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.

OVERVIEW

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:

1. The owner or the owner’s spouse or common-law partner; or
2. 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.

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.

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:

1. 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
2. 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.

Renovation/Construction

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.

New buildings

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.

Vacation/recreational properties

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:

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.

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:
  1. 5% of the applicable tax for the property for the calendar year; and
  2. 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.

CONCULSION

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 info@vaiveandassocaites.ca.

Yours very truly,

Vaive and Associates Professional Corporation

Chartered Professional Accountants

Estate planning is basically the process of taking steps to ensure that:

1. Beneficiaries maintain as much of your estate as possible

2. Your estate ends up going where you want it to go

Both goals are equally important and there will be many people lining up to assist you along the way. There will be lawyers, accountants, investment advisors, insurance specialists (and more) and while they're important, it's also crucial you don't let them dictate the process. 

The primary tool for estate planning is the writing of your will. A will contains the set of instructions on how things are going to go after your passing. It names an executor – the person who's going to administer your estate. It gives them the power to make decisions and administer the will. The executor role is important (and often an honour), but it also brings with it a lot of work, responsibility and even stress.

As mentioned in our last article (and podcast episode), one of the main goals in estate planning is saving or deferring estate taxes. And a spousal rollover will, in general, accomplish that. By leaving your assets directly to your spouse, the tax will be deferred and triggered later when your spouse either sells the assets or passes away.

A spousal rollover may be tax efficient but may not fit your personal circumstances. For example, if this is your second marriage but your children come from your first marriage, things can get complicated. In this case, you may wish to set up a trust or perhaps divide the assets between your second spouse and your children.

You can also set up trust provisions that limit your child's access to the estate until they're older, a little more mature and less apt to do something you may deem to be frivolous.

When leaving something to your children, the assets do not have to be distributed equally. For example, if you have three children and, for whatever reason, you only wish to leave money to two of them, we suggest you include a detailed letter, explaining why you're doing that. This will make your wishes crystal clear to the courts, minimize exposure to litigation and having your will contested by child number three.

What about other assets? For instance, the beloved cottage that's been in the family for a long time. You want to pass it on to your family so they can continue to enjoy it. But maybe your children don't use it equally. Some might live out of town. How will maintenance and operating costs be divided? It's important to think about what you want to happen and communicate that to the drafters of the will.

For business owners, don't underestimate the liability that can be created upon your death from owning private company shares. One important tool is an estate freeze. If you have a company growing in value, some reorganizations of your company may be in order, freezing the value of your shares at that point in time. So, if the company continues to get more valuable, it's not creating a higher tax exposure for you.

Business owners also face the tax hazard of double taxation. Let's say you have a holding company. It used to be a business but now it's all stocks and bonds and worth a million dollars. If you pass away and have no spouse, there's no spousal rollover. Now you've got a million dollar capital gain and your estate pays tax on that. Then later on, when your shares pass to your children and they pull money out of the company, that's going to be a dividend. That will create a second layer of tax on top of the million dollar capital gains tax you paid at the time of your death.

There are solutions to double taxation but they need to be considered at the time of drafting your will.

Another solution to consider is insurance to cover the estate's tax liability on death. But, just like life insurance, the policies can be expensive for those who are older or not in good health. 

Meanwhile, probate fees (the estate administration tax) aren't likely to be as costly as income taxes but they're not inconsequential. One of the ways to mitigate probate fees is to have multiple wills, separating the ones that require probate from the ones that do not. 

With RRSPs, you may also be able to directly designate a beneficiary. By doing so, the RRSPs would bypass your estate and wouldn't be subject to probate.

A tax effective will is the key to maximizing the value of your estate. And don't forget to revisit your will often. After all, tax rules change and the value of your assets may change as well. If there's any complexity at all to your estate, you need to give it long, serious thought. Once you have, then you bring in an advisory team to help you put the most tax-effective wrap around your wishes.

Learn much more about estate planning in Episode 11 of the Vaive and Associates Tax Podcast.

When we think of estate planning, it's crucial not to overlook the tax consequences. So, in part one of our two part series on estate planning, we're answering this question: 

From strictly a tax perspective, what happens to my assets when I die? 

Here's a simple way to look at it. Just pretend that, immediately before your death, you've sold everything you own for what it's worth. You've now triggered the appropriate taxes, just like anyone else who sells off their assets. Effectively, this is how the CRA treats the situation, even though your assets haven't actually been sold yet.

