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Underused Housing Tax Act

November 09, 2022

Underused Housing Tax Act

Synopsis
8 Minute Read

Highlights of the new Federal Underused Housing Tax

As a part of the 2021 Federal Budget, the Government of Canada announced its intention to implement a national one percent annual tax on the value of residential real estate owned by any non-resident, non-Canadian that is considered vacant or underused. To this end, the Underused Housing Tax Act (the Act) was enacted on June 9, 2022 and will apply to residential properties owned on December 31, 2022.

Overview of tax and reporting

Under these new rules, every person that is, on December 31, an owner (other than an excluded owner; definition follows below) of a residential property located in Canada will be required to file an annual return with the Canada Revenue Agency (CRA) and pay a one percent Underused Housing Tax (UHT) on that property for the year, based on the value of the property and the owner’s proportionate interest in the property. This federal tax is levied in addition to similar vacancy taxes already administered by certain provinces and municipalities. 

The return must be filed by April 30 of the following calendar year, and any UHT is also required to be paid to the CRA by this same date. 

Certain eligible uses will exempt a residential property from the UHT. These exemptions are discussed in greater detail below. Some of the more common exemptions will include property that is the owner’s primary place of residence, or property with a qualifying occupancy (see definition below) of more than 180 days during the year. The UHT will also not apply to property owned by a corporation that has foreign owners with shares representing less than 10 percent of the votes and value of the corporation. However, to claim an exemption from the UHT for the year, a return must be filed by the April 30 due date.

Although legislation is in force, and effective beginning January 1, 2022, some details still remain unclear. In particular, the required form and manner for the annual filing has not been established. Also, additional regulations may be introduced to prescribe special treatment for certain persons, properties or areas. Regardless of these uncertainties, many of those who are neither a Canadian citizen nor Canadian permanent resident owning Canadian properties will be affected by this new tax and reporting requirement, as well as private corporations, trusts, and partnerships.

Which owners are excluded from the UHT?

Only persons who meet the definition of an excluded owner are exempt from the annual filing and liability under the UHT.

An excluded owner is, on December 31 of a calendar year, one of the following:

  • An individual Canadian citizen or permanent resident of Canada
  • A publicly traded Canadian corporation
  • A person with title to property in their capacity of trustees of various widely held trusts
  • A registered charity
  • A cooperative housing corporation
  • A municipal organizations or other public institutions and government bodies.

All other owners will be required to file an annual return and pay UHT unless they meet an available exemption. Specifically, all private corporations, partnerships and trusts which own residential property in Canada will be required to file an annual return, as well as individuals who are neither a Canadian citizen nor a permanent resident.

The owner of a residential property is the person identified under the land registration system applicable where the property is located, as well as certain persons with a life interest or long-term (20 years or more) lease in a particular residential property or the land it is situated on.

Which properties will be subject to UHT?

Unless an exemption is available, the UHT applies to residential properties located in Canada. A residential property includes a detached house, containing no more than three dwelling units, and including the land subjacent that is reasonably necessary for its use and enjoyment. A dwelling unit generally refers to a single unit within a residential property that contains its own kitchen, bath and living area (i.e. duplex, triplex). The UHT will also apply to residential properties that are semi-detached houses, rowhouse units, residential condominium units, or any other similar premises intended to be owned as a separate unit or parcel and including the associated common areas and land subjacent to the building.

What are the available exemptions?

Where an owner does not qualify as an excluded owner, certain characteristics or use of the property may exempt the residential property from UHT for a given calendar year.

Primary place of residence

No tax is payable for a calendar year if a dwelling unit forming part of the residential property is the primary place of residence of:

  1. The owner, or the owner’s spouse or common-law partner; or
  2. A child of the owner or the owner’s spouse or common-law partner, who occupies the residential property for the purpose of authorized study at an institution designated to host international students.

If an individual who is neither a citizen or permanent resident of Canada owns multiple properties, either alone or together with a spouse who is also neither a Canadian citizen or permanent resident, this exemption is only available on filing an election to designate which property is the primary place of residence in respect of the year. The election must be filed by the April 30 of the following year, in a form which remains to be prescribed. Where the property is owned jointly, the election must be made jointly by the owners.

