bear this cost burden when

considering whether to undertake the project.

It has been argued that rising costs do not directly

impact housing costs because they assume increasing

fees and taxes come out of the price of the land and

unit prices and rents are driven by the market, as

are land values. However, it is not guaranteed that

a land vendor will be willing to reduce their selling

price to reflect rising costs. They can and have taken

their sites off the market, which reduces the amount

of land available for development and fewer homes

available to rent or buy. In a Province with severe land

constraints and increasing demand due to immigration

and other factors, this leads to and widens the gap

between supply and demand, indirectly resulting in

higher prices overall.

There are also instances when taxes and fees rise after

land is purchased by a builder. If these cost increases

exceed the project risk margin, it may be delayed (until

prices/rents increase) or not built at all; both would

undermine affordability.

In 2018, UDI conducted a similar analysis, where it

was identified that the purchaser of a new condo unit

in Vancouver could be paying up to 26% of the cost of

their unit in taxes and fees. Between 2018 and today,

builders have seen unprecedented cost increases

in all budget areas, including construction costs,

insurance, and financing, alongside dramatic increases

Municipalities and the Province need to mitigate these

risks in order to support new housing development,

especially purpose-built rental. This report examines

one of the key development risks and drivers of

new housing costs - taxes and fees - and provides

recommendations for governing bodies to reduce

barriers to new housing delivery.

Taxing Growth

Summary Analysis

items impact the costs associated with new housing.

The layers of taxes and fees on projects often coincide

with communities where housing is greatly needed.

The current analysis also examines a purpose-built

rental development in Vancouver. For the renter of

a new unit at $2,698 per month, it is estimated that

approximately one-third of their monthly rent, or

$882.70, could be paid towards the government taxes

and fees which were incurred during the development

process. The challenges associated with rising costs

and uncertainty are especially significant for rental

housing. Rental housing projects are viewed as long-

term investments, with tight budgeting processes.

If there are unexpected changes in government

charges, projects can quickly be rendered unviable.

In addition, builders may not be willing to take on

the risk of additional charges and will look for other

investment opportunities that provide more certainty.

This has a significant impact on the ability to deliver

new rental housing to an underserved market, creating

additional pressure on rents for existing homes.

In CMHC’s most recent Rental Market Report, it was

identified that vacancy rates in Vancouver’s Census

Metropolitan Area (CMA) dropped from an already-

low 1.2% in 2021 to 0.9% in 2022. There has been an

uptick in supply in the past year, however, demand

continues to outpace the creation of new rental housing.

This has led to decreased vacancy rates and higher rents

for the units that are available on the market.2

Rental developments have significantly higher equity

requirements than condo developments, contributing

to the cost sensitivities in the initial budgeting process.

Rental developments, unlike strata and condo projects,

cannot gather equity from presales. Rents can only be

charged once the units are occupied, and initial rents

are generally determined by the market at the time,

regardless of the additional cost pressures which may

occur during the permitting and construction process.

As policies change, often resulting in increased

costs, the development process becomes riskier.

Breaking Down the Taxes & Fees

The critical challenges associated with the cost of

building new homes are rarely caused by individual

taxes and fees. This report outlines several

government charges analysed in the examples,

however there are many other government-driven

costs that affect new housing. For example,

inclusionary zoning requires builders to incorporate

a fixed percentage of below-market housing into their

projects. These homes are typically restricted to rental

use and generally have a value that is significantly

less than the cost to construct them. As a result, this

shortfall must be distributed across all of the other

units within a development unless this cost is offset

through density or a public program. If more density

is provided, enough to offset the costs of building

below-market units, this results in more housing

supply added to the overall housing continuum.

If the additional costs on these units exceed market

values, it could undermine the project.

Similarly, green building requirements for new

buildings add to the construction cost, as high

efficiency materials and systems are incorporated into

the building design. While this cost is not paid directly

to governments, it is generated by government policy,

and unexpected changes can impact project viability.

While we support the addition of below-market rental

housing and green building practices in new buildings,

both of these requirements add to the collective

burden of charges and costs imposed by all levels of

government that put strain on project finances. Any

of these policies and charges can change throughout

the development process, making housing delivery

less certain. In addition to this, separate levels of

government rarely coordinate policies and charges,

resulting in a piling-on effect.

