Underused Housing Tax


The Underused Housing Tax Act (the “Act”) was implemented in 2022 and aims to target ownership of vacant or underused housing in Canada. The Act applies an annual underused housing tax (“UHT”) of 1% of the “taxable value” of the property unless the owner is an “excluded owner”, or the owner is eligible to claim a specific exemption. The UHT generally only applies to non-resident, non-Canadian owners. However, there are some situations where the UHT may also apply to Canadian owners. These situations are discussed further in this article. On January 18, 2023, the CRA launched a general information site for the UHT (see Resources below). We expect the CRA to update the website with new information going forward. We will provide additional updates as they are released.

Owners of Residential Property

In order to determine the filing obligations under the Act, it is important to establish who the “owner” of the property is. “Owner” is defined in the Act as a person (including a corporation) that is identified as the owner under the land registration system. Furthermore, it is also important to determine if the property qualifies as a “residential property”.  Appendix A includes examples of residential and non-residential properties for purposes of the Act. 

Excluded Owner (Good)

Being an “excluded owner” is good since the owner has no obligation or liability under the Act and would not be required to file a return with the CRA. An excluded owner includes:

  1. an individual who is a Canadian citizen or permanent resident of Canada unless they hold ownership in trust as trustee or as a partner in a partnership. A Canadian resident executor of an estate is not considered a trustee for purposes of this rule and would qualify as an excluded owner.
  2. any person with title to a residential property as a trustee of a mutual fund trust, real estate investment trust, or specified investment flow-through trust (SIFT) for Canadian income tax purposes.
  3. publicly traded Canadian corporations
  4. a registered charity for Canadian income tax purposes
  5. a cooperative housing corporation for Canadian GST/HST purposes
  6. an Indigenous governing body or a corporation wholly owned by an Indigenous governing body
  7. “prescribed persons” which as of publication have not been defined in the regulations of the Act

It is important to note that the definition of excluded owner does not include persons holding title as trustees or private corporations, such as Canadian Controlled Private Corporations (CCPCs).

Affected Owner (Bad)

Taxpayers that do not meet the definition of an “excluded owner” are referred to as an “affected owner” in the CRA publications. All “affected owners” must file a UHT return. An affected owner includes, but is not limited to:

  • an individual who is not a Canadian citizen or permanent resident
  • individual Canadian citizens or permanent residents of Canada with title to a residential property as a trustee of a trust (other than as a personal representative of a deceased individual)
  • any person – including an individual who is a Canadian citizen or permanent resident – that owns a residential property as a partner of a partnership
  • a corporation that is incorporated outside Canada
  • Canadian corporations that are not publicly traded (i.e., private corporations and CCPC’s)
  • Canadian corporations without share capital

Calculating the UHT

UHT is equal to 1% of the “taxable value”. Under the general rule, the taxable value is the greater of:

  1. value of the property established by an authority in a property assessment
  2. most recent sale price on or before December 31 of the calendar year

Alternatively, an affected owner can elect to use the fair market value instead of the “taxable value”. Affected owners can elect to use the fair market value from January 1 of the calendar year to April 30 of the following calendar year.  The election has to be filed with the CRA by April 30 of the following calendar year. The CRA states an appraisal report must be prepared by an accredited, professional real estate appraiser operating at arm’s length from the owner.

Exemptions

Affected owners must file UHT returns in order to claim an available exemption. Listed below are a few common exemptions. An exhaustive list of additional exemptions is listed in Appendix B of this article.

Primary residence exemption – an owner will be exempt if a dwelling unit that is part of the property is the primary place of residence for the individual, their spouse/common-law partner or their child who is attending a designated learning institution. 

Qualifying occupancy – to qualify for this exemption, the property must be occupied, in periods of at least one month, for at least 180 days during the calendar year by a “qualifying occupant” in relation to the owner which includes:

  1. an arm’s length tenant (i.e., non-related tenant) who leases the property under a written lease agreement; or
  2. a non-arm’s length tenant (i.e., related tenant) who leases the property under a written lease agreement and pays “fair rent” (i.e., 5% of the value for the year); or
  3. individual owner of the property or their spouse/common-law partner provided they are in Canada for the purpose of pursuing work under a Canadian work permit and occupy the property for that reason; or
  4. spouse/common-law partner, parent or child of the owner who is a Canadian citizen or permanent resident. 

A “qualifying occupancy period” in respect of a property does not count if the owner, their spouse/common-law partner or child resides at another residential property for the same amount of time or more than they would reside at the original property. 

Furthermore, if an owner and their spouse or common-law partner own multiple residential properties, a joint election is required to elect one single property for the exemption. The joint election must be filed by April 30th with the UHT return. If no election is made, the exemption will not be available on any of the properties owned.

Corporate, Partnership and Trust Exemptions – Appendix B has detailed definitions of “specified” Canadian corporations, trusts and partnerships that are exempt from the UHT but are still required to file a return to claim the relevant exemption. 

It is important to note that any residential properties owned by corporations, trusts and partnerships with shareholders, beneficiaries and partners that are Canadian citizens will likely be exempt from tax but are obligated to file to avoid penalties.

Filing and Payment Due Dates

Affected owners must file a UHT return for each residential property that they own in Canada on December 31 for the calendar year. The return must be filed by April 30th following the calendar year. Even if an affected owner qualifies for an exemption, they still must file a UHT return by the deadline to claim the exemption. The Minister does have the ability to extend the time for filing a return but as of the publication date, the CRA has not provided details or circumstances where an extension will be allowed. Note however, if a UHT return is never filed, the calendar year will never become statute barred. Furthermore, the CRA can deny a section 116 certificate of compliance if UHT returns for a non-resident vendor are not up to date.

