Understanding Canada’s Underused Housing Tax (UHT)

On June 9, 2022, Bill C-8, Economic and Fiscal Update Implementation Act, 2021 (“Budget 2021”) introduced Canada’s new Underused Housing Tax (UHT). In short, the new law imposes tax of 1% per year on the value of residential property in Canada unless the owner is eligible to claim a specific exemption. Though the UHT Act is generally targeted at non-residents of Canada, in many cases, Canadian citizens or permanent residents would be subject to these new rules. It is expected that in most cases, a Canadian citizen or permanent resident will not pay taxes but may need to file the return and claim the exemption from tax.

In this article, we will explore UHT and the obligations of taxpayers to file and pay taxes.

To Whom Will This Tax Apply?

You must file an Underused Housing Tax return for each of your properties in Canada for which the following conditions are met on December 31:

• You are an owner of the residential property.
• You are determined to be an affected owner of the residential property.

Generally, residential property is defined as either a detached house or similar building or a semi-detached house, townhouse/rowhouse unit, or condominium, including the related land.

Who is the Owner?

You are considered owner if any of the following apply:

• You are identified as an owner of the property in the land registration system. 
• You are a life tenant or a life leaseholder.
• You are a lessee with continuous possession under a long-term lease (at least 20 years or lease with an option to purchase the land).

Types of Owners:

There are two types of owners for the purposes of the Underused Housing Tax:

• Affected owner
• Excluded owner

Who is the Affected Owner?

An affected owner includes, but is not limited to, the following owners of a residential property in Canada:

• A foreign national (that is, an individual who is not a Canadian citizen or permanent resident)
• An individual who is a Canadian citizen or permanent resident and who owns a residential property in Canada as a trustee of a trust.
• An individual who is a Canadian citizen or permanent resident and who owns a residential property as a partner in a partnership.
• A corporation that is incorporated outside of Canada.
• A Canadian corporation whose shares are not listed on a Canadian stock exchange designated for Canadian income tax purposes.
• A Canadian corporation without share capital.

Responsibility of the Affected Owner

You must file a return for each residential property you own as an affected owner on December 31 and pay the tax. However, some affected owners are exempted from tax (but not filing)

If you are an affected owner of more than one residential property in Canada, you must file a separate return for each property. If you are one of several affected owners of the residential property, each of you must file a separate return for the property.

Who is the Excluded Owner?

An excluded owner has no obligations under the UHT Act, meaning neither filing nor tax payment is required.

An excluded owner includes, but is not limited to:

• An individual who is a Canadian citizen or permanent resident (unless included in the list of affected owners)
• Any person who owns a residential property as a trustee of a mutual fund trust, real estate investment trust, or specified investment flow-through (SIFT) trust for Canadian income tax purposes
• A Canadian corporation whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes
• A registered charity for Canadian income tax purposes
• A cooperative housing corporation, hospital authority, municipality, para-municipal organization, public college, school authority, or university for Canadian GST/HST purposes
• An Indigenous governing body or a corporation wholly owned by an Indigenous governing body
• His Majesty in right of Canada or a province or an agent of His Majesty in right of Canada or a province

Exemption of Affected Owners From Paying Tax

As an affected owner on December 31, you must file a UHT return for the calendar year. However, if you qualify for one of the exemptions, you still need to file the return and claim the exemption (meaning you don’t need to pay the tax).

There are four categories of exemptions.

1) Exemption Based on the Type of Owner:

The affected owner may be exempt from paying the tax if they are any of the following:

• Specified Canadian corporation (at least 90% of the shares of which were held and controlled by Canadian citizens or permanent residents and Canadian corporations)
• Partner of a specified Canadian partnership or a trustee of a specified Canadian trust (all the partners or beneficiaries were Canadian citizens or residents at the end of the year or excluded owners if they were not owners of the property as a partner of a partnership or specified corporation)
• New owner in the calendar year (and they were never an owner in the previous nine years)
• Deceased owner, or a co-owner or personal representative of a deceased owner (and the deceased individual’s ownership percentage at the time of death was at least 25%)

2) Exemption Based on the Qualifying Occupancy: 

To qualify for this exemption, a dwelling unit that is part of the residential property must be occupied by a qualifying occupant for one or more qualifying occupancy periods totaling at least 180 days in the calendar year.