Empty Homes Tax (EHT),

Speculation and Vacancy Tax (SVT)

& Additional School Tax (AST)

The applicability of taxes and fees on new housing

can be difficult for builders to navigate. Taxes such

as Vancouver’s Empty Homes Tax (EHT) and British

Columbia’s Speculation and Vacancy Tax (SVT)

are intended to target similar market issues at two

different jurisdictional levels. Both taxes are collected

on vacant homes to generate funds for affordable

housing while incentivizing owners to contribute to the

secondary rental market. The Additional School Tax

(AST), applied to the amount of a property’s residential

value over $3 million, is an annual charge factored into

a builder’s budget as part of the residential property tax.

The evaluation of these taxes during the development

process is made more complicated by their differing

applicability and exemption criteria. The SVT requires

Building Activity criteria to be met in order for a project

to be exempt. For Vancouver’s EHT, the exemption is

defined by a Letter of Enquiry (LOE), which differs from

the AST exemption of Construction Activity.

In Vancouver, if developments do not meet the

necessary exemptions, they could attract both the

SVT and EHT, and end up paying increased AST

depending on the length of the approvals process.

For example, a project may meet the Building Activity

exemption thresholds for the provincial SVT, but

still be required to pay the EHT in Vancouver if the

project has not submitted an LOE. The LOE process

was initially intended as a high-level application to

understand the merits of a project, however in recent

years it has grown into a more detailed application,

adding time to the process and making it more difficult

to meet the EHT exemption threshold. In addition,

the longer a property is in the approvals process, the

more property tax is paid on the land. AST adds to

this burden, as it is charged alongside property tax.

Taxing Growth

Breaking Down the Taxes & Fees

Aligning exemptions for similarly focused tax measures

would streamline the budgeting process for new housing.

Funds collected through both the EHT and SVT are

intended to increase the availability and affordability

of housing within Vancouver and the province, but

can ultimately pose as a barrier to the delivery of new

homes. For the AST, development sites that have

a high residential value when they are assembled

can attract this tax while the developer is awaiting

permit approvals. As AST is charged annually, it is

dependent on approvals timelines to determine the

overall cost burden on the project budget. Exemptions

for new developments would eliminate the impact

of the AST on the cost of new housing. In addition,

faster permitting timelines would mitigate the impacts

of annual property taxes in general. Applying the

exemptions allowed in the SVT legislation to the AST

and EHT would improve the complicated application

of these taxes on new housing developments.

Federal Goods and Services Tax (GST)

The Federal Goods and Services Tax (GST) is not a

new cost, but it has substantial impacts on the ability

to deliver much-needed rental housing. For purpose-

built rental builders, it is often the most impactful tax

or fee that is charged on a project. GST rebates were

introduced to incentivize rental development; however,

they are no longer effective in many urban centres.

The qualification thresholds are set at a national level

and the unit values do not vary based on jurisdiction.

Compounding their ineffectiveness, these thresholds

have not been updated since they were introduced

nearly two decades ago.

For rental housing, GST rebates are available for new

residential rental units with a fair market value below

$350,000 and partial rebates for units valued up to

$450,000. There are no rebates available for new rental

housing exceeding $450,000 in value. This is an issue

in jurisdictions that cannot meet the rebate thresholds.

In an estimate completed by a rental housing

developer, a 430 sq. ft. studio unit in a new rental

building in downtown Vancouver could be valued at

approximately $554,000 based on current market

rents in new buildings. Even a studio exceeds the

rebate threshold value and therefore would not meet

the rebate eligibility criteria, larger units in Vancouver

would almost certainly be required to pay the full GST

amount. The GST rebate criteria is a substantial barrier

in areas where demand for rental housing far exceeds

supply and market values are high. This results in a

situation where markets that are most in need of new

rental housing are least likely to receive a GST rebate.

While all levels of government

acknowledge the need to increase

the supply of rental housing, the

way in which the GST is applied is

counter-productive to that goal.

GST is the largest single tax or fee

in a rental project budget.