Payment of any tax owing is also due by April 30th.  Since April 30, 2023 falls on a Sunday, the first annual filing for the 2022 calendar year will be due May 1, 2023.

To file a return, a filer must have a tax identifier number:

  • individual Canadian citizen or permanent resident will file their UHT return using their SIN
  • Corporations with an existing CRA BN must register for a UHT (RU) program account identifier code to file the UHT return. Registration for RU account will open after February 6, 2023
  • Filers who do not have a SIN, must use an Individual Tax Number (ITN) to file their UHT return. Link to ITN Application

As of the publication date, the CRA has not released the filing forms required to file the UHT tax return or details on how payments can be made. 

Penalties

Affected owners that fail to file a UHT return are subject to penalty. The penalty is the higher of:

  1. $5,000 for individuals and $10,000 for non-individuals and
  2. The total of:
    • 5% of the tax payable PLUS
    • 3% of the tax payable for each month the return is late.

If the UHT return is not filed by December 31st of the following calendar year, the penalty is calculated without considering any available exemptions from the UHT. 

 

Resources

Underused Housing Tax

Underused Housing Tax Act and related regulations made under this Act

Underused housing tax technical information

Underused housing tax notices

 

Appendix A – Residential Property Examples

Examples of residential properties:

  • detached houses or similar buildings with not more than three dwelling units
  • duplexes and triplexes
  • laneway houses and coach houses
  • cottages, cabins and chalets that are not commercial cottages, cabins and chalets
  • semi-detached houses
  • residential condominium units
  • rowhouse units or townhouses

 

Examples of non-residential properties:

  • quadruplexes (buildings that have four dwelling units)
  • high-rise apartment buildings
  • buildings that are primarily (more than 50%) for retail or office use and that contain an apartment
  • commercial condominium units
  • boarding houses and lodging houses
  • commercial cottages, cabins and chalets (that is, those that are used by the operator of an establishment to provide lodging to several unrelated business or leisure travellers at once in separate cottages, cabins or chalets)
  • hotels, motels, inns, and bed and breakfasts
  • floating homes
  • mobile homes
  • park model trailers
  • travel trailers, motor homes and camping trailers

 

Appendix B – Additional Exemptions

Additional Exemptions – ss. 6(7)

  1. Property owned by a
    • “specified Canadian partnership” – defined as a partnership whose members are all, on December 31, any of the following: 
      1. excluded owners
      2. individual Canadian citizens or permanent residents of Canada who would be “excluded owners” if they were not owners of the residential property as partners of a partnership
      3. specified Canadian corporations
    • “specified Canadian trust” – a trust whose beneficiaries that have a beneficial interest in a residential property are all, on December 31, excluded owners or specified Canadian corporations.
  2. Property owned by a “specified Canadian corporation” – defined as a corporation incorporated or continued in Canada where on December 31st of the calendar year more than 90% of either the equity shares or voting shares are owned or controlled, directly or indirectly, by:
    • an individual who is either a citizen or permanent resident of Canada
    • a corporation that is incorporated or continued under the laws of Canada or a province
    • any combination of those individuals or corporations

      If the corporation is without share capital, both the following must be met:

    • the chairpersons and other presiding officers are citizens or permanent residents of Canada
    • more than 90% of its directors are citizens or permanent residents of Canada

  3. Property is not suitable for year-round use as a place of residence
  4. Property is seasonally inaccessible because public access is not maintained year-round
  5. Uninhabitable exemption 
    • the property is uninhabitable for at least 60 consecutive days in the calendar year due to a disaster or hazardous condition; and
    • the disaster or hazardous condition was caused by circumstances beyond the reasonable control of the owner; and
    • this exemption was not claimed for the same disaster or hazardous condition for more than one prior calendar year
  6. Renovation exemption 
    • property is uninhabitable for at least 120 consecutive days in the calendar year due to a renovation; and
    • the renovation is carried on without unreasonable delay; and
    • this exemption did not apply for the property in any of the 9 prior calendar years
  7. Year of acquisition exemption – person becomes an owner of the property in the calendar year and was never an owner of the property in the prior 9 calendar years
  8. Death exemption – exemption available in the calendar year of death or the following calendar year 
  9. Executor exemption 
    • the person is the personal representative of a deceased individual who was an owner of the property during the calendar year of death and prior calendar year of death; and
    • the person was not otherwise an owner of the property in either of those calendar years
  10. Surviving joint owner exemption – a surviving joint owner is exempt in the calendar year of death and the following calendar year as long as the deceased owner had an ownership percentage of 25% or more at the time of death 
  11. Construction exemption I – construction of the residential property is not 90% completed before April of the calendar year
  12. Construction exemption II – construction of the residential property is 90% completed in January, February or March of the calendar year, the residential property is offered for sale to the public during the calendar year and it had never been occupied by an individual as a place of residence during the calendar year.
  13. The residential property is a vacation property that is used as a place of residence by individual owners for at least 28 days during the calendar year and the property is not located within a census metropolitan area as determined by Stats Canada. The CRA has developed an online tool that will help individuals determine if their residential property is located in an eligible area of Canada for the purposes of this exemption. It is important for individuals to perform this verification each year before claiming the exemption for vacation properties on their return. To use this tool, go to Underused housing tax vacation property designation tool.
Insights  -   January 26th, 2023