Qualifying occupancy

No tax is payable for a calendar year if the owner of the property satisfies a qualifying occupancy test. Specifically, the property needs to be occupied by a qualifying individual (described below), in periods of at least one month and that total at least six months (180 days) of the year.

To meet the qualifying occupancy test, one of the following individuals must occupy a dwelling unit that is part of a residential property during the relevant period:

  1. An individual who deals at arm’s length with the owner and any spouse or common-law partner of the owner, under an agreement evidenced in writing.
  2. An individual who does not deal at arm’s length with the owner or with any spouse or common-law partner, and who is given continuous occupancy of the dwelling unit under an agreement in writing, and for consideration that is not below the fair rent for the residential property.
  3. An individual who is the owner or the owner’s spouse or common-law partner, who is in Canada for the purpose of pursuing authorized work under a Canadian work permit, and who occupies the dwelling unit in relation to that purpose; or
  4. An individual who is a spouse, common-law partner, parent or child of the owner and who is citizen or permanent resident.

In order to count any given month towards the qualifying occupancy test, the individual owner, spouse, common-law partner, parent or child, as the case may be, must primarily reside at the particular residential property for the month (i.e., in terms of the number of days in the period). 

Where an owner or their spouse or common-law partner filed an election to designate one of multiple properties as a primary residence, the owner and their spouse are excluded as qualifying occupants of any other properties they may own.

MNP INSIGHT: Fair rent is currently defined as five percent of the taxable value of the residential property, however new regulations could prescribe an alternate measure. Presumably fair rent may be pro-rated for the appropriate period of occupancy for the year, however this is not currently specified in the rules.

Limited seasonal access

No tax will be payable on residential properties not suitable for year-round use as a place of residence. For example, properties which are not winterized would meet this condition. In addition, an exemption is available for residential properties inaccessible during part of the year. This would be the case if public access is not maintained year-round (i.e. through the winter).

Disaster or hazardous condition

No tax will be payable on residential properties which are uninhabitable for a period of at least 60 consecutive days in the calendar year due to disaster or hazardous condition caused by circumstances beyond the reasonable control of an owner, provided the exemption was not already granted for the same disaster for more than one prior calendar year.

Renovation or construction

No tax will be payable on residential properties which are uninhabitable for a period of at least 120 consecutive days in the calendar year as a result of a renovation, carried on without unreasonable delay, provided the exemption was not granted in respect to the property for any of the nine prior calendar years.

Also, no tax will be payable where construction of a residential property is not substantially completed (generally meaning 90 percent or more) before April of the calendar year. If construction of a residential property is substantially completed after March of the calendar year, an exemption will be available provided the property is offered for sale to the public during the year and has never been occupied by an individual.

Year of acquisition

No tax is payable for a calendar year if the owner first acquired the residential property during the year and did not own the same property at any time during the nine prior years. This exemption will apply to acquisitions by sale and is expected to also apply to other transfers of ownership such as distributions by an estate or other trust.

On death of owner

No tax is payable for a calendar year by an owner in the year of the owner’s death or the following year. This exemption extends to the personal representative of a deceased individual. In other words, an exemption is available for two calendar years while an estate is under administration – December 31 of the year of death, and the following calendar year. 

In addition, this exemption will be available to the surviving owners of a residential property, where the deceased owner’s interest in the property was at least 25 percent.

Specified Canadian corporation

No tax is payable for a calendar year by a specified Canadian corporation, which is a corporation incorporated under the laws of Canada, except where:

  • The following persons have ownership and control of 10 percent or more of the shares of the corporation representing both value and voting rights under all circumstances:
    1. An individual who is neither a citizen nor a permanent resident
    2. A corporation that is incorporated or continued outside of Canada
    3. Any combination of (a) and (b)
  • In the case of corporation without share capital:
    1.  A chairperson or other presiding officer who is neither a citizen nor a permanent resident, or
    2. 10 percent or more of its directors are neither citizens nor permanent residents.

Partner of specified Canadian partnership

No tax is payable for a calendar year by a person who owns residential property solely in their capacity as a partner of a specified Canadian partnership, which is a partnership where each member is, on December 31, an excluded owner or specified Canadian corporation.

Trustee of specified Canadian trust

No tax is payable for a calendar year by a person who owns residential property solely in their capacity as a trustee of a specified Canadian trust, which is a trust where each beneficiary with an interest in the residential property owned by the trust is, on December 31, an excluded owner or specified Canadian corporation.