There has been a substantial increase in market values

over the past 20 years, and the rebate thresholds

for rental development should be revised to reflect

inflation and the rise in housing prices. The GST

rebate should also be varied by local CMA. This

would incentivize rental housing development in

the jurisdictions with some of the greatest housing

availability challenges, such as in Vancouver, the

Capital Region or Okanagan. In the Vancouver rental

analysis, GST could account for nearly 10%, or

$250.60, of the average unit starting rent paid per

month. Removing this charge or offering a rebate

would eliminate one of the most significant barriers to

delivering new rental homes.

Taxing Growth

Monthly Rent

GST

Size

675

Per unit

$2,698

$250.60

GST Allocation in the Vancouver Rental Budget Example

Breaking Down the Taxes & Fees

Development Cost Charges (DCCs)

and Development Cost Levies (DCLs)

Development Cost Charges (DCCs) and Development

Cost Levies (DCLs) can be set at both the local and regional

level. These fees are levied on new developments

to fund infrastructure-related expenses that support

growth, such as water and sewer services or parks.

It is understood that growth needs to pay for growth,

however, increasing DCC and DCL rates with

inadequate notice and the layering of both local and

regional charges adds to project costs, which become

a component of the purchase price or monthly rent.

When the budgeting stage of the development process is

complete, the project viability is based-on what policies

are in place at the time. While DCCs are intended to

undergo a comprehensive review at least every five years

and can be indexed to inflation, there are a number of

municipalities that do not follow these best practices.

DCCs can increase intermittently and without a fixed

schedule. DCC and DCL changes with inadequate

notice can result in builders paying higher fees

after purchase commitments have been made and

significant redevelopment costs have been incurred.

This can impact whether the project can be built at all.

The Provincial DCC and DCL framework allows

for some in-stream protections to guard against

this challenge. Outlined in Sections 568 and 511

of the Local Government Act (LGA), a “pre-curser

application” must be in-stream, meaning a building

permit, development permit, rezoning or subdivision

application. This would satisfy the first stage of an “in-

stream” application, and the second stage would be

met if a building permit is issued within 12 months of

the adoption of the increased rates.3 These protections

set by provincial legislation were introduced over 10

years ago. Since then, the municipal approval process

has increased in complexity and staffing shortages

within municipalities have put strain on the ability to

process applications.

In the 2022 Municipal Supply and Benchmarking Study

released by the Canadian Home Builders’ Association

of B.C. (CHBA BC), it is identified that the average

municipal approval timelines in B.C. are 14.2 months for

a rezoning approval, and 13.6 months for a development

permit. In the project budgets analysed, a building

permit can take anywhere between 6-12 months for

approval. In municipalities facing staffing shortages,

permits can take even longer. The CHBA BC’s report

states that, “Shorter timelines can help improve the

responsiveness of housing supply to demand.” 4

Shorter approval timelines would provide greater

certainty that projects could qualify for in-stream

protections if DCC or DCL rate changes occurred

during the approval process. This would avoid the

builder paying higher fees than they had previously

budgeted for. In addition, phasing-in substantial DCC

or DCL increases over a multi-year period would

mitigate the budgetary impact for projects that are

in-stream but unable to receive their building permit

within the first year after the new rates are approved.

In-stream cost increases are a risk when combined

with the overall burden of taxes and fees, and make

it more challenging to develop new housing.

Developers are often required to deliver cash or in-kind

contributions for infrastructure. In Metro Vancouver,

a housing project will pay DCCs to fund infrastructure

Taxing Growth

Regional DCC Infrastructure Categories

Transportation

Water

Sewer

Municipal DCC Infrastructure Categories

Road

Sewer

Water

Drainage

Parkland Acquisition and Improvements

City of Vancouver DCL Infrastructure Categories

Road

Sewer

Water

Drainage

Parkland Acquisition and Improvements

Child Care Facilities

Replacement Housing (Social/Non-Profit Housing)

Breaking Down the Taxes & Fees

that facilitates the provision of regional utilities like

water and sewer delivery. The project will also pay

municipal DCCs or DCLs for new or upgraded systems

within their local community. In the Vancouver condo

example, the Regional DCCs and Municipal DCCs

charged on the development of an average unit total

$31,910. This amount will increase by a further $4,261

with the anticipated addition of Metro Vancouver’s new

Water DCC in 2023.

