THE UNDERUSED HOUSING TAX (UHT)
As part of the 2021 Federal Budget the Government of Canada proposed to implement a national 1% annual tax on the value of residential real estate owned by any non-resident, non-Canadian that is vacant or underused. The Underused Housing Tax (UHT) received Royal Assent on June 9, 2022 and is now law, retroactive to January 1, 2022.
On December 31, every person (other than an excluded owner; outlined below) of a residential property in Canada will be required to file an annual return with the Canada Revenue Agency (CRA) and pay a 1% tax on that property for the year, based on the taxable value of the property and the person’s interest in that property. The taxable value is the greater of the assessed value for property tax purposes and the property’s most recent sale price on or before December 31 of the calendar year. The return must be filed by April 30 of the following calendar year and the UHT owing is also required to be paid on the same date.
WHICH OWNERS ARE EXCLUDED FROM THE UHT
The legal owner will need to determine if they are an “excluded owner” for the purposes of the UHT. Excluded owners are not required to file a return and the UHT does not apply to them. Some examples of “excluded owner” are owners, who on December 31 of the calendar year, are:
- Canadian citizens or permanent residents of Canada (irrespective of their residency for income tax purposes)
- A publically traded Canadian Corporation
- A person with title to the property in their capacity as trustees
- A registered charity
- A co-operative housing corporation
- Municipal organizations or other public institutions and government bodies
*Note that the above list does not include Canadian private corporations, partnerships and trusts. As such these entities are required to file an annual return if they own residential property in Canada on December 31 of the calendar year.
TYPES OF PROPERTY SUBJECT TO THE UHT
The tax specifically applies to “residential property” in Canada only. This is defined in the Income Tax Act, and does not include empty residential lots – there must be a structure on the property. The tax applies to land with detached houses or similar buildings with not more than three dwellings such as a duplex, semi-detached houses, residential condo units, row house units or similar premises intended to be owned as a separate unit or parcel including the associated common areas and land subjacent to the building.
AVAILABLE EXEMPTIONS FROM UHT
It is important to note even if you are exempt under any of the following list of exemptions you still have an obligation to file a tax return to disclose the exemption:
Primary Place of residence
An owner who is an individual is exempt from the tax for a calendar year if a dwelling unit that is part of the residential property is the primary place of residence of:
- The owner or the owner’s spouse or common-law partner; or
- The child of the owner or the owner’s spouse or common-law partner, but only if the child occupies the residence for the purpose of authorized study at a designated learning institution
If an individual who is neither a citizen nor permanent resident of Canada owns two or more properties, the individual may elect to designate one of the properties as their primary residence for the year. If an individual and their spouse or common-law partner both own one or more residential properties and neither individual is a citizen nor permanent resident, they must file a joint election to designate one of the properties as a primary residence in order to claim the exemption. Only one single or joint primary residence election may be filed.
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.
A “qualifying occupancy period” means a period of at least one month in the calendar year during which a qualifying occupant has continuous occupancy of a dwelling unit that is part of the residential property. A qualifying occupant includes:
- An arm’s-length tenant (under an agreement evidenced in writing)
- A non-arm’s length tenant who is given occupancy in exchange for consideration that is not below the fair rent for the property
- An individual who is the owner or the owner’s spouse or common-law partner and is in Canada to pursue authorized work under a Canadian work permit
- An individual who is a spouse, common-law partner, parent or child of the owner and who is a citizen or permanent resident
- A prescribed individual (to be defined by regulation)
However, if the owner or the owner’s spouse or common-law partner owns multiple properties and has filed the primary residence election (described above), the owner and their spouse or common-law partner will be excluded as qualifying occupants of the other properties for purposes of the qualifying occupancy exemption
Specified Canadian corporation, partnership, trust
An owner that is a specified Canadian corporation is not required to pay the tax, which is any corporation incorporated within Canada, unless one of the following applies:
- An individual who is not a Canadian citizen or permanent resident, or a corporation that is incorporated or continued outside of Canada (individually or combined) have ownership and control of at least 10 percent of the shares of the corporation representing both value and voting rights; or
- If a corporation does not have share capital, the chairperson or other presiding officer is neither a citizen nor a permanent resident, or at least 10 percent of its directors are not Canadian citizens or permanent residents.