Prescribed area and condition

Draft regulations have been released to exempt recreational properties in less densely populated area. Specifically, no tax would be payable by an owner of a residential property that is both:

  • Located in a prescribed area; and
  • Used personally by the owner (or the owner’s spouse or common-law partner) for at least 28 days during the calendar year.

A prescribed area will include both:

  • An area that is not within a census metropolitan area or census agglomeration with a population more than 30,000
  • An area that is within a census metropolitan area or a census agglomeration with population of more than 30,000 but is not within a population centre.
MNP INSIGHT: Whether an area qualifies as a prescribed area must be monitored annually, as the determination will be based on census data, which is updated periodically. 

How is the UHT calculated?

The UHT formula is one percent of the value of the property, multiplied by the applicable ownership percentage in respect of the person.

There are two ways that the value of the residential property for the purpose of the annual UHT may be determined. Namely, either:

  1. Taxable value: This value method uses the greater of (i) the tax assessed value for the year for the purpose of the related property tax assessment, and (ii) the most recent sale price during the year, or
  2. Fair market value: This alternative method allows an owner to make an election for the value of the residential property to be determined in a manner satisfactory to the Minister of National Revenue (the Minister), at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. Use of this method will generally require that the owner obtain an appraisal. The election must be filed by April 30 of the following calendar year.

What happens on failure to file the annual return?

An annual return must be filed by every owner (other than an excluded owner) with the CRA for each residential property owned on December 31 of a calendar year. The return must be filed by April 30 of the following calendar year. Any UHT is also required to be paid to the CRA by this same date, subject to an exemption being available.

Given that the UHT is effective 2022, the first annual filing and payment due date will be required by April 30, 2023, for applicable residential properties owned by non-citizen, non-residents on December 31, 2022.

Loss of exemptions

Available exemption and certain elections must be made on filing the annual return. In other words, if the annual return is not filed by the April 30 deadline, it appears that an owner could no longer be able to access an available exemption on a particular property in respect of the year, causing UHT to be levied on the property.

Interest

Interest is required to be paid on unpaid amounts at the prescribed rate and is compounded daily. An extension for time for filing and payment may be made in writing by the Minister. If such an extension is granted, interest and penalties (discussed below) will be deferred to the extended filing and payment date.

Penalties

Every person who fails to file a return, as required under the Act, is liable to a penalty equal to the greater of

  1. $5,000 for individuals, or $10,000 if not an individual and
  2. The amount that is the total of
    1. Five percent of the tax payable by the person in respect of the residential property for the calendar year and
    2. The product obtained when three percent of the tax owing is multiplied by the number of complete months from the due date of the required return that the balance remains outstanding.

Where a return is not filed by December 31 of the following calendar year, the penalty is determined as if several exemptions were not available. Specifically, those exemptions generally available for primary residences, qualifying occupancy, uninhabitable properties due to disaster, renovation, or limited seasonal access, are ignored and the failure to file penalty will be determined under paragraph (b) as if a tax amount was payable in respect of the property. 

Other minor penalties may be assessed in circumstances where the owner failed to provide required information or failed to file a return when demand. However, an owner may also be assessed a more onerous where gross negligence is involved. That penalty is 25 percent of the tax avoided, where an owner has made false statements or omissions that were found to be grossly negligent that resulted in an adjustment to the UHT owing for the year.

Other consequences

Where no return is filed for a calendar year, that year will not become statute barred. Therefore, the CRA may assess tax, interest, and penalties at any time after the calendar year for delinquent returns and tax payments.

Certificates of compliance

 A sale or transfer by a non-resident person of property located in Canada gives rise to specific tax and reporting requirements, generally including making a request from the CRA for a certificate of compliance under section 116 of the Income Tax Act.

Draft legislation has been released which allows the CRA to decline a request for a certificate of compliance under the Income Tax Act, where it is determined that a non-resident vendor is not fully compliant with its UHT tax and reporting obligations for all periods up to the date of sale.

MNP INSIGHT: Going forward, it is expected that a request for a certificate of compliance will also prompt a UHT compliance review.

Contact us

Contact your local MNP Tax Advisor for more information.

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