DCC rebates can be available, but developers are

not always able to access these rebates after the

infrastructure has been financed. This creates a

level of risk associated with paying for, or directly

building, growth-related infrastructure as part of the

development process. The issue is compounded in an

inflationary environment, when financing requirements

are increased and more difficult to achieve. Increases

can occur to multiple types of government charges

in a short time period, emphasizing the need for

coordination across levels of government. This can

result in developers paying up to three separate

charges for various parts of new service. This type of

layering of taxes and fees contributes to the overall

burden of taxes on a new housing project.

Community Amenity Contributions (CACs)

Community Amenity Contributions (CACs) can be a

very unpredictable cost in the delivery of new housing.

A CAC is another fee levied by some municipalities,

outside of the legislative framework provided by the

Local Government Act and Community Charter (or

Vancouver Charter). CACs are commonly used to fund

amenities such as childcare, community facilities,

park upgrades, and affordable housing, but funds

are ultimately allocated by the municipality.5 In the

Vancouver rental example, the CAC could account for

$161.30 of the average monthly rent per unit, or 5.97%,

and in the Vancouver condo example the CAC could

contribute $89,992 to the cost of an average unit. The

CAC rates in Vancouver are greater than the CACs

budgeted in the other examples in this analysis.

If the CAC amounts are negotiated with the

municipality, the process can take several years to

reach a conclusion. This can create a risk so high

that builders may decide not to proceed with a new

housing development. While the scenarios in this

analysis have fixed CAC rates, some municipalities,

including the City of Vancouver, also use negotiated

CACs which are much harder to calculate into the

budgeting process. Although fixed CAC rates provide

more predictability, CACs in general are a burden on

any new housing development, adding more costs to

projects. If these costs exceed project revenue or the

amount a project can bear, after other costs have been

fixed (ie. land cost), the project may be delayed, or not

built at all.

In the Vancouver rental example, the CAC could be

charged at $25.61 per sq. ft. and in the Vancouver

condo example, the CAC could be more than four

times as high, totalling $112.49 per sq. ft. Supplying

new housing, especially rental housing, is critical to

meet the demands of a growing population, but high

CAC expectations can create a burden big enough

to render a project unviable. If a project does not

proceed it will reduce the new housing supply as well

as the funding for amenities.

Taxing Growth

CAC per unit

Total Fees per unit

Per unit

$161.30

$882.70

Total Charge per sq. ft.

$25.61

CAC - Vancouver Rental Example

CAC

Total Fees per unit saleable

Per unit

89,992.00

$327,565.53

Total Charge per sq. ft.

$112.49

$409.46

CAC - Vancouver Condo Example

Breaking Down the Taxes & Fees

Property Transfer Tax

In all of the condo examples, there is potential for the

Property Transfer Tax (PTT) to be charged twice.

This tax is charged when the builder assembles a site,

and becomes embedded in the cost of the housing.

It then can be charged again if the unit purchaser

does not meet all of the PTT exemption requirements.6

Both of these PTT charges have been included in

the budget of the development projects analysed to

show the range of PTT an end user could pay. There

are several types of exemptions a buyer could qualify

for, including the Newly Built Home Exemption, which

would apply to housing purchased from a developer.

To qualify for this exemption, the unit must:

Be located in British Columbia;

Only be used as a principal residence;

Have a fair market value of $750,000 or less; and

Be 0.5 hectares (1.24 acres) or smaller.

All criteria have to apply for the purchaser to qualify for

an exemption. In the Vancouver condo example, the

average unit is above the value threshold and would

not be eligible for a PTT exemption. In the Saanich and

Kelowna examples, the average unit would meet the

fair market value criteria. However, the purchaser could

still pay the PTT at the time of purchase if the unit is

intended to be rented out and would not be the buyer’s

primary residence.

If an investor purchases a new unit for the purpose of

renting it out, rather than living in it themselves, the PTT

on the sale of the completed unit would apply. In the

Saanich example, this could be an additional $10,062.00

cost for the average unit, and would become part of

what the renter would pay. If the purchaser meets all

of the PTT exemption criteria, including the criteria

of purchasing the unit as their principal residence,

the PTT charge on the purchase would be $0 at the

purchaser stage. In the Kelowna scenario, the PTT

charged on the purchase of the average unit could

either be $0 or $9,900, dependant on the purchaser’s

eligibility to meet the exemption criteria.