A qualifying occupancy period is a period of at least one month in a calendar year during which specific individuals have continuous occupancy of a dwelling unit that is part of a residential property. A qualifying occupancy period can be longer than one month but not shorter than one month.

Who are the Qualifying Occupants:

• An individual who deals with you and your spouse at arm’s length and has continuous occupancy under an agreement such as a lease agreement.
• An individual who does not deal at arm’s length with you or with your spouse, and has continuous occupancy under a written agreement such as a lease agreement, and pays at least fair market rent.
• You, or your spouse or common-law partner, who occupies the dwelling unit to pursue authorized work under a Canadian work permit
• Your spouse or common-law partner who is a citizen or permanent resident of Canada
• Your parent or child who is a citizen or permanent resident of Canada

3) Exemption Based on the Availability of the Residential Property:

You may be exempt from paying the tax if the property is any of the following:

• Newly constructed (if construction of the residential property is not substantially completed on or before March 31 of the calendar year)
• Not suitable to be lived in year-round or seasonally inaccessible.
• Uninhabitable for a certain number of days because of a disaster, hazardous conditions, or a renovation.

4) Exemption Based on Location and Use of the Residential Property:

You may be exempt from paying the tax if the property is:

• A vacation property located in an eligible area of Canada (generally speaking outside both a census metropolitan area and a census agglomeration); and
• Used by you or your spouse or common-law partner for at least 28 days in the calendar year

Link to the CRA website for checking the status of the property if the area is eligible for vacation property exemption.

Penalty for Failure to File Your Return:

In case of failure to file the tax return, the CRA may assess a penalty that is greater of the following two:-

1. $5,000 for individuals or $10,000 other than individuals (such as corporations)
2. The amount that is the total of the following:
   • 5% of your underused housing tax payable for the residential property for the calendar year
   • 3% of your underused housing tax payable for the residential property for the calendar year multiplied by the number of complete calendar months that the return is past due

Other Provincial and Municipal Taxes:

Several city governments, including Toronto, Vancouver, and Ottawa, have implemented additional taxes on underused residential properties to address the shortage of available housing. In most cases, property owners are required to file a mandatory declaration with city authorities.

In addition to Vancouver’s empty home tax, the provincial government of British Columbia has implemented a provincial speculation and vacancy tax.

Essential Recordkeeping:

As always, it is crucial to maintain the record whether you are filing a tax return and paying the tax, filing the return but exempt from tax, or are not required to file or pay tax. The owner must keep all the documents and records for at least six years to support their situation in case the CRA audits them. 

Ultimately, it is essential to understand all your obligations under the Underuse Housing Tax Act. In some situations, it is pretty complex. As we discussed in the beginning, even though this tax targets non-Canadians, many Canadian residents or citizens might have to file tax returns and claim exemptions. However, if an exemption is claimed, ensure that you adequately provide documentary evidence to support it; otherwise, CRA will disallow it.

If you need to figure out how it applies to you or if you qualify for any exemption, consult with our expert at Source Accounting Professional Corporation.

Information Source: CRA Website

Source Accounting Professional Corporation, CPA is a comprehensive accounting firm located in Mississauga, near square one. We specialize in assisting business owners, investors, commercial real estate agents, real estate brokers, developers, property managers, real estate agents, mortgage brokers, and mortgage agents with services such as tax preparation, corporate tax filing, accounting, and tax advice. If you own a holding company or have properties within a corporation and would like to discuss your tax situation, we invite you to book a consultation call at 647-930-8130

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.