The Underused Housing Tax Act (the “UHT” Act), which received royal assent on June 9, 2022, implements a national annual 1% tax on the value of residential real estate that is vacant or underused (the “Underused Housing Tax” or “UHT”). The UHT was originally proposed in the 2021 Federal Budget (see our March 14, 2022 newsletter here which describes the proposed rules).
The UHT came into effect on January 1, 2022, and only applies to real estate which is not owned by Canadian citizens or Canadian permanent residents. Canadian citizens and permanent residents of Canada are generally not subject to the tax and are generally not required to make any tax filings in respect of this tax.
Tax Payable
The UHT imposes a tax on every owner (other than an excluded owner) of a residential property on December 31 of a calendar year. The UHT for a particular calendar year is payable on April 30 of the following year.
The tax is calculated as 1% of the greater of:
- the assessed value used for the purpose of property tax; and
- the residential property’s most recent sale price on or before December 31 of the calendar year.
Alternatively, a person may elect to use the fair market value of the residential property determined at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. The fair market value must be established in a manner satisfactory to the Government and this alternative will likely only apply where the property has declined in value relative to the assessed value (for example, a property that has been damaged by a fire or a flood would likely have significant reduction in fair market value when compared to the assessed value for property tax purposes).
Where a person is co-owner of a property, the tax will be based on the person’s ownership percentage of the property. For example, a person who co-owns 50% (with another person owing the other 50%) of a property and who is subject to the UHT on that property must pay tax of 1% on 50% of the value of the property.
Who is exempt from UHT?
An “excluded owner” of a residential property is not liable to pay the UHT or required to file an annual UHT return. An excluded owner includes, but is not limited to, a person that is on December 31 of the calendar year:
- an individual who is a citizen or permanent resident of Canada, except individuals who are holding their interest as a trustee of a trust (other than a personal representative of a deceased individual) or as a partner of a partnership;
- a corporation incorporated under the laws of Canada or a province whose shares are listed on a designated stock exchange in Canada;
- a person who holds an interest in a residential property as a trustee of a mutual fund trust, a real estate investment trust, or a SIFT trust;
- a Canadian registered charity;
- a cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, or a university; or
- an Indigenous governing body or a corporation which is wholly owned by such a body.
Other exemptions
An owner of a residential property who is not an excluded owner is liable to pay the UHT unless an exemption applies. The most notable exemptions are as follows:
- the owner is a “specified Canadian corporation”, which generally means a corporation incorporated in Canada, except for those corporations whose shares representing
- 10% or more of the votes and value are owned by non-citizens and/or non-permanent residents;
- the owner holds their interest solely as a partner of a partnership each member of which is either an excluded owner or a specified Canadian corporation, on December 31 of the calendar year;
- the owner holds their interest solely as a trustee of a trust under which each beneficiary is either an excluded owner or a specified Canadian corporation on December 31 of the calendar year
- the property is a dwelling unit that is the primary place of residence of (a) the owner, (b) the owner’s spouse or common-law partner, or (c) a child of the owner or the owner’s spouse or common-law partner and the child occupies the property for the purposes of certain authorized studies;
- a dwelling unit that is rented to a tenant and the “qualifying occupancy period” is at least 180 days in the calendar year
- The property can be occupied by an arm’s length tenant, but there must be a written tenancy agreement. Landlords who are not excluded owners who do not have written tenancy agreements with tenants should obtain a written agreement with their tenant as soon possible.
- The property can be occupied by a non-arm’s length tenant (such as a relative of the property owner), but the rent must be “fair” and there must be a written tenancy agreement. The term “fairrent” is defined as the amount determined in prescribed manner, or 5% of the assessed value of the property for the year.
- In measuring occupancy, the minimum increment is 30 days; occupancy for less than 30 consecutive days is not included in the 180-day calculation. This means that a property that is only occupied for shorter periods during the year (for example, only on weekends and for three week increments for vacations) might not meet the test even if the total number of days occupied is more than 180 days).
- the property is a vacation or recreational property that is both:
- located in a “non-metropolitan area” with a population that is less than 30,000; and
- used by the owner or their spouse for at least 28 days of the calendar year.
If an owner, who is neither a citizen nor a permanent resident, owns multiple residential properties (either alone or together with their spouse or common-law partner who is also not a citizen nor a permanent resident), certain elections must be filed by April 30 of the following calendar year to qualify for the primary place of residence exemption. This will prevent a family unit from using this exemption for more than one property.
Tax Return Filing
An owner (other than an excluded owner) must file a return for each residential property owned on December 31 of a calendar year.
A prescribed return (the “UHT” return) containing certain required information must be filed with the Canada Revenue Agency (“CRA”) on or before April 30 of the following calendar year. Owners must also calculate the amount of tax owing for each residential property that does not qualify for an exemption and make a payment by April 30 of the following calendar year.
Failure to file penalty
An owner of a residential property who is required to file a UHT return and fails to file by April 30 of the following year will be liable to a penalty equal to the greater of
- $5,000 if the owner is an individual or $10,000 otherwise; and
- the total of
- 5% of the UHT payable by the owner in respect of the residential property for the calendar year, and
- 3% of the UHT payable by the owner in respect of the residential property for the calendar year for each complete month the UHT return is past due.
If an owner who is required to file a UHT return fails to file by December 31 of the following calendar year, the failure to file penalty would be calculated without the application of certain exemptions which may otherwise apply. This makes the penalty for filing more than 8 months late even more onerous.
Other penalties
The UHTA also imposes penalties for failure to provide information, gross negligence and false statements or omissions.
The UHTA contains a general anti-avoidance provision as well as special provisions that aim to deny tax benefits arising from non-arm’s length transactions which attempt to take advantage of prospective amendments to the UHTA.
What is next?
Owners of a residential property who are Canadian citizens and permanent residents are generally not liable to the UHT and are generally not required to file a UHT return by virtue of being an “excluded owner”. Although specified Canadian corporations, trusts with only excluded owners as beneficiaries, and partnerships owned exclusively by excluded owners may not be liable to pay tax under the UHT, such entities are still required to file a prescribed return by April 30 of the following calendar year to claim the applicable exemption.
Where an owner of a residential property is not an excluded owner, they must file a return and pay any UHT owing (subject to any applicable exemptions that may be claimed in the return) by April 30 of the following year.
As the UHTA is effective January 1, 2022, owners that are not excluded owners should continue planning for the tax. This should include documenting unwritten occupancy arrangements by preparing written tenancy agreements to support the eligibility of an exemption. Where an exemption for a primary place of residence is being used, relevant documents (such as utility bills, magazine or newspaper subscriptions, etc. addressed to the relevant occupant at the address of the property) should also be maintained as evidence of occupancy for the relevant time periods. Where an exemption for a vacation or recreational property is being used but the 28 day threshold for 2022 has not yet been reached, the owners should consider increasing their December 2022 property occupancy if possible so that the annual property occupancy by the owner and/or their spouse is at least 28 days for the 2022 calendar year.
- A “permanent resident” is a person who has permanent resident status under the Immigration and Refugee Protection Act (Canada). Note that a person can be a resident of Canada for income tax purposes without being a citizen of Canada or a having “permanent resident” status under the Immigration and Refugee Protection Act (Canada).
- A “dwelling unit is defined as a residential unit that contains private kitchen facilities, a private bath, and a private living area.