Your assets are now subject to two kinds of taxes: Income tax and probate fees.

Income Tax

The CRA won't tax your assets on their overall worth. But it will tax the growth in their value. For example, let's say you owned shares in a publicly traded company and you paid $5000 for them. Then, on the day of your death, the shares have grown in value to $40,000. At that point, you will trigger the capital gains tax on that extra $35,000 increase in value.

The same holds true of most other assets that either show inherent gains or haven't been taxed before.

So, as you can see, it's a highly taxable situation. 

But there are exceptions that can help you with planning, and the main one is a rollover. A rollover is basically when an asset passes from one taxpayer to another without any tax consequences. 

When discussing death and taxes, the most important rollover involves leaving assets to a surviving spouse (legally married or common-law). When you leave all of your assets directly to your spouse, there is a complete deferral on the tax. So everything passes over, as is, and no tax is triggered. 

But let's say you have a spouse and two children. If your spouse one day remarries, it's possible they may set up their own will so that everything is left to their new spouse. 

You do also have the option of leaving your assets to your spouse by way of a trust. You'll still get that rollover and tax deferral, but you'll now have a little more control and ability to direct things, ensuring that—upon your spouse's passing—any remaining assets go to your children. 

There is one other less common exception. If you have an RRSP, you can leave it to a disabled child or grandchild who's financially dependent on you and you will get that same tax deferral.

Probate Fees (Estate Administration Tax)

When your family presents your will to a bank or financial institution, looking to remove the money that's been left to them, the bank will often insist the will be probated first. This means the will goes before the courts to be certified as valid and current. Once the will is probated, the bank will release the money. 

Naturally, there's a fee for this service. Not all provinces have probate fees but, here in Ontario, we do. The fee is 0.5% of your first $500,000 worth of assets and 1.5% on anything above that. 

So, along with everything else it brings, death can be an extremely taxable event, especially if you don't plan for it. We discuss more on these topics, along with terminal returns, estate returns, and how Canadians can be exposed to U.S. estate tax in Episode 10 of The Vaive and Associates Tax Podcast.

If you’ve made the decision to sell your business, it’s important to do some serious planning first to minimize your overall tax hit. Today, we’re focusing on the sale of incorporated businesses.

When you’re selling your incorporated business, you basically have two options:

• You can sell the shares of the corporation.
• You can sell the assets of the corporation.

At a glance, the two options may seem quite similar but, from a tax perspective, they can actually produce dramatically different results.

As a vendor, you’ll probably favour selling your shares because you can use the lifetime capital gains deduction and get a better tax result. But your buyer will usually be on the other page, wanting to purchase the assets.

What is the Lifetime Capital Gains Deduction?

If you sell your shares in your company and meet certain criteria, the first $892,218 of capitals gains you receive on the sale of the shares will be tax free. For example, if you started your business with nothing, paying nothing for your shares and then built up the business and sold it for $1 million, the first $892,218 of that would be tax-free.

But, again, there’s certain criteria, both corporate and personal, that must be met.

Corporate criteria: The LCGD is only available if the company you’re selling is carrying on an active business, primarily in Canada. Additionally, at the time of sale, you also cannot have redundant assets that represent more than 10% of the value of the assets on the balance sheet. A redundant asset is defined as any asset not needed by your business for ongoing operations.

Personal criteria: The LCGD is generally unavailable if you haven’t held your shares for at least 24 months. You may also be ineligible if your past tax history includes a CNIL or an ABIL (Cumulative Net Investment Loss or an Allowable Business Investment Loss). You should confirm this with the CRA before your sale is completed.

Why do buyers prefer to purchase the assets of your business?

Simply put, there’s less risk in buying the assets. If buyers opt to buy the shares in your company, they also take on your risks and liabilities. Even if it’s an issue that came well before the sale, it remains attached to the shares, and now it’s the buyer’s responsibility. This can include lawsuits, product defects, tax reassessments and more.

But if they’re motivated buyers, they can mitigate the risks of buying assets through due diligence, fully exploring areas that may cause problems. They can also defer a portion of the sale price that can be used to cover off liability issues that may come up in the future.We get into much more depth on this topic in the latest episode of our podcast including: negotiating terms of the purchase and sale agreement, professional fees, working capital and more. Check out Episode 9 of the Vaive and Associates Tax Podcast with Rolland Vaive.