Public Art Fee

A municipal Public Art Fee is another type of cash

contribution charged to a project to raise funds for

public amenity projects. In the Vancouver condo

example, this is a charge of $1,584.00 per unit, and

in the Vancouver rental example, the charge could

impact rent by $12.50 per month. While this is a lower

charge, it still contributes to the layered taxes and fees

charged on housing.

Municipal Permits

In B.C., municipal permits refer to a wide range of

approvals. In this analysis, the examples have included

development and building permits. In the Vancouver

rental example, it can take anywhere from 6-12 months

to receive a development permit, and a further 6-10

months for a building permit. Municipalities such as

Vancouver are recognizing the negative impacts of

long processing times, and are working to streamline

their reviews and approval processes.

Taxing Growth

Principle Residence

PTT Paid $0

Rented

PTT Paid $$9,900

48-90 MONTHS TOTAL

12-18

Months

Rezoning

6-12

Months

Development

Permit

6-10

Months

Building

Permit

18-42

Months

Construction

6-8

Months

Lease Up

Period

Permitting: 24-40 Months

Construction & Leasing: 24-50 Months

Vancouver Rental Example - Project Timeline

Breaking Down the Taxes & Fees

Recommendations

Building the housing supply that is

required to meet British Columbia’s

current needs and planning for

future growth will take action by

all levels of government.

The recommendations outlined in this report are

only some of the tools to address taxes and fees

as barriers to new housing delivery. Some of these

recommendations build on the opportunities identified

by the Development Approvals Process Review (DAPR)

and recommendations of the Canada-B.C. Expert

Panel on Housing Supply and Affordability (Expert

Panel), to improve processing times and streamline

development approvals at the local and provincial levels.

Other recommendations include tax-specific solutions

to create certainty for home builders, and intentionally

support the development of new rental housing.

Streamline Development

Approval Processes

Steps must be taken to streamline approvals and

minimize the impact of annual property taxes, as

well as better coordinate government charges to

reduce the layers of taxes and fees that apply to

new housing. Lengthy development processes add

costs to new housing in the form of both time and

funding. Considering the extensive rezoning timelines

in jurisdictions such as Vancouver, holding costs such

as property taxes and interest can become significant

while the project goes through the development

approvals process. Uncertainty in the total amount

of charges on a project add a level of risk that can

jeopardize the viability of the project.

Establish Standardized Timelines and Processes

UDI recommends that municipalities establish

standardized and predictable development approval

timelines and processes. This recommendation aligns

with the Expert Panel, which advised that “the B.C.

government impose statutory time limits to all stages

of the property development process, municipal or

other, for all types of development.” 7 Currently, larger

developments can take many years to reach final

approval due to the capacity constraints of municipal

staff, competing policy objectives, negotiated CACs,

and lengthy Council proceedings. Streamlining municipal

approvals could address the risks associated with taxes

that are charged annually, such as the AST. It could also

minimize the impact of changes to DCC, DCL, and

CAC rates on in-stream projects. Additionally, offsetting

increases in community amenity contributions with added

density would help maintain the viability of a project, and

ultimately support the growth of the full housing continuum.

Incorporate Pre-zoning into Official Community Plans

Pre-zoning sites would reduce a project’s approval

timeline by decreasing the time and risks associated

with a full rezoning process. The DAPR recognizes the

opportunity to “Provide training to local governments

and/ or create best practices guide on conducting

a meaningful and robust public consultation process

for OCP and pre-zoning, then delegate approval of

subsequent applications.” 8 In the Vancouver and

Saanich examples, it is estimated that rezoning could

take anywhere from 12-26 months. The taxes incurred

during this time, and the uncertainty embedded

within the public-hearing process, adds risk to the

delivery of new housing. Approaches could include

pre-zoning at the end of area planning processes,

or pre-zoning within 800 metres of major transit hubs.

This would improve certainty for builders and speed

up the approvals process, reducing both cost and time

barriers to new housing delivery.9

Taxing Growth

Recommendations

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19