If a residential property is owned by a trust or partnership, no UHT is payable if:
- Each member in a Partnership that meets the definition of an excluded owner or a specified Canadian corporation on December 31 of the particular year
- A Trust where each beneficiary with a beneficial interest in the residential property owned by the trust meets the definition of an excluded owner or specified Canadian corporation on December 31 of the particular year
Seasonal Residence (Limited access)
The tax does not apply in respect of a residential property if it is not suitable for year-round use as a place of residence, or if the property is seasonably inaccessible because public access is not maintained year-round.
Disaster or hazardous condition
The tax does not apply in respect of a residential property that is uninhabitable for at least 60 consecutive days in the calendar year as a result of a disaster or hazardous condition caused by circumstances beyond the owner’s reasonable control. This exemption can only be used in respect of the same disaster or hazardous condition for up to two calendar years. A disaster includes an earthquake, fire, flood, landslide or any other natural disaster or dangerous event. Hazardous conditions generally include any condition that is hazardous to the health or safety of the property’s occupants, such as a structural defect or contamination by a dangerous substance.
The tax does not apply in respect of a residential property that is uninhabitable for at least 120 consecutive days in the calendar year due to renovations, as long as:
- Any work relating to renovation is carried out without unreasonable delay.
- This exemption did not apply in respect of the property for any of the nine prior calendar years.
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 acquiring interest
An exemption applies for the calendar year in which a person first becomes an owner of a residential property, as long as the person never owned the property in the prior nine calendar years.
Death of owner (or other owner)
An exemption applies in respect of a residential property for a calendar year if the owner died during the calendar year or the previous calendar year. This exemption extends to the personal representative of the deceased individual (e.g., the executor of the individual’s will or the administrator of the individual’s estate), provided they did not previously own the property in the calendar year or the prior calendar year.
If an owner of a residential property dies and that individual’s ownership percentage on the date of death was at least 25%, any other owner’s interest in the property is exempt for the calendar year in which the death occurred and the subsequent calendar year, as long as they were an owner of the property on the day the individual died.
An exemption applies in respect of a residential property for a calendar year if construction of the property is not substantially completed (i.e., generally 90% or more) before April of the calendar year. As well, the UHT Act provides an exemption for new property held by a developer as inventory for sale. Specifically, the tax does not apply to a residential property for a calendar year if the following conditions are met:
- Construction of the property is substantially completed after March of the calendar year.
- The property is offered for sale to the public during the calendar year.
- The property is not occupied by an individual as a place of residence or lodging during the calendar year.
The tax does not apply to a residential property that is vacation or recreational properties. This exemption would apply to a property that is:
- Located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents.
- Used personally by the owner (or the owner’s spouse or common-law partner) for at least four weeks in the calendar year.
However, the details of this exemption have not yet been confirmed by regulation, yet there is a tool online to assist owners determine if their property is eligible under this exemption: Underused housing tax vacation property designation tool
DETERMINING THE TAX PAYABLE
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:
- 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
- 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.
FILING REQUIREMENTS AND PENALTIES
An owner (other than an excluded owner) of one or more residential properties on 31 December of a calendar year is required to file a return for each residential property. A return for a calendar year is due on or before 30 April of the following calendar year. The return must be made in prescribed form (yet to be released at the time of writing) containing prescribed information and must indicate the amount of tax (if any) that is payable.
Since 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.
A person who fails to file a return on time is liable to a penalty equal to the greater of the following amounts:
- $5,000, if the owner is an individual, or $10,000, if the owner is not an individual; and
- The total of:
- 5% of the applicable tax for the property for the calendar year; and
- 3% of the applicable tax for each complete calendar month the return is late
For the purpose of determining the penalty, if a person fails to file a return for a calendar year by 31 December of the following calendar year, the applicable tax is calculated on the basis that certain exemptions are 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.
Owners of residential property will want to ensure they are well aware of any obligations they may have under this new UHT and whether they qualify for any exemptions, as tax returns will need to be filed by April 30, 2023 for the calendar year of 2022. Owners should also be alert to similar taxes imposed at the provincial or municipal level. For example, vacancy tax imposed in the city of Vancouver in addition to the vacancy tax imposed by the province of British Columbia. Other cities with (or considering) vacancy taxes include Ottawa, Toronto, Hamilton and Peel Region.
We would be happy to review your situation to determine if the UHT applies and your filing requirement, as well as preparing any required returns under the UHT. Please contact us for more information regarding the above by sending an email to firstname.lastname@example.org.
Yours very truly,
Vaive and Associates Professional Corporation
Chartered Professional Accountants