IMPORTANT REMINDER – New Underused Housing Tax (UHT) compliance requirement – Due April 30, 2023
Effective January 1, 2022, new legislation came into effect in Canada, and with that, additional annual tax filing requirements with severe penalties for non-compliance. Initially designed to stop non-residents/foreign investors from “parking money” by buying homes in Canada and leaving them vacant, the the Underused Housing Tax Act (UHTA) has a much broader scope and impacts not only non-residents, but also Canadian corporations, partnerships, and trusts.
This new tax applies to a person whom is an owner of a « residential property » in Canada on December 31 of the relevant year, unless the owner is an « excluded owner » or is eligible to claim one of the available exemptions to the UHT in respect of the particular property.
The first UHT filing is due April 30, 2023, and the tax is 1% of the value of the property. Canada Revenue Agency (CRA) has published additional guidelines on its website (CRA UHT Guidelines) including examples of what is considered residential property, the definition of excluded owner and situations that are exempt from UHT.
A key point to note is that if the owner is not considered an « excluded owner« , but is an « affected owner » there is an obligation to file an annual UHT return (Form UHT-2900 – Underused Housing Tax Return and Election form) before April 30, even if the filer ultimately is not liable for the tax. The legislation does impose severe penalties for non-compliance even if the filing results in no balance due – penalties start at $10,000 if the owner is an entity/corporation and $5,000 for an individual owner.
The Underused Housing Tax Act defines “residential property” as:
- A detached house or similar building, containing not more than three “dwelling units”, along with areas of the building including adjacent land that is reasonably necessary for its use and enjoyment as a place of residence for individuals;
- A semi-detached house, rowhouse unit, residential condominium unit or other similar premises together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the house, unit or premises and that is reasonably necessary for its use and enjoyment as a place of residence for individuals.
A “dwelling unit” is defined as:
- Any residential unit that has a private kitchen, bath and living area.
An “excluded owner” is defined as:
- An individual who is a Canadian citizen or permanent resident of Canada;
- A publicly listed corporation incorporated under federal or provincial law;
- A person that owns residential property in their capacity as a trustee of a mutual fund trust, a real estate investment trust (REIT), or a specified investment flow-through trust;
- A registered charity, a cooperative housing corporation, a municipality or para-municipal organization, a hospital authority, public college, school authority or university;
- An Indigenous governing body or a corporation wholly owned by such a body;
- A prescribed person.
Currently, the UHTA regulations does not specifically define what is a “prescribed person” and therefore, owners of residential property held in private companies, trusts and partnerships are not considered excluded owners.
Any owner of a Canadian residential property that is not considered an excluded owner would be considered an “affected owner” and as previously stated subject to the annual tax compliance requirement.
An affected owner might not be subject to the 1% tax liability on the value of the property, if they qualify for tax exemptions listed specifically in the UHTA. Some of the key tax exemptions are listed below. For a complete list of tax exemptions we recommend reviewing the CRA guidelines and UHTA.
Key Tax Exemptions
Some key tax exemptions of the Underused Housing Tax Act include:
- Primary Residence
- Qualifying Occupancy
- A qualifying occupancy exemption applies for a calendar year if the property is occupied by one or more qualifying occupants in relation to the owner for at least 180 days of the year. To satisfy this test, only days that fall into a qualifying occupancy period in the year are counted.
- Specified Canadian Corporation, but does not include:
- A corporation for which ownership or control of shares representing 10% or more of the equity or voting rights in the corporation is held by individuals who are neither Canadian citizens nor permanent residents of Canada or foreign corporations;
- A corporation without share capital, for which the chairperson or other presiding officer, or 10% or more of the directors or other similar officers, are individuals who are neither Canadian citizens nor permanent residents of Canada.
- Specified Canadian Partnership, specified Canadian Trust;
- New owner of the residential property in the calendar year and was never an owner of the residential property in the prior nine calendar years;
- Deceased during the calendar year or the prior calendar year;
- Personal representative in respect of a deceased individual who was an owner of the residential property during the calendar year or the prior calendar year and the person was not otherwise an owner of the residential property in either of those calendar years;
- The construction of the residential property is not substantially completed before April of the calendar year;
- The construction of the residential property is substantially completed after March of the calendar year, the residential property is offered for sale to the public during the calendar year and the residential property has never been occupied by an individual as a place of residence or lodging during the calendar year.
Welch LLP comments
Although the filing requirement imposed by the Underused Housing Tax Act are cumbersome, and at present it is not clear if CRA would provide relief from penalties for the first year filing or extend the filing deadline, we recommend that clients review their residential property holdings as soon as possible. We encourage that you review land register/land title documents to determine whose name is on the legal title of the property.
As stated above, unless an owner explicitly meets the definition of excluded owner, any other owner of Canadian residential property should familiarize themselves with the new legislation and the required tax compliance requirements.
We recommend that you review your Canadian residential property ownership held in corporations, partnerships, or trusts, including bare trusts, and discuss with your tax advisor if the UHT filing requirements would apply.